-----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, QyAC3XcPGvoscIit7IYBai9W4VfLJjb17frSSNHEpyFeRSgBqfKCmL6Op8lqWvzw OQ86o0adqJqJbzUJfpKszA== /in/edgar/work/20000815/0000950135-00-004061/0000950135-00-004061.txt : 20000922 0000950135-00-004061.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950135-00-004061 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000701 FILED AS OF DATE: 20000815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AAI FOSTERGRANT INC CENTRAL INDEX KEY: 0001067346 STANDARD INDUSTRIAL CLASSIFICATION: [5094 ] IRS NUMBER: 050419304 STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-61119 FILM NUMBER: 702640 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 10-Q 1 e10-q.txt AAI.FOSTERGRANT, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended July 1, 2000. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _______ to _______ Commission File Number 333-61119 AAI.FOSTERGRANT, INC. (Exact name of registrant as specified in its charter) RHODE ISLAND 05-0419304 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 500 GEORGE WASHINGTON HIGHWAY SMITHFIELD, RI 02917 (Address of principal executive offices) (Zip code) (401) 231-3800 (Registrant's telephone number, including area code) Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES: [X] NO: As of August 11, 2000, the aggregate market value of the voting equity held by non-affiliates of the Registrant was none. As of August 11, 2000, 608,000 shares of Common Stock , 43,700 shares of Series A Preferred Stock and 27,500 shares of Series B Preferred Stock of the Registrant were issued and outstanding. 2 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES QUARTERLY REPORT TABLE OF CONTENTS PAGE PART I. - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Consolidated Condensed Balance Sheets as of January 1, 2000 and July 1, 2000 3 Consolidated Condensed Statements of Operations for the three and six months ended July 3, 1999 and July 1, 2000 4 Consolidated Condensed Statements of Cash Flows for the six months ended July 3, 1999 and July 1, 2000 5 Notes to Consolidated Condensed Financial Statements 6-16 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17-22 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 22 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 23 ITEM 2. Changes in Securities and Use of Proceeds 23 ITEM 3. Defaults Upon Senior Securities 23 ITEM 4. Submission of Matters to a Vote of Security Holders 23 ITEM 5. Other Information 23 ITEM 6. Exhibits and reports on Form 8-K 24 SIGNATURES 25 2 3 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands, except share and per share data)
ASSETS JANUARY 1, JULY 1, 2000 2000 ---------- --------- CURRENT ASSETS: Cash and cash equivalents $ 2,289 $ 1,785 Accounts receivable less reserves of approximately $12,804 and $10,643 22,231 28,778 Inventories 33,025 38,070 Prepaid expenses and other current assets 794 425 Deferred tax assets 3,743 2,500 --------- --------- Total current assets 62,082 71,558 --------- --------- Property, plant and equipment, net 19,392 20,450 Intangible assets 13,486 13,158 Other assets 7,588 7,128 Deferred tax assets 5,319 3,529 --------- --------- Total assets $ 107,867 $ 115,823 ========= ========= LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Borrowings under revolving note payable $ 11,000 $ 19,564 Redeemable preferred stock of a subsidiary 1,000 -- Current maturities of long-term obligations 902 673 Deferred compensation - current portion 10 11 Accounts payable 16,414 22,671 Accrued expenses 23,253 22,479 Accrued income taxes 2,104 2,250 --------- --------- Total current liabilities 54,683 67,648 --------- --------- 10 3/4% series B senior notes due 2006 75,000 64,250 Long-term obligations - less current maturities 420 3,501 Deferred compensation - less current portion 1,662 1,423 Series A redeemable convertible Preferred stock, $.01 par value -- Authorized -- 200,000 shares Designated, issued and outstanding -- 43,700 shares stated at redemption value 31,864 33,452 Series B redeemable Preferred stock, $.01 par value -- Authorized -- 75,000 shares Designated, issued and outstanding - 27,500 shares stated at redemption value -- 367 SHAREHOLDERS' DEFICIT: Common stock, $.01 par value -- authorized -- 4,800,000 shares issued and outstanding -- 608,000 shares 6 6 Additional paid-in capital 270 270 Accumulated other comprehensive loss (122) (663) Accumulated deficit (55,916) (54,431) --------- --------- Total shareholders' deficit (55,762) (54,818) --------- --------- Total liabilities and shareholders' deficit $ 107,867 $ 115,823 ========= =========
The accompanying notes are an integral part of these consolidated condensed financial statements. 3 4 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (In thousands, except share and per share data)
THREE MONTHS ENDED SIX MONTHS ENDED ---------------------- ---------------------- JULY 3, JULY 1, JULY 3, JULY 1, 1999 2000 1999 2000 --------- --------- --------- --------- NET SALES $ 45,616 $ 45,707 $ 87,097 $ 88,235 COST OF GOODS SOLD 26,757 25,529 50,745 49,111 --------- --------- --------- --------- Gross profit 18,859 20,178 36,352 39,124 OPERATING EXPENSES: Selling 13,267 12,062 24,796 23,505 General and administrative 4,571 4,539 9,038 9,129 Restructuring charge -- -- -- 2,500 --------- --------- --------- --------- Income from operations 1,021 3,577 2,518 3,990 Interest expense (2,679) (2,851) (5,021) (5,448) Other (expense) income, net (152) 94 (17) 145 --------- --------- --------- --------- (Loss) income before income tax expense (1,810) 820 (2,520) (1,313) Income tax expense -- 43 -- 43 --------- --------- --------- --------- Net (loss) income before extraordinary items (1,810) 777 (2,520) (1,356) Extraordinary gain, net of $3.2 million in taxes -- 4,429 -- 4,429 --------- --------- --------- --------- Net (loss) income before dividends and accretion on preferred stock (1,810) 5,206 (2,520) 3,073 Dividends and accretion on preferred stock 737 801 1,455 1,588 --------- --------- --------- --------- Net (loss) income applicable to common shareholders $ (2,547) $ 4,405 $ (3,975) $ 1,485 ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated condensed financial statements. 4 5 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands)
SIX MONTHS ENDED --------------------- JULY 3, JULY 1, 1999 2000 --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income before dividends and accretion on preferred stock $ (2,520) $ 3,073 Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 5,878 6,039 Extraordinary gain on early extinguishment of debt -- (4,429) Amortization of interest costs related to debt 360 272 Equity in earnings of investments in affiliates (84) -- Minority interest in income of consolidated subsidiary 42 -- Cumulative foreign currency translation adjustment 42 -- Changes in assets and liabilities, net of acquisitions - Accounts receivable (13,025) (6,704) Inventories 2,051 (5,164) Prepaid expenses and other current assets 218 212 Deferred costs (106) (230) Accounts payable 2,563 6,116 Accrued expenses (5,311) (792) Accrued income taxes (21) 26 -------- -------- Net cash used in operating activities (9,913) (1,581) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment (4,892) (5,534) Increase in other assets (237) (179) -------- -------- Net cash used in investing activities (5,129) (5,713) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving note payable 14,728 8,564 Proceeds from issuance of long-term debt -- 2,750 Repurchase of 10 3/4% Series B Senior Notes due 2006 -- (2,750) Payments on long term obligations and deferred compensation (336) (677) Redemption of Preferred Stock of a subsidiary -- (1,000) -------- -------- Net cash provided by financing activities 14,392 6,887 -------- -------- Effect of exchange rate changes on cash and cash equivelents -- (97) NET DECREASE IN CASH AND CASH EQUIVALENTS (650) (504) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,207 2,289 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,557 $ 1,785 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for- Interest $ 4,532 $ 5,355 ======== ======== Income taxes $ 6 $ 40 ======== ======== SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Acquisition of equipment under capital lease obligations $ -- $ 557 ======== ======== Issuance of Series B Preferred Stock in connection with debt repurchase $ -- 367 ======== ========
The accompanying notes are an integral part of these consolidated condensed financial statements. 5 6 AAI.FOSTERGRANT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note 1 - Significant Accounting Policies (a) Interim Consolidated Condensed Financial Statements The accompanying unaudited interim consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosure required for complete financial statements are not included herein. It is recommended that these financial statements be read in conjunction with the consolidated financial statements and related notes of AAi.FosterGrant, Inc. (the "Company" or "AAi") for the year ended January 1, 2000 as reported in the Company's 10-K filed with the SEC on March 31, 2000. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The consolidated condensed balance sheet presented as of January 1, 2000 has been derived from the consolidated financial statements that have been audited by the Company's independent public accountants. The results of operations for the period ended July 1, 2000 may not be indicative of the results that may be expected for the year ending December 30, 2000, or for any other future period. (b) 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. (c) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following at January 1, 2000 and July 1, 2000 (in thousands): JANUARY 1, JULY 1, 2000 2000 ---------- -------- Finished goods.............................. $29,695 $ 35,287 Work-in-process and raw materials........... 3,330 2,783 ------- -------- $33,025 $ 38,070 ======= ======== (d) Customer Acquisition Costs The Company incurs direct and incremental costs in connection with the acquisition of certain new customers and new store locations from existing customers under multi-year agreements. The Company may also receive the previous vendor's merchandise from the customer in connection with these agreements. In these situations, the Company values this inventory at its fair market value, representing the lower of cost or net realizable value, and records that value as inventory. The Company sells this inventory through various liquidation channels. Except as provided below, the excess costs over the fair market value of the inventory received is charged to selling expense when incurred. The Company expensed customer acquisition costs of approximately $225,000 and $372,000 for the three and six months ended July 1, 2000 and $199,000 and $284,000 for the three and six months ended July 3, 1999. The excess costs over the fair market value of the inventory received is capitalized as deferred costs and amortized over the agreement period if the Company enters into a minimum purchase agreement with the customer from which the estimated gross profits from future minimum sales during the term of the agreement are sufficient to recover the amount of the deferred costs. During the three and six months ended July 3, 1999 the Company capitalized approximately $45,000 and $106,000 of these costs. The Company capitalized costs of approximately $230,000 during the three and six months ended July 1, 2000. Amortization expense related to these costs as well as previously capitalized costs was approximately $300,000 and $596,000 for the three and six months ended July 3, 1999 and $339,000 and $659,000 for the three and six months ended July 1, 2000. 6 7 Note 2 - Long-Term Obligations On July 21, 1998, the Company sold $75.0 million of 10 3/4% Senior Series A Notes due 2006 (the Notes) through a Rule 144A offering. The net proceeds of approximately $71.3 million received by the Company from the issuance and sale of the Notes were used to repay outstanding indebtedness under the credit facility with a bank and certain subordinated promissory notes to shareholders, net of amounts due the Company from certain of these shareholders. The Company incurred issuance costs of approximately $3.7 million in relation to the Notes. These costs are being amortized over the life of the Notes and are included in other assets in the accompanying consolidated balance sheets. In December 1998 the Notes were exchanged for 10 3/4% Series B Notes due 2006 registered with the SEC. Interest on the Series B Notes is payable semiannually on January 15 and July 15. 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. Accounts receivable and inventory of the Company and its domestic subsidiaries secure the bank credit facility. 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 fully and unconditionally guaranteed, on a joint and several basis, by each of the Company's current and future Domestic Subsidiaries (as defined) (the Guarantors). 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. At July 1, 2000 management believes the Company was in compliance with these covenants. The Notes are redeemable at the option of the Company, in whole or in part, on or after July 15, 2002 at various redemption prices, declining from 105.375% of the principal amount to par on and after July 15, 2004. In addition, on or prior to July 15, 2001, the Company may use the net cash proceeds of one or more equity offerings to redeem up to 35% of the aggregate principal amount of the Notes originally issued at a redemption price of 110.750% of the principal amount thereof plus accrued interest to the date of redemption. Upon a change of control, each Note holder has the right to require the Company to repurchase such holder's Notes at a purchase price of 101% of the principal amount plus accrued interest. In June 2000, the Company repurchased $10.75 million face value of the Notes for a purchase price of $2.75 million. The purchase price was financed utilizing a term loan under its existing Senior Credit Facility. The term loan is secured by a mortgage on its Smithfield, RI facility and guaranteed by certain preferred shareholders. The term loan is being amortized over 60 months commencing April 1, 2001, with the principal balance due at the expiration of the Senior Credit Facility on July 31, 2003. As a result of this transaction, the Company recognized a $4.4 million extraordinary gain, net of $3.2 million in taxes. These purchases resulted from inquiries from holders of the Notes. The Company does not solicit offers to tender Notes for repurchase, but may, from time to time, consider requests to repurchase Notes, subject to the availability of appropriate financing. In conjunction with this guarantee, 27,500 shares of Series B preferred stock were issued. The holders of Series B preferred stock are entitled to receive, prior and in preference to distribution of any assets of the Company with respect to any other series of preferred stock, common stock or other capital stock of the Company an amount per share equal to the sum of $6.67 multiplied by the number of six month periods, and fractions thereof, in the period during which the guarantee was outstanding. The Company has calculated the value of the Series B preferred stock to be $367,000 based on the assumption that the guarantee will be outstanding for one year. This amount is being amortized over the one year period as interest expense. If the guarantee is outstanding for a period beyond twelve months, the Company will assign additional value to the stock and amortize the related costs over the additional period of the guarantee. Note 3 - Earnings Per Share During the quarter ended July 1, 2000, the Company decided to eliminate its earning per share disclosure. This decision was based on several factors including the Company does not have common stock or potential common stock that is traded in a public market, as required by SFAS No. 128, "Earnings Per Share", and the Company's common stock does not have a readily ascertainable fair market value. Note 4 - Comprehensive Income (Loss) Comprehensive income for the three and six months ended July 1, 2000 was $4.7 million and $2.4 million, respectively, as compared to comprehensive loss for the three and six months ended July 3, 1999 of $1.6 million and $2.5 million, respectively. Differences between comprehensive income (loss) and income (loss) before dividends and accretion on preferred stock for each period represents the foreign currency translation adjustment for each period. 7 8 Note 5 - Restructuring Charge In March 2000, the Company recorded a restructuring charge of $2.5 million related to the termination of three executives. The charge consists of an accrual of severance payments due to three executives for a two-year period. The severance will be paid through fiscal 2002. Through July 1, 2000 severance benefits of approximately $39,000 were paid to one of the three executives. Restructure Charge Payments Reserve Balance Description April 1,2000 Q2 2000 July 1, 2000 ----------- ------------------ -------- -------------- Severance benefits $2,500 ($39) $2,461 ====== ===== ====== Note 6 - New Accounting Standards In June 1999, FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB No. 133", which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, issued in June 1998, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company does not expect adoption of this statement to have a significant impact on its consolidated financial position or results of operations. The Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition", in December 1999. The Company is required to adopt this new accounting guidance through a cumulative charge to operations, in accordance with Accounting Principles Board (APB) Opinion No. 20, "Accounting Changes", no later than the fourth quarter of fiscal 2000. The Company does not expect adoption of the guidance provided in SAB No. 101 to have a material impact on future operating results. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25." The interpretation clarifies the application of APB Opinion No. 25 in certain situations, as defined. The Interpretation is effective July 1, 2000, but covers certain events occurring during the period after December 15, 1998, but before the effective date. To the extent that events covered by this interpretation occur during the period after December 15, 1998, but before the effective date, the effects of applying this interpretation would be recognized on a prospective basis from the effective date. Accordingly, upon initial application of the final interpretation, (a) no adjustments would be made to the financial statements for periods before the effective date and (b) no expense would be recognized for any additional compensation cost measured that is attributable to periods before the effective date. The Company does not expect the adoption of this interpretation to have a significant impact on the accompanying financial statements. Note 7 - Segment Reporting The Company has determined it has three reportable segments: mass merchandisers, chain drug stores/combo stores/supermarkets, and variety stores. The Company distributes accessories such as, costume jewelry, optical products, watches, clocks and other accessories. The Company's reportable segments are strategic business units that sell the Company's products to distinct distribution channels. They are managed separately because each business requires different marketing strategies. The Company's approach is based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses. 8 9
CHAIN DRUG THREE MONTHS STORES/COMBO ENDED MASS STORES/ JULY 3, 1999 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - --------------------- ------------- ------------- ------- ------ -------- Net sales $ 24,527 $11,849 $ 5,312 $3,928 $ 45,616 ======== ======= ======= ====== ======== Segment (loss) profit $ (1,235) $ 1,143 $(1,159) $ (407) $ (1,658) ========= ======= ======= ====== ========
CHAIN DRUG THREE MONTHS STORES/COMBO ENDED MASS STORES/ JULY 1, 2000 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - --------------------- ------------- ------------ -------- ------ -------- Net sales $ 27,492 $ 10,023 $ 5,447 $2,745 $ 45,707 ======== ======== ======== ====== ======== Segment profit $ 467 $ 187 $ 47 $ 24 $ 725 ======== ======== ======== ====== ========
CHAIN DRUG SIX MONTHS STORES/COMBO ENDED MASS STORES/ JULY 3, 1999 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - --------------------- ------------- ------------ -------- ------ -------- Net sales $ 50,782 $19,722 $10,725 $ 5,868 $ 87,097 ======== ======= ======= ======= ======== Segment (loss) profit $ (177) $ 874 $(1,941) $(1,259) $ (2,503) ========= ======= ======= ======= ========
CHAIN DRUG SIX MONTHS STORES/COMBO ENDED MASS STORES/ JULY 1, 2000 MERCHANDISERS SUPERMARKETS VARIETY OTHER TOTAL - --------------------- ------------- ------------ -------- ----- -------- Net sales $ 51,147 $ 20,066 $ 12,750 $4,272 $ 88,235 ======== ======== ======== ====== ======== Segment profit (loss) $ 1,402 $ 910 $ (687) $ (582) $ (1,043) ======== ======== ======== ====== ========
Revenues from segments below the quantitative thresholds are attributable to five operating segments of the Company. Those segments include department stores, armed forces' PX stores, boutique stores, gift shops, bookstores and catalogues. None of these segments have ever met any of the quantitative thresholds for determining reportable segments and their combined results are presented as Other. Segment profit (loss) differs from the profit (loss) before income tax expense and dividends and accretion on preferred stock by the amount of other income, restructure charge and extraordinary items which are not allocated by segment. The chief operating decision-maker does not review segment assets. Total assets specifically identifiable with each reportable segment are as follows: JANUARY 1, JULY 1, 2000 2000 --------- --------- Mass merchandisers $ 19,730 $ 28,608 Chain drug stores/combo stores/supermarkets 3,495 9,088 Variety 2,708 4,184 Other 2,454 2,588 Unassigned assets 79,480 71,355 --------- --------- $ 107,867 $ 115,823 ========= ========= 9 10 Note 8 - Supplemental Consolidating Financial Information The following is summarized consolidating financial information for the Company, segregating the Company, wholly owned guarantor subsidiaries, mostly owned guarantor subsidiaries and non-guarantor subsidiaries as they relate to the Notes. The guarantor subsidiaries, both mostly and wholly owned, are domestic subsidiaries of the Company and they guarantee the Notes on a full, unconditional and joint and several basis. Separate financial statements of the wholly owned guarantor subsidiaries have not been included because management believes that they are not material to investors. Prior to September 1, 1999, the Company held an 80% interest in Fantasma LLC ("Fantasma") and accordingly Fantasma was included as a mostly owned subsidiary in the supplemental consolidating financial information for such periods. The Company and guarantor subsidiaries account for investments in subsidiaries on the equity method for the purposes of the consolidating financial data. Earnings of subsidiaries are therefore reflected in the Company's and subsidiary's investment accounts and earnings. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Effective January 3, 1999, the assets of the Company's wholly owned guarantor subsidiaries (other than Fantasma) were transferred to the Company. Accordingly, the Company now performs all operations previously performed by these wholly owned guarantor subsidiaries, the results of which are included in the consolidating financial information for periods ending after such date. Effective September 1, 1999, the Company acquired 100% of the interests of Fantasma, which is included as a wholly owned subsidiary in the consolidating financial information for periods ending after such date. 10 11 SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
JANUARY 1, 2000 ------------------------------------------------------------------- WHOLLY OWNED NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------ ------------ ------------ (IN THOUSANDS) ASSETS CONSOLIDATING BALANCE SHEETS CURRENT ASSETS: Cash and cash equivalents $ 97 $ 8 $ 2,184 $ -- $ 2,289 Accounts receivable, net 16,303 2,427 3,501 -- 22,231 Inventories 28,743 -- 4,282 -- 33,025 Prepaid expenses and other current assets 400 41 353 -- 794 Deferred tax assets 3,743 -- -- -- 3,743 -------- ------ ------- -------- -------- Total current assets 49,286 2,476 10,320 -- 62,082 PROPERTY, PLANT AND EQUIPMENT, NET 17,727 14 1,651 -- 19,392 OTHER ASSETS 43,334 -- 1,712 (18,653) 26,393 -------- ------ ------- --------- -------- Total assets $110,347 $2,490 $13,683 $ (18,653) $107,867 ======== ====== ======= ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Borrowings under revolving note payable $ 11,000 $ -- $ -- $ -- $ 11,000 Redeemable preferred stock of a subsidiary 1,000 -- -- -- 1,000 Current maturities of long-term obligations 569 -- 343 -- 912 Accounts payable 15,364 209 841 -- 16,414 Accrued expenses 22,545 1,075 1,798 (61) 25,357 Due (from) to affiliate (590) 5,569 4,940 (9,919) -- --------- ------ ------- --------- -------- Total current liabilities 49,888 6,853 7,922 (9,980) 54,683 10 3/4% SENIOR NOTES 75,000 -- -- -- 75,000 LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 1,878 -- 204 -- 2,082 Preferred stock 31,864 -- 31,864 Shareholders' (deficit) equity (48,283) (4,363) 5,557 (8,673) (55,762) -------- ------ ------- --------- -------- Total liabilities and shareholders' (deficit) equity $110,347 $2,409 $13,683 $ (18,653) $107,867 ======== ====== ======= ========= ========
11 12 SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
JULY 1, 2000 ------------------------------------------------------------------ WHOLLY OWNED NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------- ------------ ------------ (IN THOUSANDS) ASSETS CONSOLIDATING BALANCE SHEETS CURRENT ASSETS: Cash and cash equivalents $ 76 $ -- $ 1,709 $ -- $ 1,785 Accounts receivable, net 21,969 783 6,027 -- 28,778 Inventories 34,439 -- 3,630 -- 38,069 Prepaid expenses and other current assets 220 45 159 -- 425 Deferred tax assets 3,743 -- -- -- 3,743 --------- ------ ------- -------- --------- Total current assets 60,448 828 11,524 -- 72,801 PROPERTY, PLANT AND EQUIPMENT, NET 18,769 10 1,671 -- 20,450 OTHER ASSETS 40,719 -- 1,379 (19,526) 22,572 --------- ------ ------- -------- --------- TOTAL ASSETS $ 119,936 $ 838 $14,575 $(19,526) $115,823 ========= ====== ======= ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Borrowings under revolving note payable $ 19,564 $ -- $ -- $ -- $ 19,564 Current maturities of long-term obligations 476 -- 208 -- 684 Accounts payable 20,721 -- 1,951 -- 22,671 Accrued expenses 22,921 693 1,114 -- 24,729 Due to (from) affiliate (985) 6,974 9,538 (15,527) -- ---------- ------ ------- -------- -------- Total current liabilities 62,697 7,667 12,811 (15,527) 67,648 10 3/4% SENIOR NOTES 64,250 -- -- -- 64,250 LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 4,669 -- 255 -- 4,924 Preferred stock 33,819 -- -- -- 33,819 Shareholders' (deficit) equity (45,498) (6,829) 1,509 (3,999) (54,818) --------- ------ ------- -------- -------- Total liabilities and shareholders' (deficit) equity $ 119,936 $ 838 $14,575 $(19,526) $ 115,823 ========= ====== ======= ======== =========
12 13 SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
SIX MONTHS ENDED --------------------------------------------------------------------- JULY 3, 1999 --------------------------------------------------------------------- MOSTLY OWNED NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF OPERATIONS Net sales $ 71,687 $ 2,844 $ 12,566 $ -- $ 87,097 Cost of goods sold 41,906 3,010 5,829 -- 50,745 -------- -------- -------- -------- -------- Gross profit 29,781 (166) 6,737 -- 36,352 Operating expenses 26,056 2,302 5,476 -- 33,834 Restructuring charge -- -- -- -- -- -------- -------- -------- -------- -------- Income (loss) from operations 3,725 (2,468) 1,261 -- 2,518 Interest expense (4,731) (153) (137) -- (5,021) Other income (expense), net 421 (24) (498) (1,988) (101) Equity in earnings (losses) of consolidated subsidiaries 2,072 -- -- -- 84 -------- -------- -------- -------- -------- Income (loss) before income tax expense and dividends and accretion and preferred stock 1,487 (2,645) 626 (1,988) (2,520) Income tax expense -- -- -- -- -- -------- -------- -------- -------- -------- Net income (loss) before dividends and accretion on preferred stock 1,487 (2,645) 626 (1,988) (2,520) Dividends and accretion on preferred stock 1,455 -- -- -- 1,455 -------- -------- -------- -------- -------- Net income (loss) applicable to common shareholders $ 32 $ (2,645) $ 626 $ (1,988) $ (3,975) ======== ======== ======== ======== ========
13 14 SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
SIX MONTHS ENDED --------------------------------------------------------------------- JULY 1, 2000 --------------------------------------------------------------------- WHOLLY OWNED NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------- ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF OPERATIONS Net sales $ 73,681 $ 1,396 $ 13,159 $ -- $ 88,235 Cost of goods sold 41,750 1,705 5,656 -- 49,111 -------- -------- -------- -------- -------- Gross profit (loss) 31,931 (309) 7,503 -- 39,124 Operating expenses 26,319 1,176 5,139 -- 32,634 Restructuring charge 2,500 -- -- -- 2,500 -------- -------- -------- -------- -------- Income (loss) from operations 3,111 (1,485) 2,365 -- 3,990 Interest expense (5,144) (30) (274) -- (5,448) Other income (expense), net 785 38 (678) -- 145 Equity in (losses) earnings of consolidated subsidiaries (65) -- -- 65 -- -------- -------- -------- -------- -------- (Loss) income before income tax expense and dividends and accretion on preferred stock (1,313) (1,477) 1,413 65 (1,313) Income tax expense 43 1 -- -- (43) -------- -------- -------- -------- -------- Net (loss) income before extraordinary (1,356) (1,478) 1,413 -- (1,356) gain Extraordinary gain, net of tax 4,429 -- -- 65 4,429 -------- -------- -------- -------- -------- Net income (loss) before dividends and accretion on preferred stock 3,073 (1,478) 1,413 65 3,073 Dividends and accretion on preferred stock 1,588 -- -- -- 1,588 -------- -------- -------- -------- -------- Net income (loss) applicable to common shareholders $ 1,485 $ (1,478) $ 1,413 $ 65 $ 1,485 ======== ======== ======== ======== ========
14 15 SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
SIX MONTHS ENDED ----------------------------------------------------------------------- JULY 3,1999 ----------------------------------------------------------------------- MOSTLY OWNED NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF CASH FLOWS Cash flows from operating activities $ (9,701) $ (75) $ (137) $ -- $ (9,913) Cash flows from Investing activities: Purchase of property, plant and equipment (3,863) -- (1,029) -- (4,892) Advance to affiliates (323) -- -- 328 -- Other investing activities (460) (12) 235 -- (237) -------- -------- -------- -------- -------- Net cash (used in) provided by investing activities (4,651) (12) (794) 328 (5,129) -------- -------- -------- -------- -------- Cash flows from financing activities: Net borrowings under revolving note payable 14,446 -- 282 -- 14,728 Payments on long-term obligations and Deferred compensation (196) -- (140) -- (336) Due to (from) affiliates -- -- 328 (328) -- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities 14,250 -- 470 (328) 14,392 -------- -------- -------- -------- -------- Net (decrease) increase in cash (102) (87) (461) -- (650) Cash and cash equivalents, beginning of period 134 104 1,969 -- 2,207 -------- -------- -------- -------- -------- Cash and cash equivalents, end of period $ 32 $ 17 $ 1,508 $ -- $ 1,557 ======== ======== ======== ======== ========
15 16 SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
SIX MONTHS ENDED ----------------------------------------------------------------------------- JULY 1, 2000 ----------------------------------------------------------------------------- WHOLLY OWNED NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------- ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATING STATEMENTS OF CASH FLOWS Cash flows from operating activities $ (1,643) $(1,413) $ 1,475 $ -- $ (1,581) Cash flows from Investing activities: Purchase of property, plant and equipment (4,775) -- (759) -- (5,534) Advance to affiliates (395) -- -- 395 -- Other investing activities (179) -- -- -- (179) -------- ------- ------- ------ -------- Net cash (used in) provided by investing activities (5,349) -- (759) 395 (5,713) -------- ------- ------- ------ -------- Cash flows from financing activities: Net borrowings under revolving note payable 8,564 -- -- -- 8,564 Proceeds from issuance of long-term debt 2,750 -- -- -- 2,750 Repurchase of 10 3/4% Series B Senior Notes due 2006 (2,750) -- -- -- (2,750) Payments on long-term obligations and deferred compensation (593) -- (84) -- (677) Redemption of Series A Preferred Stock (1,000) -- -- -- (1,000) Due to (from) affiliates -- 1,405 (1,010) (395) -- -------- ------- ------- ------ -------- Net cash provided by financing activities 6,971 1,405 (1,094) (395) 6,887 -------- ------- ------- ------ -------- Net (decrease) in cash (21) (8) (475) -- (504) Exchange rate effect on cash -- -- (97) -- (97) Cash and cash equivalents, beginning of period 97 8 2,184 -- 2,289 -------- ------- ------- ------ -------- Cash and cash equivalents, end of period $ 76 $ -- $1,709 $ -- $ 1,785 ======== ======= ======= ====== ========
16 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion may contain "forward-looking" statements and are subject to risks and uncertainties that could cause actual results to differ significantly from expectations. In particular, statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" section which are not historical facts, including, but not limited to, statements regarding the anticipated adequacy of cash resources to meet the Company's working capital and capital expenditure requirements and statements regarding the anticipated proportion of revenues to be derived from a limited number of customers, may constitute forward-looking statements. Although the Company believes the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. These risks and uncertainties include the substantial leverage of the Company, customer concentration and consolidation, dependence on licensed brands, a single site distribution facility, operating in international economies, unpredictability of discretionary consumer spending, competition, susceptibility to changing consumer preferences and obtaining full benefits from the new information system. The following discussion and analysis of financial condition and results from operations should be read in conjunction with the Consolidated Financial Statements and related Notes thereto included elsewhere. OVERVIEW The Company is a value-added distributor of optical products, costume jewelry, watches, clocks and other accessories primarily to mass merchandisers, chain drug stores/combo stores/supermarkets and variety stores 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. When establishing or expanding a customer relationship, the Company generally enters into multi-year agreements for the supply of specified product lines to specific customer stores. The agreements typically do not contain required minimum sales volumes but may provide for termination penalties equal to the Company's unamortized cost of product displays provided to the customer. The Company believes its relationships with retailers are 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. The Company has historically retained customers from year to year, although retailers may drop or add product lines supplied by the Company. Generally, customer loss has been attributable to such customer going out of business or being acquired by a company which does not carry the Company's product line or has prior relationships with a competitor of the Company. 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 may have an impact on the Company's results of operations. In addition, many major retailers have sought to reduce inventory levels in order to reduce their operating costs which has had a negative effect on the Company's results of operations. Net Sales. The Company offers optical products, costume jewelry, small synthetic leather goods, watches, clocks and other accessories, generally at retail price points of $30 or less. Net sales of the Company's optical products accounted for approximately 71.5% and 54.9% of the Company's net sales for the six months ended July 1, 2000 and July 3,1999, respectively. Net sales of the Company's costume jewelry accounted for approximately 25.4% and 36.7% of the Company's net sales for the six months ended July 1, 2000 and July 3, 1999, respectively, and the balance represented sales of synthetic leather goods, watches, clocks and other accessories. Cost of Goods Sold. The Company outsources manufacturing for all of its products, approximately 79.2% 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 17 18 and installation of display fixtures in connection with establishing and maintaining customer relationships. The Company capitalizes the production cost of these display fixtures as long as it retains ownership of them. These costs are amortized to selling expense on a straight-line basis over the estimated useful life of these fixtures, which is one to three years. If the Company does not retain title to the displays, the display costs are expensed as shipped. During the six months ended July 1, 2000, the Company recognized a $2.5 million restructuring charge related to the accrual of severance payments due to three executives, which will be paid over a two-year period. The Company incurs direct and incremental costs in connection with the acquisition of certain new customers and new store locations from existing customers under multi-year agreements. The Company may also receive the previous vendor's merchandise from the customer in connection with these agreements. In these situations, the Company values this inventory at its fair market value, representing the lower of cost or net realizable value, and records that value as inventory. The Company sells this inventory through various liquidation channels. Except as provided below, the excess costs over the fair market value of the inventory received is charged to selling expense when incurred. The Company expensed customer acquisition costs of approximately $199,000 and $284,000, respectively for the three and six months ended July 1, 2000 and $225,000 and $372,000, respectively, for the three and six months ended July 3, 1999. The excess costs over the fair market value of the inventory received is capitalized as deferred costs and amortized over the agreement period if the Company enters into a minimum purchase agreement with the customer from which the estimated gross profits from future minimum sales during the term of the agreement are sufficient to recover the amount of the deferred costs. During the three and six months ended July 3, 1999, the Company capitalized approximately $45,000 and $106,000 of these costs, respectively. The Company capitalized costs of approximately $230,000 during the three and six months ended July 1, 2000. Amortization expense related to the costs as well as previously capitalized costs was approximately $339,000 and $659,000, for the three and six months ended July 1, 2000, respectively and $300,000 and $596,000, for the three and six months ended July 3, 1999, respectively. 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 Group US and related companies. 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 in the Articles of Incorporation) is outstanding. Net income (loss) applicable to common shareholders represents net income (loss) less accretion of original issuance costs and cumulative dividends due on the Series A Preferred Stock. Extraordinary Gain. In June 2000 the Company repurchased $10.75 million face value of the Notes for a purchase price of $2.75 million. As a result of this transaction, the Company recognized a $4.4 million extraordinary gain, net of $3.2 million in taxes. See further discussion in "Liquidity and Capital Resources". Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). Although EBITDA is not a measure of performance calculated in accordance with Generally Accepted Accounting Principles (GAAP), the Company believes that EBITDA is accepted as a generally recognized measure of performance in the distribution industry and provides an indicator of the earnings available to meet the Company's debt service obligations. EBITDA 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 the Company's operating performance or liquidity which is calculated in accordance with GAAP. EBITDA, before the restructuring charge of $2.5 million and the extraordinary gain of $4.4 million was approximately $6.7 million and $12.7 million for the three and six months ended July 1, 2000, respectively, as compared to $3.5 million and $8.4 million for the three and six months ended July 3, 1999, respectively. The year-to-date increase before the restructuring charge and extraordinary gain of $4.3 million or 51% is principally due to the increase in operating income. Year-to-date EBITDA, after the restructuring charge and extraordinary gain was $10.2 million for the six months ended July 1, 2000. Net income before dividends and accretion on preferred stock, excluding the restructuring charge and extraordinary gain was $0.8 million and $1.1 million for the three and six months ended July 1, 2000 as compared to a net loss before dividends and accretion on preferred stock of $1.8 million and $2.5 million for the three and six months ended July 3, 1999. Net income before dividends and accretion on preferred stock, including the restructuring charge and extraordinary gain was $5.2 million and $3.1 million for the three and six months ended July 1, 2000. 18 19 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 Consolidated Condensed Statements of Operations:
THREE MONTHS ENDED SIX MONTHS ENDED -------------------------- -------------------------- JULY 3, JULY 1, JULY 3, JULY 1, 1999 2000 1999 2000 ------- ------- ------- ------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 58.7 55.9 58.3 55.7 ---- ---- ---- ---- Gross profit 41.3 44.1 41.7 44.3 Operating expenses, excluding restructuring charge 39.1 36.3 38.8 37.0 Restructuring charge -- -- -- 2.8 ----- ----- ----- ----- Income from operations 2.2 7.8 2.9 4.5 Interest expense (5.9) (6.2) (5.8) (6.2) Other (expense) income, net (0.3) 0.2 -- 0.2 ----- ----- ----- ----- (Loss) income before taxes and dividends and accretion on preferred stock (4.0) 1.8 (2.9) (1.5) Income tax expense -- (0.1) -- (0.1) ----- ----- ----- ------ Net (loss) income before extraordinary items, dividends and accretion on preferred stock (4.0) 1.7 (2.9) (1.6) Extraordinary gain, Net -- 9.7 -- 5.0 ----- ----- ----- ----- Net income (loss) before dividends and accretion on preferred stock (4.0) 11.4 (2.9) 3.4 Dividend and accretion on preferred stock 1.6 1.8 1.7 1.7 ----- ----- ----- ----- Net income (loss) applicable to common shareholders (5.6)% 9.6% (4.6)% 1.7% ===== ===== ===== =====
THREE MONTHS ENDED JULY 1, 2000 COMPARED TO THREE MONTHS ENDED JULY 3, 1999 Net Sales. Consolidated net sales were $45.7 million for the three months ended July 1, 2000 as compared to $45.6 million for the three months ended July 3, 1999, an increase of $0.1 million. Sales increased in the Mass Merchandisers and Variety segments 12.0% and 2.5%, respectively, driven largely by improved optical sales and partially offset by reductions with a major customer in the Mass Merchandiser segment. The jewelry reductions were a result of a planned restructuring in the relationship of a major customer which reduced selling space and increased competition. These gains were offset by reductions in Chain Drug/Combo/Supermarkets and other segments due to reductions in jewelry, along with continued de-emphasis on clocks and watches and small leather goods. Gross Profit. Gross profit was $20.2 million for the three months ended July 1, 2000 as compared to $18.9 million for the three months ended July 3, 1999. Gross profit as a percentage of net sales increased to 44.1% for the three months ended July 1, 2000 from 41.3% for the three months ended July 3, 1999. The $1.3 million or 7.0% increase is related primarily to the shift of sales towards optical and the shift within optical to higher margin products along with lower royalties incurred due to the planned de-emphasis on branded watches, clocks and other accessory lines. Operating Expenses. Operating expenses were $16.6 million for the three months ended July 1, 2000 as compared to $17.8 million for the three months ended July 3, 1999, a decrease of 6.9% or $1.2 million. Decreases occurred throughout the Company and represent continued attention to expense control. Interest Expense. Interest expense was $2.9 million for the three months ended July 1, 2000 as compared to $2.7 million for the three months ended July 3, 1999, an increase of 6.4% or $172,000. This resulted from additional borrowings under the Company's credit facilities to fund increased purchases of optical products related to increased shipments as compared to the prior year. Income Tax. Income tax expense was $43,000 for the three months ended July 1, 2000. No income tax expense or benefit was recorded for the three months ended July 3, 1999. Net Income (Loss). As a result of the factors discussed above, net income before dividends and accretion on preferred stock, excluding the extraordinary gain was $0.8 million for the three months ended July 1, 2000 as compared to net loss before dividends and accretion on preferred stock of $1.8 million for the three months ended July 3, 1999, an increase of $2.6 million in earnings. Net income before dividends and accretion on preferred stock, after the extraordinary gain was $5.2 million for the three months ended July 1, 2000. The extraordinary gain of $4.4 million was recognized as a result of early extinguishment of debt. 19 20 Net Loss Applicable to Common Shareholders. Net loss applicable to common shareholders excluding the extraordinary gain was $24,000 for the three months ended July 1, 2000 as compared to a loss of $2.5 million for the three months ended July 3, 1999, a decrease of $2.5 million. SIX MONTHS ENDED JULY 1, 2000 COMPARED TO SIX MONTHS ENDED JULY 3, 1999 Net Sales. Consolidated net sales were $88.2 million for the six months ended July 1, 2000 as compared to $87.1 million for the six months ended July 3, 1999, an increase of $1.1 million or 1.3%. The increase in net sales is primarily attributable to increased optical sales in all retail segments, partially offset by a decrease in non-optical (which is expected to continue in the second half). Gross Profit. Gross profit was $39.1 million for the six months ended July 1, 2000 as compared to $36.4 million for the six months ended July 3, 1999. Gross profit as a percentage of net sales increased to 44.3% for the six months ended July 1, 2000 from 41.7% for the six months ended July 3, 1999. The $2.7 million or 7.6% increase is primarily due to the shift in mix to higher margin optical products and lower royalties expense related to the planned de-emphasis of branded watches, clocks and other accessories. Also, in 1999, a significant promotion was conducted with a major customer which resulted in lower than expected margin. Operating Expenses. Operating expenses were $32.6 million, before the restructuring charge of $2.5 million for the six months ended July 1, 2000 as compared to $33.8 million for the six months ended July 3, 1999, a decrease of $1.2 million or 3.6%. Decreases occurred throughout the Company and represent continued attention to expense control. Interest Expense. Interest expense was $5.4 million for the six months ended July 1, 2000 as compared to $5.0 million for the six months ended July 3, 1999, an increase of $0.4 million or 8.5%. This resulted from additional borrowings under the Company's credit facilities to fund operations during 1999 as well as to fund increased purchases of optical products related to increased shipments as compared to the prior year. Income Tax. Income tax expense was $43,000 for the six months ended July 1, 2000. No income tax expense or benefit was recorded for the six months ended July 3, 1999. Net Income (Loss). As a result of the factors discussed above, net income before dividends and accretion on preferred stock, excluding the extraordinary gain of $4.4 million and the restructuring charge of $2.5 million was $1.1 million for the six months ended July 1, 2000 as compared to a net loss before dividends and accretion on preferred stock of $2.5 million for the six months ended July 3, 1999, an increase of $3.6 million in earnings. Net income before dividends and accretion on preferred stock, after the extraordinary gain and the restructuring charge was $3.1 million for the six months ended July 1, 2000. Net Income (Loss) Applicable to Common Shareholders. Net loss applicable to common shareholders excluding the extraordinary gain and the restructuring charge was $0.4 million for the six months ended July 1, 2000 as compared to $4.0 million for the six months ended July 3, 1999, a decrease of $3.6 million. The decrease is attributable to the $3.6 million increase in earnings. Net income applicable to common shareholders after the extraordinary gain and the restructuring charge was $1.5 million for the six months ended July 1, 2000. LIQUIDITY AND CAPITAL RESOURCES At July 1, 2000, the Company had cash and cash equivalents of $1.8 million and working capital of $5.2 million as compared to $2.3 million and $7.4 million, respectively, at January 1, 2000. The decline in cash and cash equivalents is due to the Company's enhanced focus on utilizing worldwide cash reserves to fund payments on its Senior Credit Facility. The decline in working capital was driven by an increase in accounts payable due to higher optical product purchases that carry 60-120 day payment terms. The Company used $1.6 million of cash in operations during the six months ended July 1, 2000 compared to a use of $9.9 million during the six months ended July 3, 1999. The decrease in cash used is principally due to significant improvements in receivables' days outstanding and the timing of payments in accrued expenses in the quarter ended July 3, 1999. The Company used $5.7 million in investing activities during the six months ended July 1, 2000 compared to a use of $5.1 million during the six months ended July 3, 1999. These investments were primarily related to the purchase of display fixtures used in the merchandising of both optical and jewelry products and represent normal purchases. The Company generated $6.9 million from financing activities during the six months ended July 1, 2000 compared to $14.4 million during the six months ended July 3, 1999. The funds generated from financing activities consisted mainly of borrowings under the revolving note payable. 20 21 The Company has 43,700 shares of Series A Preferred Stock that has a redemption value at July 1, 2000 of $32.7 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. 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 in the Company's Articles of Incorporation) is outstanding. The $75.0 million 10 3/4% Senior Notes due 2006 (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. In connection with the purchase of Foster Grant US, the Company's wholly owned subsidiary, Foster Grant Holdings, Inc. (FG Holdings) issued 100 shares of FG Preferred Stock, which were redeemable for $1.0 million on February 28, 2000. The $1.0 million was paid on April 3, 2000. The former holder of the FG Preferred Stock is entitled to receive an additional payment of between $2.5 million and $3.0 million, depending upon transaction value, in the event of an initial public offering, merger or similar transaction, or private placement of securities representing more than 50% of the Company's capital stock, at a specified valuation. In June 2000, the Company repurchased $10.75 million face value of the Notes for a purchase price of $2.75 million. The purchase price was financed utilizing a term loan under its existing Senior Credit Facility. The term loan is secured by a mortgage on its Smithfield, RI facility and guaranteed by certain preferred shareholders. The term loan is being amortized over 60 months commencing April 1, 2001, with the principal balance due at the expiration of the Senior Credit Facility on July 31, 2003. As a result of this transaction, the Company recognized a $4.4 million extraordinary gain, net of $3.2 million in taxes. These purchases resulted from inquiries from holders of the Notes. The Company does not solicit offers to tender Notes for repurchase, but may, from time to time, consider requests to repurchase Notes, subject to the availability of appropriate financing. In conjunction with this guarantee, 27,500 shares of Series B preferred stock were issued. The holders of Series B preferred stock are entitled to receive, prior and in preference to distribution of any assets of the Company with respect to any other series of preferred stock, common stock or other capital stock of the Company an amount per share equal to the sum of $6.67 multiplied by the number of six month periods, and fractions thereof, in the period during which the guarantee was outstanding. The Company has calculated the value of the Series B preferred stock to be $367,000 based on the assumption that the guarantee will be outstanding for one year. This amount is being amortized over the one year period as interest expense. If the guarantee is outstanding for a period beyond twelve months, the Company will assign additional value to the stock and amortize the related costs over the additional period of the guarantee. The Company has substantial indebtedness and significant debt service obligations. As of July 1, 2000, the Company had total indebtedness, including borrowings under the Senior Credit Facility, in the aggregate principal amount of $89.4 million. The Company had current liabilities of approximately $67.6 million. In addition, the Company has significant annual obligations that include interest on the Notes of approximately $6.9 million, minimum royalty obligations over the next two years of approximately $3.5 million and minimum payments under its operating leases of approximately $306,000. The Indenture permits the Company to incur additional indebtedness, including secured indebtedness, subject to certain limitations. The Company has up to $12.3 million available for borrowings under the Senior Credit Facility as of July 1, 2000. 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. On March 24, 2000, the Company entered into a second amendment to the Senior Credit Facility that modified the financial covenants and waived non-compliance with the prior covenants. As of July 1, 2000, the Company is in compliance with the financial covenants, as modified. The Company's ability to make scheduled payments of principal, or to pay the interest 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. 21 22 SEASONALITY AND QUARTERLY INFORMATION Significant portions of the Company's business are seasonal. Sunglasses are shipped primarily during the first half of the 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 working capital requirements grow throughout the first half of the year to fund purchases and accounts receivable. In the second half of the year, the Company's working capital requirements decrease as accounts receivable are collected and inventory purchases decline relative to first half needs. YEAR 2000 Prior to January 1, 2000, many computer experts had predicted widespread problems related to computer programs' inability to process dates after December 31, 1999. During fiscal 1999, to accommodate the Company's growth, AAi implemented a new information management system that is Year 2000 compliant. The Company has not, and does not expect to incur any significant further expenses related to the Year 2000 issue. The Company anticipates that additional expenditures will be necessary to achieve the full benefit of its information system unrelated to the Year 2000 issue, but cannot quantify those costs at this time. To date, the Company has not experienced any significant operating problems or product failures as a result of Year 2000 issues with its vendors, service providers, or customers. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The following discussion about the Company's market risk disclosures includes forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. The Company does not use derivative financial instruments for speculative or trading purposes. Interest Rate Risk. The Company is exposed to market risk from changes in interest rates primarily through its borrowing activities. In addition, the Company's ability to finance future acquisition transactions may be impacted if the Company is unable to obtain appropriate financing at acceptable interest rates. The Company manages its borrowing exposure to changes in interest rates by optimizing the use of fixed rate debt with extended maturities. At July 1, 2000, 71% of the carrying values of the Company's long-term debt were at fixed interest rates. Foreign Currency Risk. The Company's results of operations are affected by fluctuations in the value of the U.S. dollar as compared to the value of currencies in foreign markets primarily related to changes in the British Pound, the Canadian Dollar, the Mexican Peso, the Euro Dollar and the Hong Kong Dollar. During the six months ended July 1, 2000, the net impact of foreign currency changes was not material to the Company's financial condition or results of operations. The Company manages its exposure to foreign currency exchange risk by trying to minimize the Company's net investment in its foreign subsidiaries. The Company generally does not enter into derivative financial instruments to manage foreign currency exposure. The Company's operations in Europe are not significant and, therefore, the Company has not been materially impacted by the introduction of the Euro dollar. 22 23 AAI. FOSTERGRANT, INC. AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Shareholders held May 31, 2000, shareholders elected the Company's Board of Directors and approved an Amendment to the Company's Articles of Incorporation authorizing a class of Senior Series B Preferred Stock. The vote for the director nominee was: FOR* WITHHELD Gerald F. Cerce 921,500 0 Stephen J. Carlotti 921,500 0 Michael Cronin 921,500 0 John H. Flynn, Jr. 921,500 0 Martin E. Franklin 921,500 0 George Graboys 921,500 0 David Jenkins 921,500 0 John R. Ranelli 921,500 0 The vote to approve the Amendment to the Articles of Incorporation authorizing a class of Senior Series B Preferred Stock was: FOR* AGAINST ABSTAIN 921,500 0 0 * Includes the holders of Common Stock and Series A Preferred Stock. Holders of Series A Preferred Stock are entitled to vote based on the number of shares of Common Stock into which such shares are convertible, currently 10 to 1. ITEM 5. OTHER INFORMATION None 23 24 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1.1(a) Articles of Amendment to Articles of Incorporation filed on June 9, 2000 10.1.3 Third Amendment to Second Amended and restated Financing and Security Agreement dated as of June 12, 2000 10.18 Employment Agreement between AAi and Howard Collins dated March 24, 2000 27.1 Financial Data Schedule (b) Report on Form 8-K The registrant filed no reports on form 8-K during the quarter ended July 1, 2000. 24 25 AAI. FOSTERGRANT, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AAi.FosterGrant, Inc. (Registrant) Dated: August 15, 2000 /s/ Gerald F. Cerce ----------------------------------------- Gerald F. Cerce Chairman of the Board Dated: August 15, 2000 /s/ John R. Ranelli ----------------------------------------- John R. Ranelli Director, President, and Chief Executive Officer (Principal Executive Officer) Dated: August 15, 2000 /s/ Mark D. Kost ----------------------------------------- Mark D. Kost Chief Financial Officer (Principal Financial Officer) 25 EX-3.1.1(A) 2 ex3-1_1a.txt ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION 1 FILING FEE $50.00 Exhibit 3.1.1(a) ID NUMBER: 36896 [GRAPHIC OMITTED] STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS Office of the Secretary of State Corporations Division 100 North Main Street Providence, Rhode Island 02903-1335 BUSINESS CORPORATION ------------ ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION (TO BE FILED IN DUPLICATE ORIGINAL) Pursuant to the provisions of Section 7-1.1-56 of the General Laws, 1956, as amended, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: 1. The name of the corporation is AAi.FosterGrant, Inc. -------------------------------------- 2. The shareholders of the corporation (or, where no shares have been issued, the board of directors of the corporation) - -------------------------------------------------------------------------------- on March 31, 2000 , in the manner prescribed by Chapter 7-1.1 of the General Laws, 1956, as amended, - -------------------------------------------------------------------------------- adopted the following amendment(s) to the Articles of Incorporation: [INSERT AMENDMENT(S)] (If additional space is required, please list on separate attachment) Article Fourth, as amended, is hereby deleted in its Entirety and the following substituted therefor: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- See Exhibit A. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3. The number of shares of the corporation outstanding at the time of such adoption was 653,676; and --------- the number of shares entitled to vote thereon was 653,676. -------------------------- 4. The designation and number of outstanding shares of each class entitled to vote thereon as a class were as follows: (If inapplicable, insert "none.") Class Number of Shares ---------------------------------------------------------------------------- COMMON STOCK 608,000 ---------------------------------------------------------------------------- PREFERRED STOCK 45,676 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Form No. 101 Revised: 01/99 2 5. The number of shares voted for such amendment was 632,510; and the number of shares voted against such amendment was 21,166. 6. The number of shares of each class entitled to vote thereon as a class voted for and against such amendment, respectively, was: (If inapplicable, insert "none.") Number of Shares Voted Class For Against ----- --- ---------------------- Common 600,400 7,600 ----------------------------- -------------- ------------------------ Preferred 32,110 13,566 ----------------------------- -------------- ------------------------ ----------------------------- -------------- ------------------------ 7. The manner, if not set forth in such amendment, in which any exchange, reclassification, or cancellation of issued shares provided for in the amendment shall be effected, is as follows: (If no change, so state) The manner is set forth in the amendment. ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- 8. The manner in which such amendment effects a change in the amount of stated capital, and the amount (expressed in dollars) of stated capital as changed by such amendment, are as follows: (If no change, so state) No change. ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 9. As required by Section 7-1.1-57 of the General Laws, the corporation has paid all fees and franchise taxes. 10. Date when amendment is to become effective upon filing --------------------------------- (not prior to, nor more than 30 days after, the filing of these articles of amendment) Date: June 8, 2000 AAi.FosterGrant, Inc. ------------------------------------------ Print Corporate Name By /s/ John R. Ranelli ---------------------------------------- X President or Vice President (check one) AND By /s/ Stephen J. Carlotti --------------------------------------- X Secretary or Assistant Secretary (check one) STATE OF Rhode Island ------------------------- COUNTY OF Providence ------------------------- In Smithfield , on this 8th day of June , 2000 personally appeared before me John Ranelli who, being by me first duly sworn, declared that he/she is the CEO/President of the corporation and that he/she signed the foregoing document as such officer of the corporation, and that the statements herein contained are true. /s/ Dawn E. Degnan ----------------------------------- Notary Public My Commission Expires: 2/17/2002 -------------- 3 EXHIBIT A TO ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION ARTICLE FOURTH, AS AMENDED, IS HEREBY DELETED IN ITS ENTIRETY AND THE FOLLOWING SUBSTITUTED THEREFOR: "FOURTH: The aggregate number of shares which the Corporation has the authority to issue is 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 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. 1.1. SERIES A PREFERRED STOCK. 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 initially be 34,200 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. 1.2. SERIES B PREFERRED STOCK. The designation of the second series of the Preferred Stock shall be Senior Series B Preferred Stock (the "SERIES B PREFERRED STOCK"). The number of shares of Series B Preferred Stock shall be 75,000. 1.3. ISSUANCE. The Series A Preferred Stock has been issued pursuant to a Securities Purchase Agreement by and among the Corporation, Weston Presidio Capital II, L.P., and certain other investors (as from time to time in effect, the "PURCHASE AGREEMENT"). The Series B Preferred Stock will be issued in consideration of the guaranty to be provided to Bank of America, N.A. (f/k/a NationsBank, N.A.) ("the Bank") by certain of the holders of Series A Preferred Stock (the "GUARANTORS") to guarantee the Corporation's obligations up to an amount of $7,500,000 (the "GUARANTY") under the terms of that certain Second Amended and Restated Financing and Security Agreement by and between the Bank and the Corporation dated July 21, 1998, as heretofore and hereafter amended (the "LOAN AGREEMENT"). A copy of the Purchase Agreement 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. 1.4. RELATIVE POWERS, PREFERENCES AND RIGHTS. The respective 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 and the Series B 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 4 and (f) references to a particular Person include such Person's successors and assigns to the extent not prohibited by these Articles of Amendment, the Purchase Agreement and the Addendum. References to "the date hereof" mean the effective date of these Articles of Amendment. 2.1. "ACCEPTED SHARES" is defined in Section 11.2. 2.2. "ADDITIONAL SHARES OF COMMON STOCK" is defined in Section 9.4.1(d). 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 STOCK" means the common stock $0.01 par value, of the Corporation. 2.5. "CORPORATION" is defined in the Preamble. 2.6. "CONVERSION PRICE" is defined in Section 9.1.1. 2.7. "CONVERTIBLE SECURITIES" is defined in Section 9.4.1(c). 2.8. "FUTURE SHARES" is defined in Section 11.1. 2.9. "FUTURE SHARES EXERCISE PERIOD" is defined in Section 11.1. 2.10. "GUARANTY" Is defined in Section 1.3. 2.11. "GUARANTORS" is defined in Section 1.3. 2.12. "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. 2.13. "INVESTOR AGREEMENT" is defined in the Purchase Agreement. 2.14. "LOAN AGREEMENT" is defined in Section 1.3. 2.15. "NOTICE OF PURCHASE" is defined in Section 11.2. 2.16. "OFFEREE" is defined in Section 11.1. 2.17. "OPTIONS" is defined in Section 9.4.1(a). 2.18. "ORGANIC CHANGE" is defined in Section 6.2. 2.19. "ORIGINAL ISSUE DATE" is defined in Section 9.4.1(b). 2.20. "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. 5 2.21. "PREFERRED DIRECTOR" is defined in Section 5.3. 2.22. "PREFERRED STOCK" is defined in Section 1. 2.23. "PROPORTIONATE PERCENTAGE" is defined in Section 11.1. 2.24. "PROPOSAL" is defined in Section 11.1. 2.25. "PUBLIC OFFERING" is defined in Section 4.2. 2.26. "PURCHASE AGREEMENT" is defined in Section 1. 2.27. "QUALIFIED PUBLIC OFFERING" is defined in Section 9.2. 2.28. "RELATED AGREEMENTS" is defined in the Purchase Agreement. 2.29. "REMEDY EVENT" is defined in Section 8. 2.30. "REMEDY NOTICE" is defined in Section 5.2.2. 2.31. "SERIES A CALCULATION DATE" is defined in Section 4.2. 2.32. "SERIES A PREFERENTIAL AMOUNT" is defined in Section 4.1.2. 2.33. "SERIES B PREFERENTIAL AMOUNT" is defined in Section 4.1.1. 2.34. "SERIES A PREFERRED STOCK" is defined in Section 1.1. 2.35. "SERIES B PREFERRED STOCK" is defined in Section 1.2. 2.36. "SERIES A REQUIRED HOLDERS" means the holders of two-thirds of the outstanding Series A Preferred Stock. 2.37. "SERIES B REQUIRED HOLDERS" means the holders of two-thirds of the outstanding Series B Preferred Stock. 2.38. "WARRANTS" is defined in Section 6.3. 3. DIVIDENDS. 3.1. SERIES B PREFERRED STOCK. The holders of Series B Preferred Stock shall not be entitled to receive dividends. 3.2. SERIES A PREFERRED STOCK. 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. 6 4.1. LIQUIDATION; DISSOLUTION; MERGER. 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 Series B Required Holders and the Series A Required Holders, a merger or consolidation of the Corporation, distributions to the stockholders of the Corporation shall be made in the following manner. 4.1.1. HOLDERS OF SERIES B PREFERRED STOCK. The holders of Series B 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 six dollars and sixty-seven cents ($6.67) MULTIPLIED BY the number of six (6) months periods, and/or any fractional period thereof, from the date of issuance of the Guaranty to the last date on which the Guaranty was outstanding (such sum being referred to as the "SERIES B PREFERENTIAL AMOUNT"). If the assets and funds of the Corporation shall be insufficient to permit the payment of the full Series B Preferential Amount to the holders of Series B Preferred Stock, then the entire assets of the Corporation legally available for distribution shall be distributed ratably among the holders of Series B Preferred Stock in accordance with the aggregate liquidation preference of the shares of Series B Preferred Stock held by each of them. 4.1.2. HOLDERS OF SERIES A PREFERRED STOCK. After payment has been made to the holders of Series B Preferred Stock of the full amounts to which they are entitled, the holders of Series A Preferred Stock shall next 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, other than Series B 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 greater of (1) 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 "SERIES A 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 "SERIES A PREFERENTIAL AMOUNT"), or (2) the amount which the holders would receive if the Series A Preferred Stock had converted to Common Stock immediately prior to the distribution. If the assets and funds of the Corporation shall be insufficient to permit the payment of the full Series A Preferential Amount to the holders of Series A Preferred Stock, then the remaining 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. 4.1.3. HOLDERS OF COMMON STOCK. After payment in full of the Series B Preferential Amount and the amount required by Section 4.1.2, the holders of Common Stock shall be entitled to share ratably in the remaining assets without participation by the holders of either Series B Preferred Stock or Series A Preferred Stock. 4.2. PUBLIC OFFERING. Upon the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933 covering the offer and sale of Common Stock for the account of the Corporation to the public generally (the "PUBLIC OFFERING"), the holders of the Series B Preferred Stock shall be entitled to receive an amount equal to the lesser of (x) the Series B Preferential Amount or (y) the net proceeds of the Public Offering. 5. VOTING RIGHTS; REPRESENTATIVE DIRECTORS; ETC. 5.1. VOTES PER SHARE; NOTICES. 5.1.1. SERIES B PREFERRED STOCK. The holders of the Series B Preferred Stock shall not be entitled to vote on any matter except (a) as otherwise provided herein, or (b) as otherwise required by law. 7 5.1.2. SERIES A PREFERRED STOCK. 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 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. SERIES A 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 Series A 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 Series A 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 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 OF SERIES A PREFERRED STOCK. 8 6.1. MANDATORY REDEMPTION. Except as set forth in Section 6.3 and Section 10.1(c), 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 Series A 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. Except as set forth in Section 10.1(c), 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, (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 Series A 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 Series A 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 Series A 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 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. 9 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 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. 7. REDEMPTION OF SERIES B PREFERRED STOCK. Pursuant to the consent or a vote of a majority of the disinterested directors of the Corporation, the Corporation may redeem the Series B Preferred Stock in whole for the Series B Preferential Amount at any time after the Guaranty is no longer in effect. Upon the payment in full by the Corporation of the Series B Preferential Amount, the outstanding shares of Series B Preferred Stock shall be canceled. The provisions of Section 6.4 (excluding the last sentence thereof) and Section 6.5 shall apply to any such redemption as if all references to Series A Preferred Stock were replaced by references to Series B Preferred Stock. No redemption of the Series B Preferred Stock in accordance with this Section 7 shall occur unless such redemption complies with Section 4.07 of the Series A and Series B 10 3/4% Senior Note Indenture dated as of July 21, 1998. 8. REMEDY EVENT. The term "REMEDY EVENT" shall mean the occurrence and continuance of any of the following events for a period exceeding 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 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. 10 (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 consolidated stockholders' equity of the Corporation and its subsidiaries plus (to the extent not included in the stockholder's equity) the Series A Preferred Stock plus up to $5,000,000 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. (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 Agreement 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 Series A 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. 9. CONVERSION. 9.1. RIGHT OF CONVERSION. 11 9.1.1. SERIES A PREFERRED STOCK. 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 the then effective conversion price of the Series A Preferred Stock (as from time to time adjusted by this Section 9, the "CONVERSION PRICE"). The initial Conversion Price shall be $52.63 per share. All calculations under this Section 9 shall be made to the nearest one hundredth of a cent. 9.1.2. SERIES B PREFERRED STOCK. Shares of Series B Preferred Stock shall not be convertible into shares of the Common Stock of the Corporation. 9.2. 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 Series A 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 175% of the initial Conversion Price, adjusted for stock splits and stock dividends after the Original Issue Date (a "QUALIFIED PUBLIC OFFERING"). 9.3. 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 9..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 upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date. 9.4. ADJUSTMENT OF CONVERSION PRICE DUE TO ISSUANCE OF ADDITIONAL SHARES. The Conversion Price shall be subject to adjustment as follows: 9.4.1. SPECIAL DEFINITIONS. (a) "OPTIONS" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. 12 (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 9.4.5, 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 9.4.5, 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 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 9.4.3; (iii) pursuant to a stock option, stock bonus or other employee stock plan permitted by Section 5.14 of the 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 Series A 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 11.1. 9.4.2. NO ADJUSTMENT OF CONVERSION PRICE. No adjustment in the Conversion Price shall be made in respect of the issuance of Additional Shares of Common Stock (a) unless the consideration per share (determined pursuant to Section 9.4.6) 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 Series A Required Holders give a written waiver of such adjustment. 9.4.3. 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 9.4.5) 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 9.4.3, 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 13 any issuance of any Additional Shares of Common Stock to any amount higher than the Conversion Price in effect immediately prior to such issuance. 9.4.4. 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. 9.4.5. DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK - OPTIONS AND CONVERTIBLE SECURITIES. Except as provided in Section 9.4.3 or Section 9.4.4, 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 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 9.4.6) 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; 14 (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 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 9.4.5 shall apply. 9.4.6. DETERMINATION OF CONSIDERATION. For purposes of this Section 9.4, 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 9.4.5, 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 9.4.5(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 for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion of exchange of such Convertible Securities. 9.4.7. OTHER DILUTIVE EVENTS. In case any event shall occur as to which the other provisions of this Section 9.4 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 9, then, upon request of the Series A Required Holders, the Board of Directors of the Corporation shall appoint a firm of independent public accountants of recognized national 15 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 9, 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. 9.5. 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 9, 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. 9.6. 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. 9.7. CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 9, 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 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. 9.8. 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. 10. COVENANTS. 10.1. SERIES B PREFERRED STOCK SPECIAL RESTRICTIONS. At any time when shares of Series B Preferred Stock are outstanding, in addition to any other vote required by law or the Articles of Incorporation, as amended, without the consent of the Series B 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 B 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 B 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 B Preferred Stock as to the distribution of assets on the liquidation, 16 dissolution or winding up of the Corporation, or create or authorize any instrument or security convertible into shares of Series B Preferred Stock or into shares of any other class or series of stock unless the same ranks junior to the Series B 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 B Preferred Stock in any respect or for which the holders of Series B 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 B Preferred Stock, except for redemptions of Series A Preferred Stock in accordance with Section 6 and 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 Purchase Agreement), if each such purchase is made pursuant to contractual rights held by the Corporation relating to the termination of 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 B Preferred Stock except pursuant to a purchase offer made pro rata to all holders of the shares of Series B Preferred Stock on the basis of the aggregate number of outstanding shares of Series B Preferred Stock then eld 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 effectuate a merger or consolidation (a) 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 of all convertible securities and exercise of all outstanding options and warrants) or (b) where provision is made for payment in full of the Series B Preferential Amount at the time of consummation of the merger or consolidation. 10.2. SERIES A PREFERRED STOCK 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 Series A 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 to 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; 17 (c) purchase or set aside any sums for the purchase of any shares of stock other than the Series A Preferred Stock, except for redemptions of Series B Preferred Stock in accordance with Section 7 and 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 Purchase Agreement), if each such purchase is made pursuant to contractual rights held by the Corporation relating to the termination of 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 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 of all convertible securities and exercise of all outstanding options and warrants). 10.3. 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 all rights of the holders of Preferred Stock against impairment. 10.4. 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. 10.5. 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. 10.6. NOTICE OF CERTAIN EVENTS. If at any time: 18 (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. 10.7. NO REISSUANCE OF PREFERRED STOCK. No shares of 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. 11. SERIES A PREEMPTIVE RIGHTS. 11.1. 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 11.7) (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 19 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. 11.2. NOTICE. Notice of each holder of Series A Preferred Stock's intention to accept the Proposal made pursuant to Section 11.1 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. 11.3. 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 11.6, the number of Accepted Shares set forth in such holder's Notice of Purchase. 11.4. 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 11.6, 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 11.6 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. 11.5. 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. 11.6. 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 11 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 11. 11.7. EXCLUSION OF CERTAIN SHARES. Notwithstanding any contrary provision of this Section 11, Future Shares shall not include: 11.7.1. shares of Common Stock issuable upon conversion of the Series A Preferred Stock or upon exercise or conversion of the Warrants. 11.7.2. shares of Common Stock issued pursuant to the exercise of options granted under a stock option plan described in Section 9.4.1(d). 11.7.3. shares of Common Stock issued in connection with mergers permitted by section 5.9 of the Purchase Agreement or otherwise permitted to be issued by section 5.14 of the Purchase Agreement. 20 11.7.4. shares of Common Stock issued to the original holders of Series A Preferred Stock pursuant to the Purchase Agreement. 12. AMENDMENTS. 12.1. SERIES B PREFERRED STOCK. The provisions of these terms relating to the Series B Preferred Stock may not be amended, modified or waived without the written consent or affirmative vote of the Series B Required Holders. 12.2. SERIES A PREFERRED STOCK. The provisions of these terms relating to the Series A Preferred Stock may not be amended, modified or waived without the written consent or affirmative vote of the Series A 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. 12.3. OTHER CLASSES OF CAPITAL STOCK. Except as provided in this Section 12 and to the extent required by law, the vote of the holders of any class of capital stock of the Corporation is not required for the amendment, modification or waiver of the terms of these Articles of Amendment. 13. ADDITIONAL SHARES OF PREFERRED STOCK. 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." EX-10.1.3 3 ex10-1_3.txt THIRD AMENDMENT AND RESTATED FINANCING AGREEMENT 1 Exhibit 10.1.3 THIRD AMENDMENT TO SECOND AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT ------------------------------------------------------------------------------- THIS THIRD AMENDMENT TO SECOND AMENDED AND RESTATED FINANCING AND SECURITY AGREEMENT (this "Agreement") is made as of the 12th day of June, 2000, 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"; the Corporate Guarantors together with Foster Grant and Fantasma, the "Guarantors"; and the Guarantors together with the Borrower, the "Obligors"); BANK OF AMERICA, N.A., a national banking association ("Bank of America"), formerly NationsBank, N.A., and each other financial institution which is party to the Financing Agreement (as that term is defined below) from time to time (collectively, the "Lenders" and individually, a "Lender"); and BANK OF AMERICA, N.A., a national banking association(the "Agent"), formerly NationsBank, N.A., in its capacity as both collateral and administrative agent for each of the Lenders. RECITALS -------- A. The Borrower, the Guarantors, the Lenders and the Agent entered into a Second Amended and Restated Financing and Security Agreement dated July 21, 1998 (as amended by that certain First Amendment to Second Amended and Restated Financing and Security Agreement dated as of May 7, 1999, Second Amendment to Second Amended and Restated Financing and Security Agreement dated as of March 24, 2000, and as further amended, restated, modified, substituted, extended, and renewed from time to time, the "Financing Agreement"). The Financing Agreement provides for some of the agreements among the Borrower, the Guarantors, the Lenders and the Agent with respect to the "Loan" (as defined in the Financing Agreement), including the Revolving Credit Facility (as that term is defined in the Financing 1 2 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. The Borrower has requested that the Agent and Lenders consent to the redemption of a portion of the Senior Notes (as that term is defined in the Financing Agreement) at a discount and that one or more of the Lenders provide a credit subfacility for that purpose. C. The Agent and Lenders are willing to agree to the Borrower's request on the condition, among others, that this Agreement be executed. AGREEMENTS ---------- NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, receipt of which is hereby acknowledged, the Borrower, the Guarantors, the Lenders and Agent agree as follows: 1. The Obligors, the Lenders and the Agent agree that the Recitals above are a part of this Agreement. Unless otherwise expressly defined in this Agreement, terms defined in the Financing Agreement shall have the same meaning under this Agreement. 2. The Obligors, the Lenders and Agent agree that the aggregate outstanding principal balance under the Revolving Credit Note (subject to change for returned items and other adjustments made in the ordinary course of business) as of the close of the business day of June 9, 2000 is $22,659,851.37. 3. Each of the Borrower, Foster Grant and Fantasma represents and warrants to the Lenders and Agent as follows: (a) The Borrower is a corporation duly organized, and validly existing and in good standing under the laws of the state in which it was organized and is duly qualified to do business as a foreign corporation in good standing in every other state wherein the conduct of its business or the ownership of its property requires such qualification. (b) Foster Grant is a limited partnership duly organized, validly existing and in good standing under the laws of the state in which it was organized and is duly qualified to do business as a foreign limited partnership in every other state wherein the conduct of its business or the ownership of its property requires such qualification. (c) Fantasma is a limited liability company duly organized, validly existing and in good standing under the laws of the state in which it was organized and is duly qualified to do business as a foreign limited partnership in every other state wherein the conduct of its business or the ownership of its property requires such qualification. (d) Each of the Borrower, Foster Grant and Fantasma has the power and authority to execute and deliver this Agreement and perform its obligations hereunder and has taken all necessary and appropriate corporate, partnership or limited liability company action, as applicable, to authorize the execution, delivery and performance of this Agreement. 2 3 (e) The Financing Agreement, as amended by this Agreement, and each of the other Financing Documents remains in full force and effect, and each constitutes the valid and legally binding obligation of the Borrower, Foster Grant and Fantasma, enforceable in accordance with its terms. (f) All of the Borrower's, Foster Grant's and Fantasma's representations and warranties contained in the Financing Agreement and the other Financing Documents are true and correct on and as of the date of the Borrower's, Foster Grant's and Fantasma's execution of this Agreement. (g) No Event of Default and no event which, with notice, lapse of time or both would constitute an Event of Default, has occurred and is continuing under the Financing Agreement or the other Financing Documents which has not been waived in writing by the Lenders and Agent. 4. The Financing Agreement is hereby amended as follows: (a) Section 1.1 of the Financing Agreement is hereby amended by changing certain existing definitions in their entirety and adding certain new definitions as follows: "BASE RATE LOAN" MEANS ANY LOAN OR ANY SNR LOAN FOR WHICH INTEREST IS TO BE COMPUTED WITH REFERENCE TO THE BASE RATE. "COMMITMENT" MEANS WITH RESPECT TO EACH LENDER, SUCH LENDER'S REVOLVING CREDIT COMMITMENT AND SNR COMMITMENT AS THE CASE MAY BE, AND "COMMITMENTS" MEANS THE COLLECTIVE REFERENCE TO THE REVOLVING CREDIT COMMITMENTS AND SNR COMMITMENTS OF ALL OF THE LENDERS. "COMMITTED AMOUNT" MEANS WITH RESPECT TO EACH LENDER, SUCH LENDER'S REVOLVING LOAN COMMITTED AMOUNT OR SNR COMMITTED AMOUNT, IF ANY, AS THE CASE MAY BE, AND "COMMITTED AMOUNTS" MEANS COLLECTIVELY THE REVOLVING LOAN COMMITTED AMOUNT AND SNR COMMITTED AMOUNT OF EACH OF THE LENDERS. "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 OR SNR PRO RATA SHARE, IF ANY, OF THE SENIOR NOTE REDEMPTION SUBFACILITY AS THE CASE MAY BE, AND "CREDIT FACILITIES" MEANS COLLECTIVELY WITH RESPECT TO EACH LENDER, SUCH LENDER'S PRO RATA SHARE OF THE REVOLVING CREDIT FACILITY AND THE LETTER OF CREDIT FACILITY AND SNR PRO RATA SHARE, IF ANY, OF THE SENIOR NOTE REDEMPTION SUBFACILITY AND ANY AND ALL OTHER CREDIT FACILITIES NOW OR HEREAFTER EXTENDED UNDER OR SECURED BY THIS AGREEMENT. "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, THE REVOLVING CREDIT UNUSED FACILITY FEES, THE 3 4 LETTER OF CREDIT FEES, THE EARLY TERMINATION FEE, THE ORIGINATION FEE, THE SNR ACTIVATION FEE, AND THE FIELD EXAMINATION FEES. "LIBOR LOAN" MEANS ANY LOAN OR ANY SNR LOAN FOR WHICH INTEREST IS TO BE COMPUTED WITH REFERENCE TO THE LIBOR RATE. "LOANS" MEANS THE COLLECTIVE REFERENCE TO THE LOAN AND TO THE SNR LOAN. "MORTGAGE" MEANS THAT CERTAIN MORTGAGE, ASSIGNMENT AND SECURITY AGREEMENT DATED AS OF THE SNR CLOSING DATE, FROM THE BORROWER TO THE AGENT FOR ITSELF AND THE SNR LENDERS SECURING THE OBLIGATIONS WITH RESPECT TO THE SENIOR NOTE REDEMPTION SUBFACILITY. "NOTE" MEANS ANY REVOLVING CREDIT NOTE OR ANY SNR NOTE AS THE CASE MAY BE, AND "NOTES" MEANS COLLECTIVELY EACH REVOLVING CREDIT NOTE, EACH SNR NOTE AND ANY OTHER PROMISSORY NOTE WHICH MAY FROM TIME TO TIME EVIDENCE ALL OR ANY PORTION OF THE OBLIGATIONS. "PERMITTED SENIOR NOTE PURCHASES" MEANS THE COLLECTIVE REFERENCE TO EACH PURCHASE BY THE BORROWER OF SENIOR NOTES USING THE PROCEEDS OF AND IN CONFORMANCE WITH THE SENIOR NOTE REDEMPTION SUBFACILITY. "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 AND/OR THE SENIOR NOTE REDEMPTION SUBFACILITY, 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. 4 5 "SENIOR NOTE REDEMPTION SUBFACILITY" AND "SNR" EACH MEAN SENIOR NOTE REDEMPTION CREDIT FACILITY PROVIDED BY THE SNR LENDERS AS DESCRIBED IN SECTION 2.6.1 (SENIOR NOTE REDEMPTION SUBFACILITY). "SNR ACTIVATION FEE" HAS THE MEANING DESCRIBED IN SECTION 2.6.5 (ACTIVATION FEE). "SNR CLOSING DATE" MEANS JUNE 12, 2000. "SNR COMMITMENT" AND "SNR COMMITMENTS" HAVE THE MEANINGS DESCRIBED IN SECTION 2.6.1 (SENIOR NOTE REDEMPTION SUBFACILITY). "SNR COMMITMENT PERIOD" MEANS THE PERIOD OF TIME FROM THE SNR CLOSING DATE TO JULY 7, 2000. "SNR COMMITTED AMOUNT" HAS THE MEANING DESCRIBED IN SECTION 2.6.1 (SENIOR NOTE REDEMPTION SUBFACILITY). "SNR EXPIRATION DATE" MEANS THE REVOLVING CREDIT EXPIRATION DATE. "SNR GUARANTOR" MEANS WESTON PRESIDIO CAPITAL II, L.P., A DELAWARE LIMITED PARTNERSHIP AND ITS SUCCESSORS. "SNR GUARANTY" MEANS THAT CERTAIN GUARANTY OF PAYMENT AGREEMENT DATED AS OF THE SNR CLOSING DATE FROM THE SNR GUARANTOR IN FAVOR OF THE AGENT AND THE SNR LENDERS WITH RESPECT TO THE SENIOR NOTE REDEMPTION SUBFACILITY. "SNR INSTALLMENT PAYMENT SCHEDULE" HAS THE MEANING DESCRIBED IN SECTION 2.6.4 (PAYMENTS OF SENIOR NOTE REDEMPTION FACILITY). "SNR LENDER" MEANS EACH LENDER THAT HAS A SNR PRO RATA SHARE, AS THE CASE MAY BE AND EACH OF THEIR RESPECTIVE SUCCESSORS AND ASSIGNS; AND "SNR LENDERS" MEANS THE COLLECTIVE REFERENCE TO ALL LENDERS THAT HAVE A SNR PRO RATA SHARE, AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS. "SNR LOAN" HAS THE MEANING SET FORTH IN SECTION 2.6.1 (SENIOR NOTE REDEMPTION SUBFACILITY). "SNR LOAN OBLIGATIONS" MEANS THE OBLIGATION WITH RESPECT TO THE SNR LOAN. "SNR LOAN OPTIONAL PREPAYMENT" HAS THE MEANING SET FORTH IN SECTION 2.6.6 (SNR LOAN OPTIONAL PREPAYMENT). "SNR NOTE" AND "SNR NOTES" HAVE THE MEANING DESCRIBED IN SECTION 2.6.3 (SNR NOTES). 5 6 "SNR NOTICE" HAS THE MEANING DESCRIBED IN SECTION 2.6.2 (PROCEDURE FOR MAKING ADVANCES UNDER THE SNR). "SNR PARTICIPANT" MEANS WESTON PRESIDIO CAPITAL II, L.P., A DELAWARE LIMITED PARTNERSHIP AND ITS SUCCESSORS. "SNR PARTICIPATION AGREEMENT" MEANS THAT CERTAIN NOTE PARTICIPATION AGREEMENT DATED AS OF THE SNR CLOSING DATE AMONG THE SNR LENDERS AND THE SNR PARTICIPANT, AS AMENDED, MODIFIED, RESTATED, SUBSTITUTED, EXTENDED AND RENEWED FROM TIME TO TIME. "SNR PRO RATA SHARE" HAS THE MEANING DESCRIBED IN SECTION 2.6.1 (SENIOR NOTE REDEMPTION SUBFACILITY). "SNR TERMINATION DATE" MEANS THE EARLIER OF (a) THE SNR EXPIRATION DATE, OR (B) THE REVOLVING CREDIT TERMINATION DATE. "TOTAL SNR COMMITTED AMOUNT" HAS THE MEANING DESCRIBED IN SECTION 2.6.1. (b) The definition of "Permitted Uses" is hereby amended to include the payment of any and all regularly scheduled payments of principal of, or interest on, the SNR Loan, as and when such payments are due and payable. (c) The table in Section 2.1.1 of the Financing Agreement is hereby amended to read as follows: REVOLVING CREDIT REVOLVING CREDIT LENDER COMMITTED AMOUNT PRO RATA SHARE BANK OF AMERICA $27,692,340 46.1539% LASALLE $18,461,520 30.7692% PNC $13,846,140 23.0769% TOTAL REVOLVING CREDIT COMMITTED AMOUNT $60,000,000 100% (d) Clause (b) of the fifth paragraph of Section 2.1.1 of the Financing Agreement is hereby amended in its entirety to read as follows: (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 MINUS THE TOTAL 6 7 SNR COMMITTED AMOUNT OR (ii) THE THEN MOST CURRENT BORROWING BASE. (e) Section 2.3.1, 2.3.2, 2.3.3 and 2.3.5 of the Financing Agreement are hereby amended in their entirety to read as follows: 2.3.1 APPLICABLE INTEREST RATES. (a) EACH LOAN AND EACH SNR 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, THE LOAN, THE SNR 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 PERCENT (2%) PER ANNUM, AND (ii) BASE RATE LOANS SHALL BE ONE-QUARTER PERCENT (0.25%) PER ANNUM. WITH RESECT TO THE SNR LOANS, THE APPLICABLE MARGIN FOR (i) LIBOR LOANS SHALL BE TWO AND ONE-HALF PERCENT (2.5%) PER ANNUM, AND (ii) BASE RATE LOANS SHALL BE THREE-QUARTERS PERCENT (0.75%) PER ANNUM. THE APPLICABLE MARGINS ARE SUBJECT TO CHANGE AS PROVIDED IN SECTION 2.3.1(d). (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 FISCAL MONTH ENDING JUNE, 2000. THE APPLICABLE MARGIN (EXPRESSED AS BASIS POINTS) SHALL VARY DEPENDING UPON THE BORROWER'S PRICING RATIO, AS FOLLOWS:
- ----------------------------------- --------------- -------------- --------------- -------------- PRICING RATIO LIBOR REVOLVING BASE RATE LIBOR BASE RATE LOAN REVOLVING LOAN SNR LOAN SNR LOAN - ---------------------------------- --------------- -------------- -------------- ------------- GREATER THAN 1.0 TO 1.0 BUT LESS 275 100 325 150 THAN OR EQUAL TO 1.05 TO 1.0 - ----------------------------------- --------------- -------------- --------------- -------------- GREATER THAN 1.05 TO 1.0 BUT LESS 250 75 300 125 THAN OR EQUAL TO 1.10 TO 1.0 - ----------------------------------- --------------- -------------- --------------- --------------
7 8
GREATER THAN 1.10 TO 1.0 BUT LESS 225 50 275 100 THAN OR EQUAL TO 1.15 TO 1.0 - ----------------------------------- --------------- -------------- --------------- -------------- GREATER THAN 1.15 TO 1.0 BUT LESS 200 25 250 75 THAN OR EQUAL TO 1.60 TO 1.0 - ----------------------------------- --------------- -------------- --------------- -------------- GREATER THAN 1.60 TO 1.0 175 0 225 50 - ----------------------------------- --------------- -------------- --------------- --------------
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 LOANS. (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 2.3.2(e), THE BORROWER MAY SELECT AN INITIAL APPLICABLE INTEREST RATE OR APPLICABLE INTEREST RATES FOR THE LOAN AND/OR THE SNR LOAN OR MAY CONVERT THE APPLICABLE INTEREST RATE AND, WHEN APPLICABLE, THE INTEREST PERIOD, FOR ANY EXISTING LOAN AND/OR SNR 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; 8 9 (iii) ANY APPLICABLE INTEREST RATE CHANGE FOR ANY LOAN AND/OR SNR LOAN TO BE EFFECTIVE ON A DATE ON WHICH ANY PRINCIPAL PAYMENT ON ACCOUNT OF SUCH LOAN AND/OR SNR LOAN IS SCHEDULED TO BE PAID SHALL BE MADE ONLY AFTER SUCH PAYMENT SHALL HAVE BEEN MADE, (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) UNLESS THE AGENT ELECTS OTHERWISE, 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 OR UNDER THE SNR 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 AND/OR THE SNR LOAN, TO CONVERT THE APPLICABLE INTEREST RATE ON ADVANCES OF THE LOAN AND/OR THE SNR 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. 9 10 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. 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 OR AN SNR 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 OR AN SNR 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 OR SNR 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 OR SNR 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. 2.3.5 PAYMENT OF INTEREST. (a) UNPAID AND ACCRUED INTEREST ON ANY ADVANCE OF THE REVOLVING LOAN OR THE SNR 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. 10 11 5. Section 2.5 (Settlement Among Lenders) is hereby amended by adding the following new section as Section 2.5.5: 2.5.5 SENIOR NOTE REDEMPTION SUBFACILITY. THE AGENT SHALL PAY TO EACH SNR LENDER ON EACH INTEREST PAYMENT DATE OR DATE PROVIDED IN THE SNR INSTALLMENT PAYMENT SCHEDULE, AS THE CASE MAY BE, SUCH SNR LENDER'S SNR PRO RATA SHARE OF ALL PAYMENTS RECEIVED BY THE AGENT IN IMMEDIATELY AVAILABLE FUNDS ON ACCOUNT OF THE SNR, NET OF ANY AMOUNTS PAYABLE BY SUCH SNR LENDER TO THE AGENT, BY WIRE TRANSFER OF SAME DAY FUNDS; THE AMOUNT PAYABLE TO EACH SNR LENDER SHALL BE BASED ON THE PRINCIPAL AMOUNT OF THE SNR OWING TO SUCH SNR LENDER. 6. Article II of the Financing Agreement is hereby amended by adding the following as new Section 2.6: SECTION 2.6 THE SENIOR NOTE REDEMPTION SUBFACILITY. 2.6.1 SENIOR NOTE REDEMPTION SUBFACILITY. SUBJECT TO AND UPON THE PROVISIONS OF THIS AGREEMENT, THE SNR LENDERS COLLECTIVELY, BUT SEVERALLY, ESTABLISH IN FAVOR OF THE BORROWER A CREDIT FACILITY FOR THE REPURCHASE OF SENIOR NOTES. ADVANCES UNDER THE SENIOR NOTE REDEMPTION SUBFACILITY ARE SOMETIMES REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AND COLLECTIVELY AS THE "SNR LOAN." THE AMOUNT SET FORTH IN THE FOLLOWING TABLE IS HEREIN CALLED SUCH SNR LENDER'S "SNR COMMITTED AMOUNT," THE AGGREGATE OF ALL SNR LENDER'S SNR COMMITTED AMOUNTS EQUAL ($2,750,000) AND IS HEREIN CALLED THE "TOTAL SNR COMMITTED AMOUNT," AND THE PROPORTIONATE SHARE SET FORTH IN THE FOLLOWING TABLE IS HEREIN CALLED SUCH SNR LENDER'S "SNR PRO RATA SHARE."
SNR LENDER SNR COMMITTED AMOUNT SNR PRO RATA SHARE BANK OF AMERICA $1,269,232 46.1539% LASALLE $ 846,153 30.7692% PNC $ 634,615 23.0769% TOTAL SNR COMMITTED AMOUNT $2,750,000 100%
11 12 THE OBLIGATION OF EACH SNR LENDER TO MAKE AN ADVANCE UNDER THE SNR LOAN IS SEVERAL AND IS LIMITED TO ITS SNR COMMITTED AMOUNT AND BY THE PROVISIONS OF CLAUSE (c) IN THE FOLLOWING PARAGRAPH AND SUCH OBLIGATION OF EACH SNR LENDER IS HEREIN CALLED ITS "SNR COMMITMENT". THE SNR COMMITMENT OF EACH OF THE SNR LENDERS IS HEREIN COLLECTIVELY REFERRED TO AS THE "SNR COMMITMENTS". THE AGENT SHALL NOT BE RESPONSIBLE FOR THE SNR COMMITMENT OF ANY SNR LENDER; AND SIMILARLY, NONE OF THE SNR LENDERS SHALL BE RESPONSIBLE FOR THE SNR COMMITMENT OF ANY OF THE OTHER SNR LENDERS; THE FAILURE, HOWEVER, OF ANY SNR LENDER TO PERFORM ITS SNR COMMITMENT SHALL NOT RELIEVE ANY OF THE OTHER SNR LENDERS FROM THE PERFORMANCE OF THEIR RESPECTIVE SNR COMMITMENTS. DURING THE SNR COMMITMENT PERIOD, THE BORROWER MAY REQUEST ADVANCES UNDER THE SENIOR NOTE REPURCHASE FACILITY IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT; PROVIDED THAT AFTER GIVING EFFECT TO ANY BORROWER'S REQUEST: (a) THE OUTSTANDING PRINCIPAL BALANCE OF EACH SNR LENDER'S SNR PRO RATA SHARE OF THE SENIOR NOTE REDEMPTION SUBFACILITY WOULD NOT EXCEED SUCH SNR LENDER'S SNR PRO RATA SHARE; AND (b) THE AGGREGATE OUTSTANDING PRINCIPAL BALANCE OF THE SNR WOULD NOT EXCEED THE TOTAL SNR COMMITTED AMOUNT; AND (c) THE OUTSTANDING PRINCIPAL BALANCE OF THE AGGREGATE OF THE REVOLVING LOAN, ALL LETTER OF CREDIT OBLIGATIONS AND THE SNR LOAN WOULD NOT EXCEED AN AMOUNT EQUAL TO THE TOTAL REVOLVING CREDIT COMMITTED AMOUNT. AMOUNTS REPAID ON THE SNR MAY NOT BE REBORROWED. 2.6.2 PROCEDURE FOR MAKING ADVANCES UNDER THE SNR. THE BORROWER MAY BORROW UNDER THE SENIOR NOTE REDEMPTION SUBFACILITY ON ANY BUSINESS DAY DURING THE SNR COMMITMENT PERIOD. THE BORROWER SHALL GIVE THE AGENT WRITTEN NOTICE (AN "SNR NOTICE") AT LEAST ONE (1) BUSINESS DAY PRIOR TO THE DATE ON WHICH SUCH BORROWER DESIRES AN ADVANCE UNDER THE SNR. EACH SNR NOTICE SHALL BE ACCOMPANIED BY A WRITTEN REQUEST FROM THE BORROWER THAT ACCURATELY AND COMPLETELY DESCRIBES A SENIOR NOTE TO BE PURCHASED, THE OUTSTANDING PRINCIPAL BALANCE OF THE SENIOR NOTE, THE AMOUNT TO BE PAID (WHICH AMOUNT SHALL BE NO GREATER THAN A PERCENTAGE OF SUCH OUTSTANDING PRINCIPAL BALANCE AS MAY BE AGREED UPON BY THE BORROWER AND THE SNR LENDERS) TO REDEEM THE SENIOR NOTE, AND THE DATE AND MANNER OF PAYMENT. EACH SNR NOTICE SHALL ALSO BE ACCOMPANIED BY SUCH OTHER INFORMATION, CERTIFICATES, CONFIRMATIONS, AND OTHER ITEMS AS THE AGENT MAY REQUIRE WITH RESPECT TO THE REPURCHASE OF THE 12 13 SENIOR NOTE AND COMPLIANCE WITH THE OTHER TERMS OF THIS AGREEMENT. THE BORROWER SHALL USE THE PROCEEDS OF THE SNR LOAN PROMPTLY AND ONLY FOR THE REDEMPTION OF SENIOR NOTES IN ACCORDANCE WITH AN SNR NOTICE. NOT LATER THAN 2:00 P.M. (BALTIMORE CITY TIME) ON EACH REQUESTED BORROWING DATE FOR THE MAKING OF ADVANCES UNDER THE SNR, EACH SNR 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 SECTION 9.1, SUCH SNR LENDER'S SNR PRO RATA SHARE OF THE ADVANCES TO BE MADE ON SUCH DATE. 2.6.3 SNR NOTES. THE OBLIGATION OF THE BORROWER TO PAY EACH SNR LENDER'S SNR PRO RATA SHARE OF THE SENIOR NOTE REDEMPTION SUBFACILITY, 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 "SNR NOTES" AND INDIVIDUALLY A "SNR NOTE") SUBSTANTIALLY IN THE FORM OF EXHIBIT "A-2" ATTACHED HERETO AND MADE A PART HEREOF, WITH APPROPRIATE INSERTIONS. EACH SNR LENDER'S SNR NOTE SHALL BE PAYABLE TO THE ORDER OF SUCH SNR LENDER AT THE TIMES PROVIDED IN THE SNR NOTE, AND SHALL BE IN THE PRINCIPAL AMOUNT OF SUCH SNR LENDER'S SNR PRO RATA SHARE. THE BORROWER ACKNOWLEDGES AND AGREES THAT, IF THE OUTSTANDING PRINCIPAL BALANCE OF THE SENIOR NOTE REDEMPTION SUBFACILITY OUTSTANDING FROM TIME TO TIME EXCEEDS THE AGGREGATE FACE AMOUNT OF THE SNR NOTES, THE EXCESS SHALL BEAR INTEREST AT THE RATES PROVIDED FROM TIME TO TIME FOR THE SENIOR NOTE REDEMPTION SUBFACILITY EVIDENCED BY THE SNR NOTES AND SHALL BE PAYABLE, WITH ACCRUED INTEREST, ON DEMAND. THE SNR 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. 2.6.4 PAYMENTS OF SENIOR NOTE REDEMPTION SUBFACILITY. EACH ADVANCE UNDER THE SENIOR NOTE REDEMPTION SUBFACILITY SHALL BE REPAYABLE IN INSTALLMENT PAYMENTS OF PRINCIPAL MONTHLY (ON THE FIRST DAY OF EACH MONTH) COMMENCING APRIL 1, 2001 IN AN AMOUNT EQUAL TO 1/60TH OF THE AMOUNT OUTSTANDING ON MARCH 31, 2001. THE SNR INSTALLMENT PAYMENT SCHEDULES 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 OR THE SNR NOTES. 2.6.5 ACTIVATION FEE. 13 14 THE BORROWER SHALL PAY TO THE AGENT FOR THE RATABLE (BASED UPON EACH SNR LENDER'S SNR PRO RATA SHARE) BENEFIT OF THE SNR LENDERS ON OR BEFORE THE DATE OF EACH ADVANCE UNDER THE SENIOR NOTE REDEMPTION SUBFACILITY A FEE (THE "SNR ACTIVATION FEE") IN THE AMOUNT OF ONE AND ONE-HALF PERCENT (1-1/2%) OF THE AMOUNT ADVANCED. 2.6.6 OPTIONAL PREPAYMENTS OF SNR LOAN. THE SNR LOAN MAY NOT BE PREPAID IN WHOLE OR IN PART ON OR BEFORE JULY 31, 2001. SUBJECT TO THE PROVISIONS OF SECTION 2.6.7 (SNR EARLY TERMINATION FEE) AND SECTION 2.3.4 (INDEMNITY), THE BORROWER SHALL HAVE THE OPTION AT ANY TIME THEREAFTER AND FROM TIME TO TIME PREPAY (EACH A "SNR LOAN OPTIONAL PREPAYMENT" AND COLLECTIVELY THE "SNR LOAN OPTIONAL PREPAYMENTS") THE SNR LOAN, IN WHOLE OR IN PART WITHOUT PREMIUM OR PENALTY; PROVIDED, HOWEVER, THAT THE BORROWER MAY NOT USE ANY PROCEEDS OF AN ADVANCE UNDER THE REVOLVING CREDIT FACILITY FOR AN SNR LOAN OPTIONAL PREPAYMENT UNLESS AT THE TIME OF THE REQUEST FOR, AT THE TIME OF THE FUNDING OF AND IMMEDIATELY AFTER THE TIME OF THE APPLICATION OF SUCH ADVANCE, THE OUTSTANDING PRINCIPAL AMOUNT OF THE REVOLVING LOAN PLUS THE OUTSTANDING LETTER OF CREDIT OBLIGATIONS DOES NOT EXCEED AN AMOUNT EQUAL TO THE LESSER OF (i) THE TOTAL REVOLVING CREDIT COMMITTED AMOUNT OR (ii) THE BORROWING BASE, MINUS TEN MILLION DOLLARS ($10,000,000) AND MINUS AN AMOUNT EQUAL TO ACCRUED AND AN UNPAID INTEREST ON THE SENIOR NOTES. 2.6.7 SNR EARLY TERMINATION FEE. WITH EACH SNR LOAN OPTIONAL PREPAYMENT 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 "SNR EARLY TERMINATION FEE") EQUAL TO FOLLOWING AMOUNT AT THE FOLLOWING TIMES: - -------------------------------------------------------------------------------- PERIOD SNR EARLY TERMINATION FEE - -------------------------------------------------------------------------------- AUGUST 1, 2001 THROUGH AND INCLUDING JULY 31, 0.5% OF THE AMOUNT PREPAID 2002 - -------------------------------------------------------------------------------- AUGUST 1, 2002 THROUGH AND INCLUDING JULY 31, 0.25% OF THE AMOUNT PREPAID 2003 - -------------------------------------------------------------------------------- AUGUST 1, 2003 AND THEREAFTER NONE - -------------------------------------------------------------------------------- PAYMENT OF THE SNR 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, 14 15 SHALL BE DEEMED TO BE A PREPAYMENT OF THE SNR LOAN SUBJECT TO THE SNR EARLY TERMINATION FEE PROVIDED IN THIS SUBSECTION. NOTWITHSTANDING THE FOREGOING, THE BORROWER SHALL NOT BE REQUIRED TO PAY THE SNR 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 THE BORROWER, (b) THE PROCEEDS OF AN ISSUANCE OF COMMON STOCK BY THE BORROWER, (c) A REPLACEMENT CREDIT FACILITY EXTENDED BY BANK OF AMERICA, 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 WHICH GENERATES SUFFICIENT PROCEEDS AND IS IN FACT USED TO REPAY ALL OBLIGATIONS 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. 7. Section 7.2.5 of the Financing Agreement is hereby amended in its entirety as follows: 7.2.5 APPLICATION OF PROCEEDS; SNR PARTICIPANT. (a) 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 THEREAFTER (i) PROCEEDS FROM THE COLLATERAL (OTHER THAN THE MORTGAGE) SHALL BE APPLIED FIRST TO THE OBLIGATIONS WITH RESPECT TO THE REVOLVING CREDIT FACILITY, SECOND TO OBLIGATIONS OTHER THAN THE THOSE WITH RESPECT TO THE SENIOR NOTE REDEMPTION SUBFACILITY, THEN TO ANY OBLIGATIONS WITH RESPECT TO THE SENIOR NOTE REDEMPTION SUBFACILITY, AND (ii) PROCEEDS FROM THE MORTGAGE SHALL BE APPLIED FIRST TO THE OBLIGATIONS WITH RESPECT TO THE SENIOR NOTE REDEMPTION SUBFACILITY AND THEN TO ANY OTHER OBLIGATIONS. IF THE SALE OR OTHER DISPOSITION (BY FORECLOSURE, LIQUIDATION OR OTHERWISE) OF THE COLLATERAL FAILS TO FULLY SATISFY THE OBLIGATIONS, THE BORROWER SHALL REMAIN LIABLE TO THE AGENT AND THE SNR LENDERS FOR ANY DEFICIENCY. (b) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, THE THIRD AMENDMENT OR OTHERWISE, WITHOUT THE PRIOR WRITTEN CONSENT OF THE REQUISITE LENDERS, UNTIL THE OBLIGATIONS (OTHER THAN THE SNR LOAN OBLIGATIONS AND CONTINGENT INDEMNIFICATION OBLIGATIONS NOT THEN DUE AND PAYABLE), HAVE BEEN INDEFEASIBLY PAID IN FULL IN CASH (i) THE SNR LOAN SHALL NOT BE INCLUDED IN THE DETERMINATION OF PRO RATA SHARES AND REQUISITE LENDERS, (ii) THE AGENT AND THE LENDERS MAY TAKE ANY ACTION UNDER THIS AGREEMENT, UNDER THE FINANCING AGREEMENT, UNDER THE FINANCING 15 16 DOCUMENTS, UNDER APPLICABLE LAWS (INCLUDING, WITHOUT LIMITATION, THOSE ACTIONS FOR WHICH THE CONSENT OF ALL LENDERS IS REQUIRED UNDER SECTION 9.2.2 (CIRCUMSTANCES WHERE CONSENT OF ALL LENDERS IS REQUIRED) OF THE FINANCING AGREEMENT) OR OTHERWISE WITH RESPECT TO THE OBLIGATIONS AND/OR THE COLLATERAL (OTHER THAN THE MORTGAGE AND OTHER THAN TO MODIFY THE TERMS OF, OR TO RELEASE THE OBLIGORS WITH RESPECT TO, THE SNR LOAN OBLIGATIONS AS PROVIDED UNDER THE THIRD AMENDMENT) WITHOUT THE FURTHER AGREEMENT OR CONSENT OF THE HOLDER OF THE SNR LOAN OR ANY INTEREST THEREIN (INCLUDING, WITHOUT LIMITATION, THE SNR PARTICIPANT), (iii) ALL LIENS (OTHER THAN THE LIEN OF THE MORTGAGE) SECURING THE SNR LOAN OBLIGATIONS SHALL BE AND ARE HEREBY AGREED TO BE FULLY SUBORDINATE TO THE LIENS OF THE AGENT AND THE LENDERS IN THE COLLATERAL (OTHER THAN THE MORTGAGE), AND THE HOLDER OF THE SNR LOAN OR ANY INTEREST THEREIN (INCLUDING, WITHOUT LIMITATION, THE SNR PARTICIPANT) SHALL HAVE NO RIGHTS OF MARSHALLING OR OTHERWISE IN CONNECTION WITH THE DISPOSITION OF THE COLLATERAL, (iv) NO PROCEEDS OF SALE OR OTHER DISPOSITION OF THE COLLATERAL (OTHER THAN THE MORTGAGE) WILL BE APPLIED TO THE SNR LOAN, AND (v) THE AGENT, IN THE EXERCISE OF ITS SOLE AND ABSOLUTE DISCRETION, MAY AT ANY TIME RELEASE, TERMINATE, FAIL TO PERFECT OR OTHERWISE DEAL WITH OR FAIL TO DEAL WITH THE COLLATERAL (OTHER THAN THE MORTGAGE) AS LONG AS SUCH ACTION IS NOT TAKEN BY THE AGENT IN BAD FAITH OR BY WILLFUL MISCONDUCT, ALL AS IF THE SNR LOAN DID NOT EXIST, THE HOLDERS OF THE SNR LOAN AND OF ANY INTEREST THEREIN (INCLUDING, WITHOUT LIMITATION, THE SNR PARTICIPANT) WAIVING ANY CLAIM TO THE CONTRARY. 8. Article V of the Financing Agreement is hereby amended by adding the following as new Sections 5.3 and 5.4: SECTION 5.3 CONDITIONS TO THE INITIAL ADVANCE UNDER THE SENIOR NOTE REDEMPTION SUBFACILITY. THE MAKING OF THE INITIAL ADVANCE UNDER THE SENIOR NOTE REDEMPTION SUBFACILITY IS SUBJECT TO THE FULFILLMENT ON OR BEFORE THE SNR CLOSING DATE OF THE FOLLOWING CONDITIONS PRECEDENT IN A MANNER SATISFACTORY IN FORM AND SUBSTANCE TO THE AGENT AND ITS COUNSEL: 5.3.1 ORGANIZATIONAL DOCUMENTS.- OBLIGORS THE AGENT SHALL HAVE RECEIVED FOR EACH OF OBLIGORS CERTIFICATES OF GOOD STANDING, OFFICER'S CERTIFICATES, AND TRUE AND COMPLETE COPIES OF THE APPLICABLE CORPORATE CHARTER, BYLAWS, PARTNERSHIP AGREEMENTS, PARTNERSHIP CERTIFICATES, AND ALL AMENDMENTS THERETO, ALL IN FORM AND SUBSTANCE SATISFACTORY TO THE AGENT. 5.3.2 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 AND SUBSTANCE SATISFACTORY TO THE AGENT. 16 17 5.3.3 ORGANIZATIONAL DOCUMENTS.- SNR GUARANTOR THE AGENT SHALL HAVE RECEIVED FOR THE SNR GUARANTOR CERTIFICATES OF GOOD STANDING, PARTNER'S CERTIFICATES, AND TRUE AND COMPLETE COPIES OF THE APPLICABLE PARTNERSHIP AGREEMENTS, PARTNERSHIP CERTIFICATES, AND ALL AMENDMENTS THERETO, ALL IN FORM AND SUBSTANCE SATISFACTORY TO THE AGENT. 5.3.4 OPINION OF SNR GUARANTOR'S COUNSEL. THE AGENT SHALL HAVE RECEIVED THE FAVORABLE OPINION OF COUNSEL FOR THE SNR GUARANTOR ADDRESSED TO THE AGENT AND THE LENDERS IN FORM AND SUBSTANCE SATISFACTORY TO THE AGENT. 5.3.5 NOTES. THE AGENT SHALL HAVE RECEIVED FOR DELIVERY TO EACH OF THE SNR LENDERS THE SNR 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. 5.3.6 MORTGAGE. THE BORROWER SHALL HAVE EXECUTED AND DELIVERED THE MORTGAGE CONFORMING TO THE REQUIREMENTS HEREOF AND EXECUTED BY A RESPONSIBLE OFFICER OF THE BORROWER AND ATTESTED BY A DULY AUTHORIZED REPRESENTATIVE OF THE BORROWER AND IN FORM AND SUBSTANCE SATISFACTORY TO THE AGENT. 5.3.7 SNR GUARANTY; SNR PARTICIPANT. THE SNR GUARANTOR SHALL HAVE EXECUTED AND DELIVERED THE SNR GUARANTY IN FORM AND SUBSTANCE SATISFACTORY TO THE AGENT. 5.3.8 SNR PARTICIPATION. THE SNR PARTICIPANT SHALL HAVE EXECUTED AND DELIVERED THE SNR PARTICIPATION WHICH SHALL BE IN FORM AND SUBSTANCE SATISFACTORY TO THE SNR LENDERS. 5.3.8 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. 17 18 5.3.9 PAYMENT OF FEES. THE AGENT AND THE LENDERS SHALL HAVE RECEIVED PAYMENT OF ANY FEES DUE ON OR BEFORE THE SNR CLOSING DATE. SECTION 5.4 CONDITIONS TO THE INITIAL ADVANCE UNDER THE SENIOR NOTE REDEMPTION SUBFACILITY. THE MAKING OF ALL ADVANCES UNDER THE SNR LOAN IS SUBJECT TO THE FULFILLMENT OF THE REQUIREMENTS OF SECTION 2.6 (SENIOR NOTE REDEMPTION SUBFACILITY) AND TO THE FULFILLMENT AT THE TIME OF EACH SUCH ADVANCE OF THE CONDITIONS SET FORTH IN SECTION 5.2 (CONDITIONS TO ALL EXTENSIONS OF CREDIT) (EXCEPT THAT REFERENCES TO EACH ADVANCE UNDER THE LOAN SHALL BE DEEMED TO REFER TO EACH ADVANCE UNDER THE SNR LOAN). 9. With respect to the SNR Guaranty: (a) After February 28, 2001 and before April 15, 2001, the SNR Guarantor or the Borrower by notice to the Agent and the SNR Lenders may request that the SNR Guaranty be released, which the Agent and the SNR Lenders shall do if (a) the Borrower has delivered the annual financial statements, certificates and opinions as and when required by Sections 6.1.1(a) and (b); (b) there shall exist no Default or Event of Default as of the date of those financial statements, the date of the notice and the date of the release; (c) the outstanding principal amount of the Revolving Loan plus the Outstanding Letter of Credit Obligations does not on the date of release exceed an amount equal to the lesser of (i) the Total Revolving Credit Committed Amount or (ii) the Borrowing Base, minus Ten Million Dollars ($10,000,000) and minus an amount equal to accrued and an unpaid interest on the Senior Notes; and (d) the conditions of the following subparagraph (c) have been met. (b) If the SNR Guarantor or the Borrower does not make a request meeting the requirements of subsection (a) above, for a period of thirty (30) days after the Borrower delivers the financial statements and certificates as and when required by Sections 6.1.1(c) for a month that is also the end of a fiscal quarter of the Borrower, the SNR Guarantor or the Borrower by notice to the Agent and the SNR Lenders may request that the SNR Guaranty be released, which the Agent and the SNR Lenders shall do if (a) the Borrower has delivered the monthly financial statements and certificates as and when required by Sections 6.1.1(c) for the fiscal quarter most recently ended; (b) there shall exist no Default or Event of Default as of the date of those financial statements, the date of the notice and the date of the release; (c) the outstanding principal amount of the Revolving Loan plus the Outstanding Letter of Credit Obligations does not on the date of release exceed an amount equal to the lesser of (i) the Total Revolving Credit Committed Amount or (ii) the Borrowing Base and minus an amount equal to accrued and an unpaid interest on the Senior Notes, minus Ten Million Dollars ($10,000,000); and (d) the conditions of the following subparagraph (c) have been met. (c) The SNR Lenders shall have no obligation to release the SNR Guaranty unless the Mortgage at the time of the release shall grant a Lien covering the real property described therein to the Agent, for the ratable benefit of the SNR Lenders and the Agent to secure the SNR 18 19 Obligations (including, without limitation, the Agent's Obligations with respect thereto), and shall: (i) be in form and substance satisfactory to the Agent; (ii) create a first priority Lien in such real property in favor of the Agent, for the ratable benefit of the SNR Lenders and the Agent to secure the SNR Obligations (including, without limitation, the Agent's Obligations with respect thereto), subject only to Permitted Liens, zoning ordinances, existing leases related to a PILOT program (provided, however, that on or before July 31, 2000 such leases shall be subordinated to the Mortgage, in form and substance satisfactory to the Agent), and such other matters as the Agent may reasonably approve and subject to no preference claims or other claims under the Bankruptcy Codes or under other Laws affecting the rights of creditors generally; (iii) be accompanied by a current appraisal of the fair market value of the subject real property prepared by appraisers reasonably satisfactory to the Agent, which appraisal shall show that the outstanding principal balance of the SNR Loan does not exceed 75% of such fair market value; (iv) be accompanied by a current survey reasonably satisfactory in all respects to the Agent of the subject real property, prepared by a registered land surveyor or engineer satisfactory to the Agent; (v) be accompanied by evidence (including, without limitation, a Phase I report ordered by and for the Agent and meeting ASTM standards and the Agent's then current standards) reasonably satisfactory to the Agent regarding the current and past pollution control practices at such real property in connection with the discharge, emission, handling, disposal or existence of Hazardous Materials, which may include, at the Agent's request, an environmental audit of such real property prepared by a person or firm acceptable to the Agent; (vi) be accompanied by a mortgagee's title insurance policy or marked-up unconditional commitment or binder for such insurance in form and substance satisfactory to the Agent and issued by a title insurance company reasonably satisfactory to the Agent; and (vii) upon request of the Agent, be accompanied by a signed opinion of counsel addressed to the Agent and each of the Lenders, in form and substance satisfactory to the Agent, and from counsel, satisfactory to the Agent, licensed to practice in the state where the subject real property is located. 10. The Borrower covenants and agrees to provide on or before July 31, 2000, the items required by clauses (iv) and (vi) of Section 9(c) above. 11. By letter dated May 15, 2000, the Borrower requested that the Agent and the Lenders consent to a reorganization of the Obligors with the effect that all of the assets of Foster Grant Holdings, Inc. and its direct and indirect subsidiaries will be held by the Borrower. The Agent 19 20 and the Lenders agree that the reorganization so described shall be treated as a transaction covered by Section 6.2.1(c) of the Financing Agreement and that no further consent of the Agent or the Lenders shall be required if the reorganization meets the requirements of Section 6.2.1(c), including, without limitation, the requirement that all Collateral remain subject to the Liens in favor of the Agent and the Lenders. 12. The Obligors, as applicable, hereby issue, ratify and confirm the representations, warranties and covenants contained in the Financing Agreement, as amended hereby. The Obligors agree that this Agreement is not intended to and shall not cause a novation with respect to any or all of the Obligations. 11. The Obligors acknowledge and warrant that the Agent and Lenders have acted in good faith and have conducted in a commercially reasonable manner their relationships with the Obligors in connection with this Agreement and generally in connection with the Financing Agreement and the Obligations, the Obligors hereby waiving and releasing any claims to the contrary. 12. The Obligors shall pay at the time this Agreement is executed and delivered all fees, commissions, costs, charges, taxes and other expenses incurred by the Agent and Lenders and their counsel in connection with this Agreement, including, but not limited to, reasonable fees and expenses of the Agent's counsel and all recording fees, taxes and charges. 13. 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 taken together shall constitute but one and the same instrument. The parties agree that their respective signatures may be delivered by facsimile. Any party who chooses to deliver its signature by facsimile agrees to provide a counterpart of this Agreement with its inked signature promptly to each other party. IN WITNESS WHEREOF, the Borrower, the Guarantors, the Lenders and Agent have executed this Agreement under seal as of the date and year first written above. WITNESS AAi.FOSTERGRANT, INC. (formerly known as Accessories, Associates, Inc.) /s/ Paula Zampini By: /s/ Mark Kost (SEAL) - ---------------------------- -------------------------- Mark Kost Chief Financial Officer 20 21 WITNESS: FOSTER GRANT GROUP, L.P. By: Bonneau General, Inc. General Partner /s/ Paula Zampini By: /s/ Mark Kost (SEAL) - ----------------------------- -------------------------- Mark Kost Chief Financial Officer WITNESS: FANTASMA, LLC /s/ Paula Zampini By: /s/ Mark Kost (SEAL) - ----------------------------- -------------------------- Mark Kost Chief Financial Officer WITNESS: F.G.G. INVESTMENTS, INC. /s/ Paula Zampini By: /s/ Mark Kost (SEAL) - ----------------------------- -------------------------- Mark Kost Chief Financial Officer WITNESS: THE BONNEAU COMPANY /s/ Paula Zampini By: /s/ Mark Kost (SEAL) - ----------------------------- -------------------------- Mark Kost Chief Financial Officer WITNESS: BONNEAU GENERAL, INC. /s/ Paula Zampini By: /s/ Mark Kost (SEAL) - ----------------------------- -------------------------- Mark Kost Chief Financial Officer 21 22 WITNESS: BONNEAU HOLDINGS, INC. /s/ Paula Zampini By:/s/ Mark Kost (SEAL) - ----------------------------- -------------------------- Mark Kost Chief Financial Officer WITNESS: FOSTER GRANT HOLDINGS, INC. /s/ Paula Zampini By:/s/ Mark Kost (SEAL) - ----------------------------- -------------------------- Mark Kost Chief Financial Officer WITNESS: O-RAY HOLDINGS, INC. /s/ Paula Zampini By:/s/ Mark Kost (SEAL) - ----------------------------- -------------------------- Mark Kost Chief Financial Officer SIGNATURES CONTINUED ON THE NEXT PAGE 22 23 WITNESS: BANK OF AMERICA, N.A., Agent /s/ Mary J. Kleinsmith By: /s/ Gary W. Bartlett (SEAL) - ----------------------------- -------------------------------- Gary W. Bartlett Vice President WITNESS: BANK OF AMERICA, N.A. in its capacity as a Lender /s/ Mary J. Kleinsmith By: /s/ Gary W. Bartlett (SEAL) - ----------------------------- -------------------------------- Gary W. Bartlett Vice President WITNESS: LASALLE BUSINESS CREDIT, INC. By: /s/ Thomas A. Buckelew (SEAL) - ----------------------------- -------------------------------- Thomas A. Buckelew Vice President WITNESS: PNC BANK, NATIONAL ASSOCIATION By: /s/ Rose Crump (SEAL) - ----------------------------- -------------------------------- Rose Crump Vice President 23 24 EXHIBIT A-2 SNR NOTE -------- $__________ Baltimore, Maryland June __, 2000 FOR VALUE RECEIVED, AAi.FOSTERGRANT, INC. (formerly known as Accessories Associates, Inc.), a corporation organized and existing under the laws of the State of Rhode Island (the "Borrower"), promises to pay to the order of ________________ (the "SNR Lender"), the principal sum of __________________________ DOLLARS ($___________) (the "Principal Sum"), or so much thereof as has been or may be advanced to or for the account of the Borrower pursuant to the terms and conditions of the "Financing Agreement" (as hereinafter defined) with respect to the SNR Lender's SNR Pro Rata Share of the SNR Loan (as those terms are defined in the Financing Agreement), together with interest thereon at the rate or rates provided in the Financing Agreement. All capitalized terms used, but not specifically defined herein, shall have the meanings given such terms in the Financing Agreement. 1. INTEREST. Commencing as of the date hereof and continuing until repayment in full of all sums due hereunder, the unpaid Principal Sum shall bear interest at the Applicable Interest Rate or, if applicable, the Post Default Rate. The rate of interest charged under this Note shall change immediately and contemporaneously with any change in the Applicable Interest Rate. All interest payable under the terms of this Note shall be calculated on the basis of a 360-day year and the actual number of days elapsed. 2. PAYMENTS AND MATURITY. The unpaid Principal Sum, together with interest thereon at the rate or rates provided above, shall be payable as follows: (d) Interest shall be paid at the times for the payment of interest set forth in Section 2.3 of the Financing Agreement; and (e) The Borrower shall make installment payments of principal at the times and in the amounts provided in Section 2.6.4 (Payments of Senior Note Redemption Subfacility) of the Financing Agreement; and (f) Unless sooner paid, the unpaid Principal Sum, together with interest accrued and unpaid thereon, shall be due and payable in full on the Revolving Credit Expiration Date (as that term is defined in the Financing Agreement). The fact that the balance hereunder may remain at or may be reduced to zero from time to time pursuant to the Financing Agreement will not affect the continuing validity of this Note or the 24 25 Financing Agreement, and the balance may be increased to the Principal Sum after any such reduction to zero. 3. LATE CHARGES. If the Borrower shall fail to make any payment under the terms of this Note within ten (10) days after the date such payment is due, the Borrower shall pay to the SNR Lender on demand a late charge equal to five percent (5%) of such payment. 4. APPLICATION AND PLACE OF PAYMENTS. All payments, made on account of this Note shall be applied first to the payment of any late charge then due hereunder, second to the payment of accrued and unpaid interest then due hereunder, then to any installments of principal then due and payable hereunder, and, if the Borrower is permitted to make a SNR Loan Optional Prepayment (as that term is defined in the Financing Agreement), then to any applicable Early Termination Fee (as that term is defined in the Financing Agreement), and the remainder, if any, shall be applied to installments of principal in the inverse order of maturity. All payments on account of this Note shall be paid in lawful money of the United States of America in immediately available funds during regular business hours of Bank of America, N. A. (the "Agent") at the office of Bank of America Business Credit in Baltimore, Maryland or at such other times and places as the Agent (as that term is defined in the Financing Agreement) may at any time and from time to time designate in writing to the Borrower. 5. FINANCING AGREEMENT. This Note is an "SNR Note" described in a Second Amended and Restated Financing and Security Agreement dated July 21, 1998 (as amended by that certain First Amendment to Second Amended and Restated Financing and Security Agreement dated as of May 7, 1999, Second Amendment to Second Amended and Restated Financing and Security Agreement dated as of March 24, 2000, Third Amendment to Financing and Security Agreement dated the same date as this Note (the "Third Amendment"), and as further amended, restated, modified, substituted, extended, and renewed from time to time, the "Financing Agreement") by and among the Borrower, Bank of America, N.A., a national banking association, in its capacity as Agent (the "Agent"), the SNR Lender, and others identified from time to time therein as "Obligors," "SNR Lenders" and "Lenders" under the Financing Agreement. The indebtedness evidenced by this Note is included within the meaning of the term "Obligations" under the Financing Agreement. 6. SECURITY. This Note is secured by the Mortgage (as that term is defined in the Financing Agreement) and as otherwise provided in the Financing Agreement. 7. EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an event of default (individually, an "Event of Default" and collectively, the "Events of Default") under the terms of this Note: 25 26 (g) The failure of the Borrower to pay to the SNR Lender when due any and all amounts payable by the Borrower to the SNR Lender under the terms of this Note; or (h) The occurrence of an "Event of Default" (as defined in the Financing Agreement). 8. REMEDIES. Upon the occurrence of an Event of Default, at the option of the SNR Lender, all amounts payable by the Borrower to the SNR Lender under the terms of this Note shall immediately become due and payable by the Borrower to the SNR Lender without notice to the Borrower or any other person, and the SNR Lender shall have all of the rights, powers, and remedies available under the terms of this Note, any of the other Financing Documents and all applicable laws. The Borrower and all endorsers, guarantors, and other parties who may now or in the future be primarily or secondarily liable for the payment of the indebtedness evidenced by this Note hereby waives presentment, protest and demand, notice of protest, notice of demand and of dishonor and non-payment of this Note and expressly agrees that this Note or any payment hereunder may be extended from time to time without in any way affecting the liability of the Borrower, guarantors and endorsers. The SNR Lender agrees with the Agent and the other Lenders that the decisions and determinations of the Required Lenders in enforcing this Note and in guiding the Agent in this matter shall be binding upon the SNR Lender, including, without limitation, authorizing the Agent at the pro rata expense of the SNR Lenders (to the extent not reimbursed by the Borrower) to retain attorneys to seek judgment on this Note. The SNR Lender similarly agrees with the Agent and the other Lenders and covenants with the Borrower that it will not seek to separately institute any legal action on this Note. All rights of action under this Note may be enforced by the Agent only and any suit or proceeding instituted by the Agent in furtherance of such enforcement may be brought in its name as Agent without the necessity of joining as plaintiffs or defendants the SNR Lender, and the recovery of any judgment shall be for the benefit of the Agent and the SNR Lenders, subject to the expenses of the Agent. 9. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING, BUT NOT LIMITED TO THOSE ARISING OUT OF THIS NOTE, THE FINANCING AGREEMENT OR THE OTHER FINANCING DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE ACT), THE RULES OF PRACTICE AND PROCEDURE FOR ARBITRATION OF COMMERCIAL DISPUTES OF THE JUDICIAL ARBITRATION AND MEDIATION SERVICES, INC. (J.A.M.S.) AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF AN INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS NOTE OR ANY OTHER FINANCING DOCUMENT MAY BRING ANY ACTION, INCLUDING A SUMMARY OR EXPEDITED 26 27 PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS NOTE RELATES IN ANY COURTS HAVING JURISDICTION OVER SUCH ACTION. (A) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF AGENT'S DOMICILE AT THE TIME OF EXECUTION OF THIS NOTE AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR. IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCING OF SUCH HEARING FOR AN ADDITIONAL 60 DAYS. (B) RESERVATION OF RIGHTS. NOTHING IN THIS NOTE OR OTHER FINANCING DOCUMENTS SHALL BE DEEMED TO: (I) LIMIT OR EXPAND THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT, AGREEMENT OR DOCUMENT; OR (II) BE A WAIVER BY THE LENDER OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT OR EXPAND THE RIGHT OF THE LENDER. (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SET OFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE LENDER MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS NOTE OR ANOTHER LOAN DOCUMENT. NEITHER THE EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF ANY ACTION FOR FORECLOSURE OR FOR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. 10. NOTICES. Any notice, request, or demand to or upon the Borrower or the SNR Lender shall be deemed to have been properly given or made when delivered in accordance with Section 9.1 of the Financing Agreement. 11. APPLICABLE LAW. The Borrower acknowledges and agrees that this Note shall be governed by the laws of the State of Maryland, even though for the convenience and at the request of the Borrower, this Note may be executed elsewhere. 27 28 IN WITNESS WHEREOF, each of the Borrower has caused this Note to be executed under seal by its duly authorized officers as of the date first written above. WITNESS: AAI.FOSTERGRANT, INC. (formerly known as Accessories Associates, Inc.) /s/ Paula Zampini By: /s/ Mark Kost (Seal) - ----------------------------- -------------------------------- Mark Kost Chief Financial Officer 28 EX-10.18 4 ex10-18.txt EMPLOYMENT AGREEMENT BETWEEN AAI & HOWARD COLLINS 1 EXHIBIT 10.18 March 24, 2000 Mr. Howard Collins P.O. Box 413 Rye Beach, NH 03871 Dear Howard: I am delighted to formally extend to you our offer to join the AAi.FosterGrant team. As I am sure you heard from all of us, this is an exciting place to work with lots of challenges and a great opportunity to contribute to the success of the company! This letter summarizes the offer of employment made to you by AAi.FosterGrant, Inc. ("Company") and is valid until March 31, 2000. 1. POSITION: Executive Director - Products. 2. REPORTING RELATIONSHIP: President & CEO. 3. PRIMARY RESPONSIBILITIES: You have full responsibility for the Company's product development and sourcing functions on a global basis. 4. BASE SALARY: Your base annual salary will be $240,000 paid in 52 weekly installments. 5. BENEFITS: As a full time employee of the Company you will become eligible for our ERISA benefits programs as are in effect from time to time, including, but not limited to: - Medical and Dental insurance - Life insurance - 401(k) program after one year of service - Paid vacation (3 weeks) - Business class on international travel A summary of our current benefits is enclosed for your review. 6. ANNUAL BONUS: You will participate in the FY '00 performance bonus plan at the 30% base salary level based equally on your attainment of personal goals and the Company's performance against annual corporate business goals. 7. STOCK OPTIONS: Attachment A shall apply. 8. PERFORMANCE REVIEW: In general, performance and salary reviews will be effective as of one year from the date of hire. 2 9. PROPRIETARY RIGHTS/NON-COMPETITION: Attachment B shall apply. 10. SPECIAL PROVISIONS/SEVERANCE: Attachment C shall apply. 11. ANTICIPATED START DATE: If you are in agreement with the foregoing, please signify by signing below and at Attachment B. Howard, I believe that you have the skills, experience, intellect and energy level that will make you a successful team player at AAi.FosterGrant. I look forward to your participation in this process and to working with you. Sincerely, AAi.FosterGrant, Inc. Agreed and Accepted: By /s/ John R. Ranelli /s/ Howard Collins ---------------------- ------------------------- John R. Ranelli Howard Collins President/CEO Encl: Benefits Summary//I-9 Form * AAi.Foster Grant, Inc. verifies the identity and employment authorization of all new hires, pursuant to the Immigration and Nationality Act. In order to comply with this legal obligation, we must complete and Employment Eligibility form for your review within three days of hire. Enclosed is an I-9 form for your review. Please note that you will need to provide one document from "List A" OR one document from "List B" AND one document from "List C" of the form. If you anticipate having difficulty completing the I-9 form, please contact Lori Gammino, AAi.FosterGrant, Inc. 3 ATTACHMENT A STOCK OPTIONS Pursuant to the provisions of the Company's Incentive Common Stock Option Plan (a copy of which will be provided to you), the Company will grant to you at the Board of Directors meeting following the commencement of your employment, but in no event later than six (6) months following the commencement of your employment, subject to the terms and conditions of the Plan and the Company's form of Incentive Stock Option Agreement (copy of which will be provided to you), the right and option to purchase from the Company all or any part of an aggregate of 12,500 shares of the common stock ($.01 par value) of the Company at a purchase price equal to $32.00 per share. The option shall vest upon an initial public offering of the Company's common stock or the achievement by Company of $20 million EBIT. 4 ATTACHMENT B PROPRIETARY RIGHTS/NON-COMPETITION AGREEMENT For purposes of this Agreement, the following are collectively referred to as "Company": AAi.FosterGrant, Inc. and any other corporation, entity or person, now or hereafter controlled by, controlling or under common control with Company. "I" shall mean Howard Collins. I acknowledge that (1) Company is in the business of providing jewelry, small leather goods, reading glasses and sunglasses and other accessories sales and services to numerous customers, and expends significant resources in developing, marketing and selling its services and products, and in developing information which is not generally known to others and which is entitled to protection from improper disclosure and use; (2) I will occupy a position of special value to Company and, in the discharge of duties customary to that position, I will have access to Company's vital and unique business information which allows Company to gain a competitive edge over competitors; and (3) I will have close, regular contact and relationships with Company's other employees and, because of the personal nature thereof, such employees will develop identification with me, rather than the Company itself, could create the potential for my appropriation of such relationships developed on Company's behalf and expense. I further acknowledge that an essential element of maintaining Company's relationships with its customers is the development and maintenance of personal contacts with vendor and customer personnel who are responsible for obtaining Company services and products and, towards that end, Company (1) encourages employees, including me, to become personally acquainted with vendor and customer personnel and (2) provides employees, including me, access to information gathered by Company about vendors and customers. This policy represents a significant, costly investment by Company, to the extent additional manpower is necessary to develop such contacts and relationships and gather such information. Because of the personal nature of such contacts and relationships, Company's vendors and customers commonly develop identification with employees, including me, rather than Company itself. Such identification creates potential for my appropriation of the benefits of relationships developed with vendors and customers on Company's behalf and expense. In this Agreement, Company's information, data and knowledge is known as Proprietary Materials. It includes such information, data and knowledge developed or obtained by or on behalf of Company relating to, used in connection with or reasonably likely to be useful to any of Company's businesses, ventures, research, investigations or activities, including but not limited to all of Company's products, discoveries, ideas, inventions, methods, improvements, concepts, developments, methods, designs, drawings, works, processes, know-how, computer programs, internal policies and procedures, vendors, customers, contacts, prospects, financial information, business records, marketing practices and any papers labeled "secret," "confidential," or "proprietary," as well as any confidential information of any of Company's customers provided to Company. I understand that each of the foregoing constitutes Proprietary Materials even if conceived, made, developed, created or first reduced to practice by me during my term of employment with Company, and whether or not (1) I did so at the request or suggestion of Company, (2) they resulted from or were suggested by any work that I have performed or may perform for Company, (3) I did the work alone or in conjunction with others, (4) I did the work during regular hours of work or otherwise, or at Company's place of business or elsewhere, and (5) the Proprietary Materials are patentable or copyrightable by me or someone else. Notwithstanding the foregoing, Company and I agree that Proprietary Materials will not include any information, data or knowledge that I can establish by written evidence as having been conceived, made or reduced to practice by me which was created or conceived without use of Company resources, outside of regular Company business hours and that is unrelated to or reasonably unlikely to be useful to Company. In order to provide greater comfort to Company that it can continue to share its Proprietary Materials with me without fear of appropriation thereof, and to clarify our common understanding concerning our mutual responsibilities, I am entering into this Agreement. I have read it carefully so that I may understand its importance. 5 As a condition to my employment and continued employment, and in consideration of the premises and the compensation that I accept in connection with such employment, I agree as follows: 1. During my employment and thereafter, I shall not, in any way, directly or indirectly, disclose or appropriate to my own use, or to the use of any party other than Company, the Proprietary Materials. I shall use my best efforts to protect the Proprietary Materials from disclosure or misuse, and inform an executive officer of Company immediately upon learning of any improper disclosure or misuse of Proprietary Materials by me or by any other employee or person. I shall not copy or remove from Company's premises any media, papers, drawings or models relating to or containing any of the Proprietary Materials, except to the extent necessary in the course of such employment. 2. During the term of such employment and upon termination of my employment, I shall promptly and fully disclose to an executive officer of Company any Proprietary Materials of which I have knowledge. 3. The Proprietary Materials shall at all times be the exclusive property of Company, although I am aware that in the absence of this Agreement I may have been entitled to rights in some of the Proprietary Materials. Accordingly, I agree that all Proprietary Materials consisting of writings or works (including but not limited to computer software program codes) shall be considered works made for hire under the copyright laws, and therefore owned by Company. So as to assure Company's exclusive rights in the Proprietary Materials, I hereby assign, transfer and give to Company my entire right, title and interest in and to the Proprietary Materials, including but not limited to all rights throughout the world and any renewals and extensions associated therewith. At the request of Company, during the term of my employment and forever thereafter, I shall (a) sign, verify, acknowledge, deliver and file any documents necessary or advisable for Company to obtain ownership of the Proprietary Materials, including, at Company's expense, the issuance of patents or copyrights to Company with respect to the Proprietary Materials, and (b) otherwise assist Company in every reasonable manner in obtaining any of its rights in the Proprietary Materials (including but not limited to providing testimony at legal proceedings). I hereby irrevocably appoint Company as my attorney-in-fact (which appointment shall be deemed a power coupled with an interest) with full powers of substitution and delegation, to execute, verify, acknowledge and deliver any such documents. 4. Upon the termination of my employment for any reason, or if Company shall request sooner, I shall promptly deliver to an executive officer of Company all media, papers, drawings, models and other existing material in my possession or control relating to or containing any of the Proprietary Materials. 5. I shall not disclose to Company any knowledge, data or information which, to my knowledge, another company may consider to be its confidential information, trade secrets or proprietary information. I am not subject to any other agreements, whether in writing or verbally, with anyone else that would prohibit, restrict or interfere with my employment or fulfilling my obligations under this Agreement. 6. Were I to leave the Company's employment and utilize my administrative, financial, technological, marketing and sales skills in competition with Company, the results would be materially adverse to Company. Accordingly, during such employment and during the twelve (12) month period following the termination of my employment with Company (the "non-competition period"), I shall not engage in or carry on, in any way, directly or indirectly, either for myself or as a member of a partnership or as a stockholder or investor (except for ownership of securities, not exceeding 5% of any class, of a corporation traded on a national securities exchange) or as an officer, director, employee, agent, representative, advisor or consultant of any entity (other than Company), any business similar to or competing with any business carried on by Company or its successors at the time of the termination of my employment, or directly or indirectly related to the Business and to which I have been exposed at any time during such employment, in the United States or any other country in which Company does business or engages in activities at the time of the termination of such employment. 7. I shall not, during the non-competition period, in any way, directly or indirectly (except in the course of such employment), call upon, solicit, advise or otherwise do or attempt to do, business with any clients, customers or accounts of Company with whom I had any dealings at any time during the course of such employment, or take away or interfere or attempt to interfere with any custom, trade, business or patronage of 6 Company, or interfere with or attempt to interfere with any officers, employees, representatives, advisors, consultants or agents of Company, or induce or attempt to induce any of them to leave the service of Company or violate agreements with it. At the termination of my employment, Company shall supply to me a written listing of clients, customers or accounts of Company. 8. The foregoing shall be deemed to be a series of separate covenants, one for each county of each state or territory of the United States and one for each and every country in which Company does business or engages in activity. If a court shall refuse to enforce all of such separate covenants, then such unenforceable covenants shall be deemed eliminated for the purpose of such proceedings to the extent necessary to permit the remaining separate covenants to be enforced. If a court refuses to enforce any one or more of such separate covenants because the time thereof is deemed to be excessive or unreasonable, then such covenants, which would otherwise be unenforceable due to such excessive or unreasonable period of time, shall be enforced for such lesser period of time as deemed reasonable and not excessive by such court. 9. I shall comply with this Agreement even after the termination of my employment for any reason, and I shall perform each and every obligation set forth in this Agreement without any further payment or compensation to me, except for any reasonable out-of-pocket expenses incurred at the request of Company. 10. It is understood and agreed that any breach of this Agreement is likely to result in irreparable injury to Company, and that the remedy at law alone will be an inadequate remedy for such breach, in that in addition to any other remedy Company may have, Company shall be entitled to enforce my specific performance of this Agreement, and to seek both temporary and permanent injunctive relief (to the extent permitted by law) without the necessity of proving actual damages. ------------------------------- Howard Collins 7 ATTACHMENT C SPECIAL PROVISIONS/SEVERANCE 1. This letter sets forth the terms of employment, and does not constitute or promise employment for a specific term. Either you or we can terminate employment for any reason. Notwithstanding the foregoing, if your employment is terminated by Company for other than cause, then so long as you are in compliance with the terms of this letter agreement, including all attachments. Company shall pay to you a severance consisting of payments on the first business day of each of the twelve (12) months immediately succeeding the date of termination of your employment equal to 1/12th of your Base Salary in effect on the date of termination. For purposes of the prior sentence, "cause" shall mean: (a) your permanent disability under Company's long-term disability insurance coverage; (b) failure to devote full time and best efforts to the performance of your duties; (c) commission of an act of gross negligence, dishonesty, fraud, gross insubordination, malfeasance, disloyalty, bad faith or breach of trust in the performance of your duties; (d) failure to observe the agreements set forth in the agreements attached as ATTACHMENT B; (e) commit a felony or act which, in the judgment of the Board of Directors of Company, subjects you or Company to public disrespect, scandal or ridicule so as to materially and adversely affect the utility of your services to Company; or (f) refuse to perform duties assigned to you in good faith or violate or fail to observe any lawful business instruction or lawful business policy established by Company with respect to the operation of its business and affairs or fail to, or refuse to, substantially perform your duties; and with respect to items (b) and (f), after a written notice is delivered by Company, which specifically identifies the manner in which you have become subject to termination for cause, if not cured (if such matter is susceptible of cure) within twenty (20) days after such written notice. 2. This Agreement shall be governed by and construed in accordance with the laws of the State of Rhode Island, without regard to its Conflict of Laws Rules. Employee agrees and consents to personal jurisdiction and service in venue in any Federal or State Court within Rhode Island having subject matter jurisdiction, for purposes of any action, suit or proceeding arising out of or relating to this Agreement. Employee waives trial by jury in any such action, suit or proceeding. EX-27.1 5 ex27-1.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF JULY 1, 2000 (UNAUDITED) AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JULY 1, 2000 (UNAUDITED) AND IS QUALIFITED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-K FOR YEAR ENDED JAN 1, 2000. 1,000 U.S. DOLLARS 6-MOS DEC-30-2000 JAN-02-2000 JUL-01-2000 1 1,785 0 39,421 10,643 38,070 72,801 40,397 19,947 115,823 67,648 67,751 33,819 0 6 (54,824) 115,823 88,235 88,235 49,111 49,111 (145) 22,219 (5,448) (1,313) 43 (1,356) 0 4,429 0 3,073 2.44 2.44
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