-----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, HcuRZUE24Fx1xyx/8e+pJ237iebHkepxxBI6WclMB8GScMFJjLhEz5qXUypM2pak cfeAfwMImugxem9TsYOjzQ== 0000950136-98-001382.txt : 19980810 0000950136-98-001382.hdr.sgml : 19980810 ACCESSION NUMBER: 0000950136-98-001382 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19980807 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AKI INC CENTRAL INDEX KEY: 0001067549 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133785856 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-60989 FILM NUMBER: 98679782 BUSINESS ADDRESS: STREET 1: 1815 EAST MAIN STREET CITY: CHATTANOOGA STATE: TN ZIP: 37404 BUSINESS PHONE: 4236243301 MAIL ADDRESS: STREET 1: 1815 EAST MAIN STREET CITY: CHATTANOOGA STATE: TN ZIP: 37404 S-4 1 REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 1998. REGISTRATION NO. 333- =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- AKI, INC. (Exact name of registrant as specified in its charter) DELAWARE 2799 13-3785856 - ------------------------------- ---------------------------- ---------------- (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
1815 EAST MAIN STREET CHATTANOOGA, TENNESSEE 37404 (423) 624-3301 ----------------------------------------------------------------- (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) KENNETH A. BUDDE CHIEF FINANCIAL OFFICER AKI, INC. 1815 EAST MAIN STREET CHATTANOOGA, TENNESSEE 37404 (423) 624-3301 (Name, address, including zip code, and telephone number including area code, of agent for service) --------------- COPIES TO: EDWARD D. SOPHER, ESQ. AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. 590 MADISON AVENUE NEW YORK, NEW YORK 10022 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] --------------- CALCULATION OF REGISTRATION FEE
============================================================================================================== PROPOSED PROPOSED MAXIMUM MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER UNIT (1) PRICE (1) FEE - -------------------------------------------------------------------------------------------------------------- 10 1/2% Senior Notes Due 2008 ......... $115,000,000 100% $115,000,000 $33,925 ==============================================================================================================
- --------------- (1) Estimated solely for the purpose of calculating the registration fee. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. =============================================================================== EXPLANATORY NOTE This Registration Statement covers the registration of an aggregate principal amount of $115,000,000 of New 10 1/2% Senior Notes due 2008 (the "New Notes") of AKI, Inc. (the "Company") that may be exchanged for equal principal amounts of the Company's outstanding 10 1/2% Senior Notes due 2008 (the "Old Notes") (the "Exchange Offer"). This exchange offer registration statement (the "Exchange Offer Registration Statement") also covers the registration of the New Notes for resale by Donaldson, Lufkin & Jenrette Securities Corporation in market-making transactions. The complete Prospectus relating to the Exchange Offer (the "Exchange Offer Prospectus") follows immediately after this Explanatory Note. Following the Exchange Offer Prospectus are certain pages of the Prospectus relating solely to such market-making transactions (the "Market-Making Prospectus"), including alternate front and back cover pages, an alternate "Available Information" section, a section entitled "Risk Factors--Trading Market for the New Notes" to be used in lieu of the section entitled "Risk Factors--No Public Market for the New Notes," a new section entitled "Use of Proceeds" and alternate sections entitled "Certain U.S. Federal Income Tax Considerations for Non-U.S. Holders" and "Plan of Distribution." In addition, the Market-Making Prospectus will not include the following captions (or the information set forth under such captions) in the Exchange Offer Prospectus: "Prospectus Summary--Summary of Terms of the Exchange Offer," "Risk Factors--Consequences of the Exchange Offer on Non-Tendering Holder of the Old Notes" and "The Exchange Offer." All other sections of the Exchange Offer Prospectus will be included in the Market-Making Prospectus. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO ANY REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE. SUBJECT TO COMPLETION DATED , 1998 PROSPECTUS OFFER TO EXCHANGE 10 1/2% NEW SENIOR NOTES DUE 2008 FOR UP TO $115,000,000 IN PRINCIPAL AMOUNT OUTSTANDING 10 1/2% SENIOR NOTES DUE 2008 OF AKI, INC. ---------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED AKI, Inc., a Delaware corporation (the "Company"), hereby offers, upon the terms and subject to the conditions set forth in this Prospectus and the accompanying letter of transmittal (the "Letter of Transmittal," and together with this Prospectus, the "Exchange Offer"), to exchange $1,000 principal amount of its New 10 1/2% Senior Notes due 2008 (the "New Notes") for each $1,000 principal amount of the outstanding 10 1/2% Senior Notes due 2008 (the "Old Notes") of the Company, of which $115,000,000 principal amount is outstanding from the holders thereof (the "Holders"). The New Notes will be obligations of the Company issued pursuant to the Indenture under which the Old Notes were issued (the "Indenture"). The form and terms of the New Notes are the same as the form and terms of the Old Notes except that (i) the New Notes will have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to an Exchange Offer Registration Statement (as defined herein) of which this Prospectus is a part, and thus will not bear legends restricting their transfer pursuant to the Securities Act, (ii) Holders of the New Notes will not be entitled to certain rights of Holders of the Old Notes under the Registration Rights Agreement (as defined herein) which rights will terminate upon the consummation of the Exchange Offer and (iii) for certain contingent liquidated damages provisions. See "The Exchange Offer." The New Notes and the Old Notes are collectively referred to herein as the "Notes." The New Notes will mature on July 1, 2008. Interest on the New Notes will be payable semi-annually on January 1 and July 1 of each year, commencing on January 1, 1999, at a rate of 10 1/2% per annum. Holders of Old Notes whose Old Notes are accepted for exchange will be deemed to have waived the right to receive any payment in respect of interest accrued from June 25, 1998 to the date of issuance of the New Notes. The New Notes will be redeemable at the option of the Company, in whole or in part, at anytime on or after July 1, 2003, in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages (as defined herein), if any, thereon to the date of redemption. In addition, at any time prior to July 1, 2001, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of New Notes originally issued at a redemption price equal to 110.5% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings (as defined herein); provided that at least 65% of the aggregate principal amount of New Notes originally issued remains outstanding immediately after the occurrence of any such redemption. See "Description of New Notes--Optional Redemption." In addition, upon the occurrence of a Change of Control (as defined herein), each holder of Notes will have the right to require the Company to repurchase all or any part of such Holder's Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. See "Description of New Notes--Repurchase at the Option of Holders--Change of Control." There can be no assurance that, in the event of a Change of Control, the Company would have sufficient funds to purchase all Notes tendered. See "Risk Factors--Limitations on Ability to Make Change of Control Payment." (Continued on next page) ---------------- SEE "RISK FACTORS" BEGINNING ON PAGE 14 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR OLD NOTES IN THE EXCHANGE OFFER. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is , 1998 The New Notes will be general unsecured obligations of the Company, will rank pari passu in right of payment to all existing and future senior unsecured indebtedness of the Company and will rank senior in right of payment to all existing and future subordinated indebtedness of the Company. The New Notes, however, will be effectively subordinated to all secured obligations of the Company, including borrowings under the Credit Agreement (as defined herein), to the extent of the assets securing such obligations. As of March 31,1998, on a pro forma basis, after giving effect to the Refinancing (as defined herein) and the consummation of the 3M Acquisition (as defined herein), the Company would have had no outstanding secured obligations (other than outstanding letters of credit in the amount of $0.6 million) under the Credit Agreement. In addition, as of such date and on such pro forma basis, borrowings of up to approximately $19.4 million were available under the Credit Agreement, subject to certain conditions. The New Notes are being offered hereunder in order to satisfy certain obligations of the Company contained in the Registration Rights Agreement. The Old Notes were originally issued and sold on June 25, 1998 in transactions not registered under the Securities Act in reliance upon the exemption provided in Section 4(2) of the Securities Act. Accordingly, the Old Notes may not be reoffered, resold or otherwise pledged, hypothecated or transferred in the United States unless so registered or unless an applicable exemption from the requirements of the Securities Act is available. Based upon interpretations by the staff of the Securities and Exchange Commission (the "Commission") set forth in no-action letters issued to unrelated third parties, the Company believes that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by a Holder thereof (other than a "Restricted Holder," being (i) a broker-dealer who purchases such Old Notes directly from the Company to resell pursuant to Rule 144A or any other available exemption under the Securities Act or (ii) a person that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the Holder is acquiring the New Notes in the ordinary course of its business and is not participating, does not intend to participate and has no arrangement or understanding with any person to participate, in a distribution of the New Notes. Eligible Holders wishing to accept the Exchange Offer must represent to the Company that such conditions have been met. Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal relating the Exchange Offer states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that it will make this Prospectus available to any broker-dealer for use in connection with any such resale for a period from the date of this Prospectus until 180 days after the consummation of the Exchange Offer, or such shorter period as will terminate when all Old Notes acquired by broker-dealers for their own accounts as a result of market-making activities or other trading activities have been exchanged for New Notes and resold by such broker-dealers. See "The Exchange Offer" and "Plan of Distribution." Any Old Notes not tendered and accepted in the Exchange Offer will remain outstanding. To the extent that Old Notes are tendered and accepted in the Exchange Offer, a holder's ability to sell untendered Old Notes could be adversely affected. Following consummation of the Exchange Offer, the holders of Old Notes will continue to be subject to the existing restrictions on transfer thereof and the Company will have no further obligation to such holders to provide for the registration under the Securities Act of the Old Notes. See "Risk Factors--Consequences of Exchange Offer on Non-Tendering Holders of the Old Notes." Prior to the Exchange Offer, there has been only a limited secondary market and no public market for the Old Notes. If a market for the New Notes should develop, the New Notes could trade at a discount from their principal amount. The Company does not intend to list the New Notes on a national securities exchange or to apply for quotation of the New Notes through the National Association of Securities Dealers Automated Quotation System. Accordingly, there can be no assurance as to the development or i liquidity of any public market for the New Notes. The Company has been advised by the Initial Purchaser (as defined herein) that the Initial Purchaser intends to make a market for the New Notes. However, the Initial Purchaser is not obligated to do so and any market-making activities with respect to the New Notes may be discontinued at any time without notice. See "Risk Factors--No Public Market for the Notes" and "Plan of Distribution." The Company will not receive any proceeds from the Exchange Offer. See "Use of Proceeds." The Company will accept for exchange any and all Old Notes that are validly tendered on or prior to 5:00 p.m. New York City time, on the date the Exchange Offer expires, which will be , 1998, unless the Exchange Offer is extended (the "Expiration Date"). The exchange of New Notes for Old Notes will be made promptly following the Expiration Date. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date, unless previously accepted for exchange. The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. However, the Exchange Offer is subject to certain conditions which may be waived by the Company. See "The Exchange Offer." The Company has agreed to pay the expenses of the Exchange Offer (which shall not include the expenses of any Holder of the Notes in connection with resales of the New Notes). Old Notes initially purchased by qualified institutional buyers were initially represented by a single, global Note in registered form, registered in the name of a nominee of The Depository Trust Company ("DTC"), as depository. The New Notes exchanged for Old Notes represented by the global Note will be represented by one or more global New Notes in registered form, registered in the name of the nominee of DTC. New Notes in global form will trade in DTC's Same-Day Funds Settlement System, and secondary market trading activity in such New Notes will therefore settle in immediately available funds. See "Description of New Notes--Form, Denomination and Book-Entry Procedures." ---------------- THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. ---------------- NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THIS EXCHANGE OFFER COVERED BY THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS AND THE ACCOMPANYING LETTER OR TRANSMITTAL DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ii ---------------- AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-4 (the "Exchange Offer Registration Statement") under the Securities Act with respect to the New Notes being offered by this Prospectus. This Prospectus does not contain all of the information set forth in the Exchange Offer Registration Statement and the exhibits and schedules thereto, certain portions of which have been omitted pursuant to the rules and regulations of the Commission. Statements made in this Prospectus as to the contents of any contract, agreement or other document are not necessarily complete. With respect to each such contract, agreement or other document filed or incorporated by reference as an exhibit to the Exchange Offer Registration Statement, reference is made to such exhibit for a more complete description of the matter involved, and each such statement is qualified in its entirety by such reference. The Exchange Offer Registration Statement and the exhibits and schedules thereto may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be available for inspection and copying at the regional offices of the Commission located at 7 World Trade Center, New York, New York 10048 and at 500 West Madison Street (Suite 1400), Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission maintains a web site (http://www.sec.gov) that contains reports, proxy statements and other information regarding registrants that file electronically with the Commission. Under the terms of the Indenture pursuant to which the Old Notes were, and the New Notes will be issued, the Company has agreed that, whether or not it is required to do so by the rules and regulations of the Commission, for so long as any of the Notes remain outstanding, it will furnish to the Trustee and Holders of the Notes and file with the Commission (unless the Commission will not accept such a filing) (i) all quarterly and annual financial information that would be required to be contained in such a filing with the Commission on Forms 10-Q and 10-K if the Company was required to file such forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent public accountants and (ii) all reports that would be required to be filed with the Commission on Form 8-K if the Company was required to file such reports. Following the consummation of the Exchange Offer, the Company has agreed to make such information available to the Trustee, securities analysts and prospective investors upon request. In addition, for so long as any of the Notes remain outstanding, the Company has agreed to make available to any prospective purchaser of the Notes or Holder of the Notes in connection with any sale thereof, the information required by Rule 144A(d)(4) under the Securities Act. iii ------------ CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS The information herein contains forward-looking statements that involve a number of risks and uncertainties. A number of factors could cause actual results, performance, achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to: the competitive environment in the sampling industry in general and in the Company's specific market areas; changes in prevailing interest rates; inflation; changes in costs of goods and services; economic conditions in general and in the Company's specific market areas; changes in or failure to comply with postal regulations or other federal, state and/or local government regulations; liability and other claims asserted against the Company; changes in operating strategy or development plans; the ability of the Company to effectively implement its cost reduction program; the ability to attract and retain qualified personnel; the significant indebtedness of the Company; labor disturbances; changes in the Company's capital expenditure plans; and other factors referenced herein. In addition, such forward-looking statements are necessarily dependent upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Forward-looking statements can be identified by, among other things, the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "pro forma," "anticipates," "intends" or the negative of any thereof, or other variations thereon or comparable terminology, or by discussions of strategy or intentions. Given these uncertainties, Holders of Notes are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligations to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. iv PROSPECTUS SUMMARY The following summary does not purport to be complete and is qualified in its entirety by the more detailed information and Consolidated Financial Statements of the Company, together with the notes thereto, contained elsewhere herein. Unless the context otherwise requires, all references herein to (i) "Acquisition Corp." shall mean AHC I Acquisition Corp., (ii) "Holding" shall mean AKI Holding Corp., a wholly-owned subsidiary of Acquisition Corp., (iii) the "Company" shall mean AKI, Inc., a wholly-owned subsidiary of Holding, and its predecessors and subsidiaries and (iv) the "Offering" or the "Note Offering" shall mean the offering of the Old Notes. Prior to commencement of the Offering, Acquisition Corp. contributed all of its ownership interest in the Company to Holding and all financial information contained herein gives effect to such contribution. As used herein, the terms "Fiscal 1995," "Fiscal 1996" and "Fiscal 1997" when used with respect to the Company refer to the Company's fiscal years ended June 30, 1995, 1996 and 1997, respectively, the term "Interim 1997 Period" refers to the Company's nine months ended March 31, 1997 and the term "Interim 1998 Period" refers to the Company's nine months ended March 31, 1998, which includes the period prior to the acquisition of the Company by Acquisition Corp. on December 15, 1997. THE COMPANY The Company is the leading global marketer and manufacturer of cosmetics sampling products, including fragrance, skin care and makeup samplers. The Company produces a range of proprietary and patented product samplers that can be incorporated into various print media principally designed to reach the consumer in the home, such as magazine inserts, catalog inserts, remittance envelopes, statement enclosures and blow-ins. The Company is the only sampling company positioned to provide complete marketing and sampling programs to its customers, including creative content and sample production and distribution. The Company's customers include most of the world's largest cosmetics companies, such as Calvin Klein Cosmetics (Unilever Plc), Chanel, Inc., Christian Dior Perfumes Inc., Coty Inc., Elizabeth Arden (Unilever Plc), Estee Lauder, Inc., Giorgio Beverly Hills (The Procter & Gamble Company), L'Oreal S.A./Cosmair, Inc., Revlon, Inc. and Sanofi Beaute, Inc. Sampling is one of the most effective and widely used promotional practices for consumer products. Product sampling expenditures have increased faster than any other form of consumer promotional expenditure from 1992 to 1996, the last year for which data is available. Product sampling is particularly critical to the cosmetics industries, where consumers generally must try products prior to purchase because of their uniquely personal nature. The Company's introduction in 1979 of the ScentStrip (Registered Trademark) sampler, the first pull-apart microencapsulated fragrance sampler, transformed the fragrance industry by providing the first cost-effective means to reach consumers in their homes on a mass scale by combining advertising and product sampling. All of the Company's sampling products are approved by the U.S. Postal Service for inclusion in subscription magazines at periodical postage rates, which is a more cost-effective means of reaching consumers than alternatives such as direct mail or newsstand magazine distribution. While the Company's ScentStrip sampler remains the most widely used technology in the sampling industry, the Company continues to be the leading innovator in the sampling industry through its development of alternative sampling technologies, all of which are designed for cost-effective mass distribution. In recent years, the Company has complemented its fragrance sampling business by focusing its research and development efforts on new product technologies and sampling solutions for the skin care, makeup and consumer products markets. While product sampling is critical to the success of these products, sampling programs for these products have been constrained historically by the characteristics of the available sampling alternatives. Most sampling programs have consisted of relatively limited in-store or direct mail efforts because existing samples have been too costly to produce in mass quantities 1 and have been incapable of being efficiently incorporated into magazines, catalogs and other print advertising. Since June 1997, the Company has introduced three innovative product sampling technologies to address this need, providing the first cost-effective means to reach consumers in their homes on a mass scale with samples of these products. Management believes these new technologies have fundamentally altered the economics and efficiencies of product sampling in these markets. Existing customers such as Chanel, Christian Dior, Estee Lauder, L'Oreal/Cosmair and Revlon have utilized these new technologies in sampling programs for their cosmetics products, such as skin care and liquid makeup. The Company has also created and produced initial sampling programs for new consumer products customers. COMPETITIVE ADVANTAGES Founded in 1902 as a printing company, the Company has been the market leader in fragrance sampling since its introduction of the ScentStrip sampler almost two decades ago and has recently expanded the application of its sampling technologies to new markets. Management believes that the Company has significant competitive advantages compared to other sampling companies: o Full product line. The Company is unique in the breadth of its product line, which includes a full range of fragrance sampling products and innovative new technologies for sampling skin care and makeup products. The Company offers nine distinct sampling products, while none of the Company's major competitors offers more than three sampling technologies. Although most major cosmetics companies generate significant revenues in each of the fragrance, makeup and skin care categories, the Company is the only sampling provider that offers sampling products for all such categories of products. o Technological leadership. The Company is the technological leader in the cosmetics sampling industry, and has introduced almost every major fragrance sampling technology to the market since its introduction of the ScentStrip sampler in 1979. Management believes that its product development program is the largest and most effective in the cosmetics sampling industry. Over the past three years, the Company's increased emphasis on new product research and development has expanded the size of the potential sampling market through the introduction of new technologies, such as BeautiSeal (Trade Mark) , LiquaTouch (Trade Mark) and PowdaTouch (Trade Mark) samplers, which target the skin care and makeup categories. Seven of the Company's nine major sampling technologies are patented or have patents pending, and all are approved by the U.S. Postal Service for inclusion in subscription magazines. Competing sampling technologies that are not approved for inclusion in subscription magazines are more expensive to mass distribute. In addition, the Company has developed certain proprietary manufacturing techniques that management believes provide the Company with a competitive advantage. o Low cost, highest quality producer. The Company is the most vertically integrated manufacturing company in the sampling industry as all of its major competitors source all or part of their products from third-party manufacturers. Management believes that the Company's high degree of vertical integration, together with the high volume resulting from the Company's market share position, provides the Company with certain cost and quality advantages. In addition, unlike some of its major competitors, which are divisions of large companies, management believes that the Company's focus on the product sampling industry allows it to produce the highest quality product offering in the industry. Management believes this focus on quality is a competitive advantage because the Company's customers are reluctant to jeopardize an expensive product launch by using an unproven sampling source that may not provide consumers with an accurate first exposure to a sampled product. o Strong customer relationships. More than 75% of Fiscal 1997 net sales were generated by sales to customers that have been doing business with the Company for the past five years or longer. The Company is proactive in proposing innovative campaigns and sampling solutions, which result in strong relationships with its customers. The Company has long-standing relationships with the key marketing, purchasing and technical executives at most of the world's leading cosmetics companies. 2 It has also developed relationships with flavor and fragrance companies, media companies and leading retailers servicing the cosmetics industry. o Superior customer service. Managing sampling programs is highly service intensive and the Company has the most experienced customer service representatives in the industry. As cosmetics companies seek to streamline their purchasing operations, the Company's ability to provide complete marketing and sampling programs is becoming increasingly important. Management believes that the Company's ability to provide excellent customer service is a competitive advantage for the Company, particularly with regard to department store sampling programs, such as catalog inserts, billing enclosures and remittance envelopes, which require significant coordination with individual retailers. o Sole global provider. The Company is the only sampling company to provide local sales, service and production capabilities on a global basis. The major cosmetics companies are increasingly global, and the Company's ability to service these customers in Europe, the United States and Southeast Asia is becoming increasingly important. The Company currently has sales offices in New York, San Francisco, Paris, France and London, England and sales agents in Sydney, Australia and Caracas, Venezuela. In addition, the Company has third-party manufacturing capabilities in Europe and Australia to complement its established domestic manufacturing operations. BUSINESS STRATEGY Management's goal is to enhance the Company's position as the leading global marketer and manufacturer of cosmetics sampling products and position itself for growth in the consumer products sampling market, while increasing its profitability. To achieve this goal, management is pursuing a strategy based on the following elements: o Leverage existing customer relationships to expand into new cosmetics categories. Almost all of the Company's sales have historically been in the fragrance category, but for many of the Company's cosmetics customers, fragrance represents a small portion of their total sales. Management estimates that skin care and makeup sales account for approximately two-thirds of all cosmetics industry sales, while sampling for such products accounts for less than one-fourth of all cosmetics sampling units. Historically, most skin care and makeup sampling programs have consisted of relatively limited in-store or direct mail efforts because existing samples have been too costly to produce in mass quantities and too expensive to incorporate into subscription magazines and other forms of distribution. Since June 1997, the Company has introduced three innovative product sampling technologies for the makeup and skin care categories, which provide a cost effective means to reach consumers in their homes. Management believes that these innovative new technologies, together with its established cosmetics industry customer relationships, position the Company for future growth in this area. o Penetrate the consumer products market. Management believes that the Company has significant opportunities to increase its existing sampling business by applying its cost-effective sampling technologies to new end-user categories within the consumer products market. The consumer products market is significantly larger than the Company's traditional fragrance market. o Continue implementation of cost reduction program. The Company is implementing a comprehensive program to reduce annual operating costs by approximately $4.0 million. The comprehensive cost reduction program was developed by the Company in connection with an evaluation of its operations conducted by manufacturing consultants with significant experience in the printing industry and is designed to improve the Company's operating efficiency through (i) reduced materials cost derived from scrap/waste reduction and from more effective purchasing, (ii) streamlined manufacturing processes that reduce the amount of time required to prepare for successive manufacturing jobs utilizing the same equipment and (iii) rationalized staffing in the product support area. Management expects the benefit of the materials cost reductions and 3 rationalized staffing will begin to be realized in the short term, while the benefits of a streamlined manufacturing process are expected to be realized incrementally through June 1999. o Increase international sales. Since reacquiring its European license with respect to its sampling technologies in August 1994, the Company has significantly increased revenues from European customers and is the leading fragrance sampling company in Europe. Management estimates that the fragrance sampling industry in Europe is only approximately 20% of the size of the fragrance sampling industry in the United States, even though the size of the fragrance markets in Europe and the United States are comparable. Management believes that European cosmetics companies have preferred fragrance renditions that contain alcohol rather than microencapsulated renditions. Given product innovations such as the Company's Scent Seal (Registered Trademark) and LiquaTouch samplers (which are alcohol-based sampling systems), the increasing globalization of the cosmetics industry and the success of sampling techniques in the U.S. market, management believes that the use of sampling will continue to become more widespread in Europe. 4 THE TRANSACTIONS THE ACQUISITION DLJ Merchant Banking Partners II, L.P. and certain related investors (collectively, "DLJMBII") and certain members of the Company's management organized Acquisition Corp. in connection with the December 15, 1997 acquisition (the "Acquisition") of all the outstanding equity interests of the Company. The total cost of the Acquisition (including related fees and expenses) was approximately $205.7 million. Non-cash costs of the Acquisition totaling approximately $6.2 million were funded by (i) the assumption of the Scent Seal Note (as defined) and certain capital lease obligations and (ii) the rollover of equity interests in the Company by the Company's Chief Executive Officer. See "Description of Certain Indebtedness." To provide the cash necessary to fund the Acquisition, including the equity purchase price and the retirement of all existing preferred stock and debt of the Company not assumed, (i) the Company issued $123.5 million in Senior Increasing Rate Notes (the "Bridge Notes") to an affiliate of DLJMBII and the Initial Purchaser and (ii) Acquisition Corp. received $76.0 million from debt and equity (common and preferred) financings, including equity investments by the Company's Chief Executive Officer and certain other prior stockholders. As of June 22, 1998, (i) DLJMBII held an aggregate of approximately 81.3% of the outstanding common stock of Acquisition Corp. and (ii) the Company's Chief Executive Officer held an aggregate of approximately 12.1% of the outstanding common stock of Acquisition Corp. See "Risk Factors--Control by DLJMBII," "Security Ownership of Certain Beneficial Owners and Management" and "The Acquisition." Acquisition Corp. has adopted a stock option plan for management of Acquisition Corp., Holding and the Company and granted options thereunder to the Company's Chief Executive Officer. See "Management--Equity-Based Compensation." 3M ACQUISITION On June 22, 1998, the Company acquired (the "3M Acquisition") the fragrance sampling business of the Industrial and Consumer Products division of Minnesota Mining and Manufacturing Company ("3M"). The Company intends to relocate all of the business operations acquired in the 3M Acquisition to its existing facilities to utilize current excess capacity at such facilities. Management believes that in order to properly service the incremental sales volume associated with the 3M Acquisition, several additional sales, marketing and administrative employees will be hired. However, the Company believes that due to the similarity of its existing customers and 3M's existing customers, no other additional employee hiring will be required as a result of the 3M Acquisition. THE OFFERINGS On June 25, 1998, the Company consummated the Note Offering. The Old Notes were sold pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act. In addition, on June 25, 1998, Holding issued and sold $50,000,000 in aggregate principal amount at maturity of debentures (the "Debentures") (the "Debenture Offering") for gross proceeds of $26.0 million. The Debentures were sold pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act. The consummation of the Note Offering occurred concurrently with and was conditioned upon, the consummation of the Debenture Offering. 5 SUMMARY OF TERMS OF THE EXCHANGE OFFER The Exchange Offer relates to the exchange of up to $115,000,000 aggregate principal amount of Old Notes for up to an equal aggregate principal amount of New Notes. The form and terms of the New Notes are identical in all material respects to the form and terms of the Old Notes except (i) that the New Notes have been registered under the Securities Act, (ii) that the New Notes are not entitled to certain registration rights which are applicable to the Old Notes under the Registration Rights Agreement and (iii) for certain contingent Liquidated Damages provisions. The Old Notes and the New Notes are collectively referred to herein as the "Notes." See "Description of New Notes." THE EXCHANGE OFFER.......... $1,000 principal amount of New Notes will be issued in exchange for each $1,000 principal amount of Old Notes validly tendered pursuant to the Exchange Offer. The exchange of New Notes for Old Notes will be made with respect to all Old Notes validly tendered and not withdrawn on or prior to the Expiration Date promptly following the Expiration Date. As of the date hereof, $115,000,000 in aggregate principal amount of Old Notes are outstanding. RESALE...................... Based on interpretations by the staff of the Commission set forth in no-action letters issued to unrelated third parties, the Company believes that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale and resold or otherwise transferred by Holders thereof (other than any Restricted Holder) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such Holders' business and such Holders are not participating, do not intend to participate and have no arrangement or understanding with any person to participate in a distribution of such New Notes. See "K-III Communications Corporation," SEC No-Action Letter (available May 14, 1993); "Morgan Stanley & Co., Incorporated," SEC No-Action Letter (available June 5, 1991); and "Exxon Capital Holdings Corporation," SEC No-Action Letter (available May 13, 1988). Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "The Exchange Offer" and "Plan of Distribution." If any person were to participate in the Exchange Offer for the purpose of distributing securities in a manner not permitted by the preceding paragraph, such person could not rely on the position of the staff of the Commission and must comply with the prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. Therefore, each holder of Old Notes who accepts the Exchange Offer must represent in the Letter of Transmittal that it meets the conditions described above. See "The Exchange Offer--Purpose and Effects of the Exchange Offer." 6 EXPIRATION DATE............. 5:00 p.m., New York City time, on , 1998 unless the Exchange Offer is extended, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. See "The Exchange Offer--Expiration Date; Extensions; Amendments." ACCRUED INTEREST ON THE NEW NOTES AND THE OLD NOTES..... Interest will accrue on the New Notes from June 25, 1998 or from the most recent interest payment date on the Old Notes surrendered in exchange therefor. Holders of Old Notes whose Old Notes are accepted for exchange will be deemed to have waived the right to receive any payment in respect of interest accrued from June 25, 1998 to the date of issuance of the New Notes. See "The Exchange Offer--Interest on New Notes." CONDITIONS TO THE EXCHANGE OFFER.............. The Exchange Offer is subject to certain customary conditions, which may be waived by the Company in whole or in part and from time to time in its sole discretion. See "The Exchange Offer--Conditions." The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Old Notes being tendered for exchange. PROCEDURE FOR TENDERING OLD NOTES................... Each Holder of Old Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with the Old Notes (unless such tender is being effected pursuant to the procedures for book-entry transfer described below) to be exchanged and any other required documentation to the Exchange Agent (as defined herein) at the address set forth herein and therein. See "The Exchange Offer--Procedure for Tendering." SPECIAL PROCEDURES FOR BENEFICIALOWNERS............ Any beneficial owner whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender in the Exchange Offer should contact such registered Holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on his own behalf, such beneficial owner must, prior to completing and executing the Letter of Transmittal and delivering his Old Notes, either make appropriate arrangements to register ownership of the Old Notes in such Holder's name or obtain a properly completed bond power from the registered Holder. The transfer of record ownership may take considerable time and may not be able to be completed prior to the Expiration Date. See "The Exchange Offer--Procedure for Tendering." GUARANTEED DELIVERY PROCEDURES.................. Holders of Old Notes who wish to tender their Old Notes and whose Old Notes are not immediately available or who cannot 7 deliver their Old Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date must tender their Old Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures." WITHDRAWAL RIGHTS........... Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date, unless previously accepted for exchange. See "The Exchange Offer--Withdrawal of Tenders." ACCEPTANCE OF OLD NOTES AND DELIVERY OF NEW NOTES....... The Company will accept for exchange any and all Old Notes which are validly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer--Terms of the Exchange Offer." CONSEQUENCE OF FAILURE TO EXCHANGE................ Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Notes as set forth on the legend thereon. In addition, if the Exchange Offer is consummated, the Company does not intend to file further registration statements for the sale or other disposition of the Old Notes. See "Risk Factors--No Public Market for the Notes" and "Risk Factors--Consequences of the Exchange Offer on Non-Tendering Holders of the Old Notes." REGISTRATION RIGHTS AGREEMENT; EFFECT ON HOLDERS........... The Old Notes were sold by the Company on June 25, 1998 to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as the initial purchaser (the "Initial Purchaser") pursuant to a Purchase Agreement dated June 22, 1998 between the Company and the Initial Purchaser (the "Purchase Agreement"). The Initial Purchaser subsequently sold the Old Notes to qualified institutional buyers and non-U.S. persons in reliance on Rule 144A and Regulation S, respectively, under the Securities Act. Pursuant to the Purchase Agreement, the Company and the Initial Purchaser entered into a Registration Rights Agreement dated as of June 25, 1998 (the "Registration Rights Agreement") which grants the Holders of the Old Notes certain exchange and registration rights. The Exchange Offer is being made to satisfy this contractual obligation of the Company. The Holders of New Notes are not entitled to any exchange or registration rights with respect to the New Notes. See "The Exchange Offer--Purpose and Effects of the Exchange Offer." CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES................ The exchange of Old Notes for New Notes by tendering holders will not be a taxable exchange for federal income tax purposes, 8 and such holders will not recognize any taxable gain or loss or any interest income for federal income tax purposes as a result of such exchange. See "Certain U.S. Federal Income Tax Consequences." EXCHANGE AGENT.............. IBJ Schroder Bank & Trust Company, the Trustee under the Indenture, is serving as exchange agent (the "Exchange Agent") in connection with the Exchange Offer. The address of the Exchange Agent is P.O. Box 84, Bowling Green Station, New York, New York 10274-0084. Hand and overnight deliveries should be directed to the Exchange Agent at One State Street, New York, New York 10004, Attn: Securities Processing Window, Subcellar One (SC-1). For information with respect to the Exchange Offer, call (212) 858-2103. See "The Exchange Offer--Exchange Agent." USE OF PROCEEDS............. The Company will not receive any cash proceeds from the exchange of the New Notes for the Old Notes pursuant to the Exchange Offer. The net proceeds from the sale of Old Notes of approximately $110,150,000 (after deducting underwriting discounts and expenses of the Offering) have been used, together with the Equity Contribution, (i) to repay the entire outstanding principal amount of, and accrued and unpaid interest on, the Bridge Notes, which were issued to an affiliate of DLJMBII and the Initial Purchaser in connection with the Acquisition and (ii) to fund working capital requirements and for general corporate purposes, including funding the purchase price of the 3M Acquisition. See "Use of Proceeds" and "--3M Acquisition." 9 SUMMARY DESCRIPTION OF NEW NOTES SECURITIES OFFERED.......... $115.0 million in aggregate principal amount of the Company's 10 1/2% Senior Notes due 2008 (the "New Notes"). MATURITY DATE............... July 1, 2008. INTEREST RATE............... The New Notes will bear interest at the rate of 10 1/2% per annum, payable semi-annually in cash in arrears on January 1 and July 1 of each year, commencing January 1, 1999. OPTIONAL REDEMPTION......... The New Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after July 1, 2003, in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of redemption. In addition, at any time prior to July 1, 2001, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of New Notes originally issued at a redemption price equal to 110.5% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the aggregate principal amount of New Notes originally issued remain outstanding immediately after the occurrence of such redemption. See "Description of New Notes--Optional Redemption." CHANGE OF CONTROL........... Upon the occurrence of a Change of Control, each Holder of New Notes will have the right to require the Company to repurchase all or any part of such Holder's New Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. See "Description of New Notes--Repurchase at the Option of Holders--Change of Control." There can be no assurance that, in the event of a Change of Control, the Company would have sufficient funds to repurchase all New Notes tendered. See "Risk Factors--Limitations on Ability to Make Change of Control Payment." RANKING..................... The New Notes will be general unsecured obligations of the Company, will rank pari passu in right of payment to all existing and future unsecured senior indebtedness of the Company and will rank senior in right of payment to all existing and future subordinated indebtedness of the Company. The New Notes, however, will be effectively subordinated to all secured obligations of the Company, including borrowings under the Credit Agreement, to the extent of the assets securing such obligations. As of March 31, 1998, on a pro forma basis, after giving effect to the Refinancing and the consummation of the 3M Acquisition, the Company would have had no outstanding secured obligations (other than outstanding letters of credit in the amount of $0.6 million) under the Credit Agreement. In addition, as of such date and on such pro forma basis, borrowings of up to approximately $19.4 million were available under the Credit Agreement, subject to certain conditions. 10 CERTAIN COVENANTS........... The Indenture contains certain covenants that will limit, among other things, the ability of the Company to: (i) pay dividends, redeem capital stock or make certain other restricted payments or investments; (ii) incur additional indebtedness or issue preferred equity interests; (iii) merge, consolidate or sell all or substantially all of its assets; (iv) create liens on assets; and (v) enter into certain transactions with affiliates or related persons. See "Description of New Notes--Certain Covenants." RISK FACTORS Holders of "Old Notes" should take into account the specific considerations set forth under "Risk Factors" as well as the other information set forth in this Prospectus before tendering Old Notes in exchange for New Notes. ------------ The Company operates under the trade name "Arcade" and its principal executive offices are located at 1815 East Main Street, Chattanooga, Tennessee 37404 and its telephone number is (423) 624-3301. 11 SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA Set forth below are summary historical and pro forma consolidated financial data of the Company and the predecessor of the Company (the "Predecessor") as of the dates and for the periods presented. The summary historical consolidated financial data of the Predecessor were derived from the audited consolidated financial statements of the Predecessor, except for the data for the nine months ended March 31, 1997 and the period from July 1, 1997 to December 15, 1997, which were derived from unaudited consolidated financial statements of the Predecessor. The summary historical consolidated financial data of the Company as of March 31, 1998 and for the period from December 16, 1997 to March 31, 1998 have been derived from the unaudited consolidated financial statements of the Company. In the opinion of management, the unaudited consolidated financial statements of the Predecessor and the Company include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial condition and results of operations as of such dates and for such periods. The pro forma consolidated financial data give effect to the Acquisition, the Refinancing and the 3M Acquisition and have been derived from the Unaudited Pro Forma Condensed Consolidated Financial Data appearing elsewhere herein. The information contained in this table should be read in conjunction with "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company's Unaudited Pro Forma Condensed Consolidated Financial Data and the notes thereto, the Company's Consolidated Financial Statements and the notes thereto and the other information contained elsewhere in this Prospectus.
PREDECESSOR ----------------------------------------------------------------- NINE MONTHS JULY 1, 1997 FISCAL YEAR ENDED JUNE 30, ENDED TO -------------------------------------- MARCH 31, DECEMBER 15, 1995 1996 1997 1997 1997 ------------ ------------ ------------ ----------- -------------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales .................. $ 61,794 $ 73,486 $ 77,723 $ 62,367 $ 35,186 Cost of goods sold ......... 38,333 49,862 49,467 39,529 22,809 -------- -------- -------- -------- -------- Gross profit ............... 23,461 23,624 28,256 22,838 12,377 Selling, general and administrative expenses .................. 8,483 10,655 13,353 10,470 5,712 Amortization of goodwill .................. 1,113 1,214 1,214 911 559 -------- -------- -------- -------- -------- Income from operations ................ 13,865 11,755 13,689 11,457 6,106 OTHER DATA (1): Capital expenditures .............. 1,325 2,051 2,462 1,839 807 Ratio of earnings to fixed charges (2) ......... 2.2x 1.6x 2.1x 2.4x 2.2x
(RESTUBBED FROM ABOVE TABLE)
THE COMPANY ---------------------------------------- PRO FORMA ------------------------- DECEMBER 16, FISCAL NINE 1997 YEAR MONTHS TO ENDED ENDED MARCH 31, JUNE 30, MARCH 31, 1998 1997 1998 -------------- ------------ ------------ (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales .................. $21,982 $ 87,771 $ 64,038 Cost of goods sold ......... 13,782 54,157 39,656 ------- -------- -------- Gross profit ............... 8,200 33,614 24,382 Selling, general and administrative expenses .................. 3,189 14,335 9,647 Amortization of goodwill .................. 1,125 4,032 3,028 ------- -------- -------- Income from operations ................ 3,886 15,247 11,707 OTHER DATA (1): Capital expenditures .............. 255 2,462 1,062 Ratio of earnings to fixed charges (2) ......... -- 1.2x 1.2x
12
AT MARCH 31, 1998 -------------------------------- PRO ACTUAL FORMA ------------------- ---------- BALANCE SHEET DATA (AT END OF PERIOD): Cash and cash equivalents ........... $ 988 $ 637 Working capital (deficit) ........... (107,821)(3) 16,733 Total assets ........................ 202,667 213,020 Total debt .......................... 128,779 118,679 Total stockholder's equity .......... 61,273 82,118
- ---------- (1) EBITDA is defined as income from operations plus depreciation and amortization. EBITDA is discussed because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles ("GAAP") in the United States and is not indicative of operating income or cash flow from operations as determined under GAAP. EBITDA for the Predecessor was $17,492, $16,177 and $18,773 for the fiscal years ended June 30, 1995, 1996 and 1997, respectively, $15,285 for the nine months ended March 31, 1997 and $8,562 for July 1, 1997 to December 15, 1997. EBITDA for the Company was $5,893 for December 16, 1997 to March 31, 1998 and pro forma EBITDA for the Company was $22,587 for the fiscal year ended June 30, 1997 and $17,213 for the nine months ended March 31, 1998. Pro forma EBITDA for the nine months ended March 31, 1998 includes the effect of the following unusual items: (i) $525 of legal costs and royalty payments associated with a successful patent infringement claim against a competitor; (ii) costs totaling $252 incurred in connection with centralizing certain acquired technologies; and (iii) costs totaling $278 related to former stockholder expenses and severance costs at the Company's European subsidiary. Depreciation and amortization for the Predecessor was $3,627, $4,422 and $5,084 for the fiscal years ended June 30, 1995, 1996 and 1997, respectively, $3,828 for the nine months ended March 31, 1997 and $2,456 for July 1, 1997 to December 15, 1997. Depreciation and amortization for the Company was $2,007 for December 16, 1997 to March 31, 1998 and pro forma depreciation and amortization was $7,340 for the fiscal year ended June 30, 1997 and $5,506 for the nine months ended March 31, 1998. (2) For purposes of calculating the ratio of earnings to fixed charges, "earnings" represent income (loss) before income taxes plus fixed charges. "Fixed charges" consist of interest on all indebtedness and amortization of deferred financing costs. Earnings were not sufficient to cover fixed charges by $1,325 for the period from December 16, 1997 to March 31, 1998. (3) The Bridge Notes mature on December 15, 1998 and, therefore, are classified on the Company's consolidated balance sheet as a current liability in accordance with GAAP, the result of which is a substantial working capital deficit. 13 RISK FACTORS Holders of Old Notes should carefully consider the following factors, together with the other information set forth in this Prospectus, before tendering Old Notes in exchange for New Notes. However, the risk factors set forth herein may not be exhaustive and these or other factors could have a material adverse effect on the ability of the Company to service its indebtedness, including principal and interest payments on the New Notes. SUBSTANTIAL LEVERAGE; RESTRICTIVE COVENANTS The Company has substantial indebtedness and debt service obligations. As of March 31, 1998, after giving pro forma effect to the Refinancing and the 3M Acquisition, the Company would have had total consolidated indebtedness of approximately $118.7 million and the Company's pro forma ratio of earnings available to cover fixed charges for Fiscal 1997 and the Interim 1998 Period would both have been 1.2x. In addition, on June 25, 1998, the date of the closing (the "Closing") of the Offering (the "Closing Date"), the Company had a maximum of $19.4 million of availability under the Credit Agreement. The Indenture and the Credit Agreement permit the Company and its Restricted Subsidiaries, in each case, to incur additional indebtedness, subject to certain limitations. The level of the Company's indebtedness could have important consequences to holders of the New Notes, including, but not limited to, the following: (i) a substantial portion of cash flow from operations must be dedicated to debt service and will not be available for other purposes; (ii) additional debt financing in the future for working capital, capital expenditures or acquisitions may be limited; (iii) the level of indebtedness could limit flexibility in reacting to changes in the operating environment and economic conditions generally; (iv) the level of indebtedness could restrict the Company's ability to increase manufacturing capacity; (v) the Company may face difficulties in satisfying its obligations with respect to its indebtedness; and (vi) a portion of the Company's borrowings bear interest at variable rates of interest, which could result in higher interest expense in the event of an increase in market interest rates. The ability of the Company to pay principal and interest on the New Notes and to satisfy its other debt obligations will depend upon the Company's future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond the Company's control, as well as the availability of revolving credit borrowings available under the Credit Agreement. The Company anticipates that its operating cash flow, together with borrowings under the Credit Agreement, will be sufficient to meet its operating expenses and to service its debt requirements as they become due. However, if the Company is unable to service its indebtedness, the Company may be required to take action such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing its indebtedness or seeking additional equity capital. There can be no assurance that any of these remedies can be effected on satisfactory terms, if at all. The Indenture and the Credit Agreement contain certain covenants that, among other things, limit the ability of the Company and its Restricted Subsidiaries to (i) pay dividends or make certain restricted payments; (ii) incur additional indebtedness and issue preferred stock; (iii) create liens; (iv) incur dividend and other payment restrictions affecting subsidiaries; (v) enter into mergers, consolidations or sales of all or substantially all of the assets of the Company; (vi) enter into certain transactions with affiliates; and (vii) sell certain assets. In addition, the Credit Agreement requires the Company to maintain specified financial ratios and satisfy certain financial condition tests. The Company's ability to meet those financial ratios and tests can be affected by events beyond its control, and there can be no assurance that the Company will meet those tests. See "Description of New Notes" and "Description of Certain Indebtedness--Credit Agreement." 14 EFFECTIVE SUBORDINATION; ENCUMBRANCES ON ASSETS Under the terms of the Credit Agreement, Heller Financial, Inc. (the "Lender") has a security interest in all of the capital stock of the Company and the Company has granted to the Lender security interests in substantially all of the current and future assets of the Company (other than the issued and outstanding shares of capital stock of the Company's subsidiaries). In the event of a default under the Credit Agreement (whether as a result of the failure to comply with a payment or other covenant, a cross-default or otherwise), such Lender will have a prior secured claim on the capital stock of the Company and the encumbered assets of the Company. As a result, the encumbered assets of the Company would be available to pay obligations on the Notes only after borrowings under the Credit Agreement and any other secured indebtedness have been paid in full. If the Lender should attempt to foreclose on their collateral, the Company's financial condition and the value of the New Notes will be materially adversely affected and could be eliminated. See "Description of Certain Indebtedness." As of March 31, 1998, on a pro forma basis, after giving effect to the Refinancing and the consummation of the 3M Acquisition, the Company would have had no outstanding obligations (other than outstanding letters of credit in the amount of $0.6 million) under the Credit Agreement. In addition, as of such date and on such pro forma basis, borrowings of up to approximately $19.4 million were available under the Credit Agreement, subject to certain conditions. POSTAL REGULATION The Company's sampling products are approved by the U.S. Postal Service for inclusion in subscription magazines mailed at periodical postage rates. The Company's products have a significant cost advantage over certain competing sampling products, such as miniatures, vials, packettes, sachets and blisterpacks, because such competing products cause an increase from periodical postage rates to the higher third class rates for the magazine's entire circulation. Subscription magazine sampling inserts delivered to consumers through the U.S. Postal Service accounted for approximately 40% of the Company's net sales in Fiscal 1997. There can be no assurance that the U.S. Postal Service will not approve other competing types of sampling products for use in subscription magazines without requiring a postal surcharge, or that the U.S. Postal Service will not reclassify the Company's sampling products such that they would incur a postal surcharge. Any such action by the U.S. Postal Service could have a material adverse effect on the Company's results of operations and financial condition. RELIANCE UPON SIGNIFICANT CUSTOMERS The Company's top ten customers by sales generated accounted for approximately 61% of the Company's net sales in Fiscal 1997 and each of Estee Lauder and Procter & Gamble accounted for in excess of 10% of the Company's net sales in Fiscal 1997. Although the Company has long-established relationships with most of its major customers, the Company does not have long-term contracts with any of its customers. The Company is currently working with Procter & Gamble to qualify the Company's manufacturing operations under certain supplier standards established by Procter & Gamble that the Company has not yet met. There can be no assurance that the Company will be able to qualify under such supplier standards or that Procter & Gamble will continue to purchase sampling products from the Company if the Company's manufacturing operations are not so qualified. An adverse change in its relationships with significant customers, including Estee Lauder and Procter & Gamble, could have a material adverse effect on the Company's results of operations and financial condition. COMPETITION The Company's competitors, some of whom have substantially greater capital resources than the Company, are actively engaged in manufacturing certain products similar to those of the Company. The Company's principal competitors in the printed fragrance sampler market are Webcraft, a subsidiary of Big Flower Holdings, Inc., Orlandi Inc., Retail Communications Corp. and Quebecor Printing (USA) Corp. Competition in the Company's market is based upon product quality, product technologies, customer relationships, price and customer service. The future success of the Company's business will depend in large part upon its ability to market and manufacture products and services that meet customer 15 needs on a cost-effective and timely basis. There can be no assurance that capital will be available for these purposes, that investments in new technology will result in commercially viable products or that the Company will be successful in generating sales on commercially favorable terms, if at all. In addition, the Company's success, competitive position and revenues will depend, in part, upon its ability to protect its proprietary technologies and to operate without infringing on the proprietary rights of others. Although the Company has certain patents and has filed, and expects to continue to file, other patent applications, there can be no assurance that the Company's issued patents are enforceable or that its patent applications will mature into issued patents. The expense involved in litigation regarding patent protection or a challenge thereto has been and could be significant and any future expense, if any, cannot be estimated by the Company. A portion of the Company's manufacturing processes are not covered by any patent or patent application. As a result, the business of the Company may be adversely affected by competitors who independently develop technologies substantially equivalent to those employed by the Company. See "Business--Competition." DEPENDENCE ON FRAGRANCE INDUSTRY; SEASONALITY The advertising budgets of the Company's customers, and therefore the revenues of the Company, are susceptible to prevailing economic and market conditions that affect advertising expenditures, the performance of the products of the Company's customers in the marketplace and certain other factors. See the discussion of net sales for the Interim 1998 Period compared to the Interim 1997 Period and Fiscal 1997 compared to Fiscal 1996 in "Management's Discussion of Financial Condition and Results of Operations--Results of Operations." There can be no assurance that further reductions in advertising spending will not occur, which could have a material adverse effect on the Company's results of operations and financial condition. In addition, the Company's sales and operating results have historically reflected seasonal variations. Such seasonal variations are based on the timing of the Company's customers' advertising campaigns, which have traditionally been concentrated prior to the Christmas and spring holiday seasons. As a result, a higher level of sales are reflected in the Company's first two fiscal quarters ended December 31 when sales from such advertising campaigns are principally recognized while the Company's fourth fiscal quarter ended June 30 typically reflects the lowest sales level of the fiscal year. These seasonal fluctuations require the Company to accurately allocate its resources to manage the Company's manufacturing capacity, which often operates at full capacity during peak seasonal demand periods. RAW MATERIALS--PAPER Paper is the primary raw material utilized by the Company in producing its sampling products. Paper costs represented approximately one-third of the Company's cost of goods sold in each of Fiscal 1995, 1996 and 1997. During the five years prior to Fiscal 1996, the Company had not experienced any significant increases in paper prices. In Fiscal 1996, a series of significant price increases for paper occurred, which increased the Company's average price of paper by 14.8% as compared to Fiscal 1995. The magnitude and close proximity of such increases prevented the Company from recovering all of such increased paper costs from its customers and had an adverse impact on the Company's results of operations. Future significant increases in paper costs could have a material adverse effect on the Company's results of operations and financial condition to the extent that the Company is unable to price its products to reflect such increases. There can be no assurance that the Company's customers would accept such price increases or the extent to which such price increases would impact their decision to utilize the Company's sampling products. All of the Company's encapsulated sampling products, which accounted for a majority of the Company's net sales in Fiscal 1997, utilize specific grades of paper that are produced exclusively for the Company by one supplier. However, the Company does not have any supply contract with 16 respect to such grades of paper. Any disruption or loss of such supply of paper could have a material adverse effect on the Company's results of operations and financial condition to the extent that the Company is unable to obtain such paper elsewhere. DEPENDENCE UPON SENIOR MANAGEMENT The Company is substantially dependent on the personal efforts, relationships and abilities of Roger L. Barnett, the Company's President and Chief Executive Officer. Barry W. Miller, the Company's Chief Operating Officer, joined the Company in May 1998 and, consequently, the Company has limited operating history under such senior manager upon which holders of New Notes may base an evaluation of his performance. The Company has entered into employment agreements with Messrs. Barnett and Miller. The Company does not maintain key person life insurance on any member of senior management of the Company. The loss of Mr. Barnett's services or the services of any other member of senior management could have a material adverse effect on the Company. See "Management." RISKS OF INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS Approximately 9.6% of the Company's net sales in Fiscal 1997 were generated outside the United States. Foreign operations are subject to certain risks inherent in conducting business abroad, including, among others, exposure to foreign currency fluctuations and devaluations or restrictions on money supplies, foreign and domestic export law and regulations, price controls, taxation, tariffs, import restrictions, and other political and economic events beyond the Company's control. The Company has not experienced any material effects of these risks as of yet, but there can be no assurance that they will not have such an effect in the future. CONTROL BY DLJMBII DLJMBII has the power to elect a majority of the directors of Acquisition Corp. and generally exercises control over the business, policies and affairs of Acquisition Corp., Holding and the Company through its ownership of Acquisition Corp. By reason of such ownership, DLJMBII may have interests that could be in conflict with those of the holders of New Notes. A portion of the net proceeds from the Offering and the Equity Contribution have been used to repay the Bridge Notes, which were issued to an affiliate of DLJMBII and the Initial Purchaser. See "Use of Proceeds," "Security Ownership of Certain Beneficial Owners and Management" and "Certain Relationships and Related Transactions." LIMITATIONS ON ABILITY TO MAKE CHANGE OF CONTROL PAYMENT Upon the occurrence of a Change of Control, each holder of New Notes will have the right to require the Company to purchase all or any part of such holder's New Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. The prepayment of the New Notes following a Change of Control would constitute a default under the Credit Agreement. In the event that a Change of Control occurs, the Company would likely be required to refinance the indebtedness outstanding under the Credit Agreement and the New Notes. There can be no assurance that the Company would be able to refinance such indebtedness or, if such refinancing were to occur, that such refinancing would be on terms favorable to the Company. See "Description of New Notes--Repurchase at the Option of Holders--Change of Control." LABOR RELATIONS As of March 31, 1998, approximately 60% of the Company's employees worked under a collective bargaining agreement that expires on April 1, 1999. While the Company believes that its relations with its employees are good, there can be no assurance that the Company's collective bargaining agreement will be renewed in the future. A prolonged labor dispute (which could include a work stoppage) could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Employees." 17 RISK OF FRAUDULENT TRANSFER LIABILITY If a court of competent jurisdiction in a suit by an unpaid creditor or a representative of creditors (such as a trustee in bankruptcy or a debtor-in-possession) were to find that either the Company did not receive fair consideration or reasonably equivalent value for issuing the Notes and, at the time of the incurrence of indebtedness represented by the New Notes, the Company was insolvent, was rendered insolvent by reason of such incurrence, was engaged in a business or transaction for which its remaining assets constituted unreasonably small capital, intended to incur, or believed that it would incur, debts beyond its ability to pay as such debts matured, or intended to hinder, delay or defraud its creditors, such court could avoid such indebtedness, subordinate such indebtedness to other existing and future indebtedness of the Company or take other action detrimental to the holders of the New Notes. The measure of insolvency for purposes of the foregoing will vary depending upon the law of the relevant jurisdiction. Generally, however, a company would be considered insolvent for purposes of the foregoing if the sum of such company's debts is greater than all the company's property at a fair valuation, or if the present fair saleable value of the company's assets is less than the amount that will be required to pay its probable liability on its existing debts as they become absolute and matured. YEAR 2000 ISSUES The Company has commenced a study of its computer systems in order to assess its exposure to Year 2000 issues. The Company expects to make the necessary modifications or changes to its computer information systems to enable proper processing of transactions relating to the Year 2000 and beyond. The Company will evaluate appropriate courses of action, including replacement of certain systems whose associated costs would be recorded as assets and subsequently amortized. There can be no assurance that costs and expenses or other matters relating to Year 2000 issues will not have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Issues." NO PUBLIC MARKET FOR THE NEW NOTES There has previously been only a limited secondary market and no public market for the Old Notes, and there can be no assurance as to the liquidity of any market that may develop for the New Notes, the ability of Holders of the New Notes to sell their New Notes, or the prices at which the Holders of the New Notes would be able to sell their New Notes. In addition, because the Exchange Offer is not conditioned upon any minimum number of Old Notes being tendered for exchange, the number of New Notes tendered could be quite small which could have an adverse effect on the liquidity of the New Notes. The Initial Purchaser has advised the Company that it currently intends to make a market in the New Notes. The Initial Purchaser is not obligated to do so, however, and any market-making with respect to the New Notes may be discontinued at any time without notice. Also, to the extent that Old Notes are tendered and accepted in the Exchange Offer, a holder's ability to sell untendered Old Notes could be adversely affected. Therefore, no assurance can be given as to the liquidity of the trading market for the New Notes. The Company does not intend to list the New Notes on a national securities exchange or to apply for quotation of the New Notes through the National Association of Securities Dealers Automated Quotation System. However, it is expected that the New Notes will be eligible for trading in the Private Offerings, Resales and Trading through Automated Linkages ("PORTAL") Market upon issuance. CONSEQUENCES OF THE EXCHANGE OFFER ON NON-TENDERING HOLDERS OF THE OLD NOTES The Company intends for the Exchange Offer to satisfy its registration obligations under the Registration Rights Agreement. If the Exchange Offer is consummated, the Company does not intend to file further registration statements for the sale or other disposition of Old Notes. Old Notes that are not exchanged for New Notes will remain restricted securities within the meaning of Rule 144 of the Securities Act. Consequently, following completion of the Exchange Offer, Holders of Old Notes seeking liquidity in their investment would have to rely on an exemption to the registration requirements under applicable securities laws, including the Securities Act, with respect to any sale or other disposition of the Old Notes. 18 USE OF PROCEEDS The Company will not receive any cash proceeds from the exchange of the New Notes for the Old Notes pursuant to the Exchange Offer. As consideration for issuing the New Notes offered hereby the Company will receive, in exchange, Old Notes in like principal amount, which will be canceled and as such will not result in any increase in indebtedness of the Company. The net proceeds to the Company from the sale of the Old Notes, after deducting discounts and commissions and other estimated expenses of the Offering, was approximately $110.7 million. The net proceeds from the Offering have been used, together with the Equity Contribution, (i) to repay the entire outstanding principal amount of, and accrued and unpaid interest on, the Bridge Notes, which were issued to an affiliate of DLJMBII and the Initial Purchaser in connection with the Acquisition and (ii) to fund working capital requirements and for general corporate purposes, including funding the purchase price of the 3M Acquisition. As of June 22, 1998, the interest rate on the Bridge Notes was 11.75%. See "Certain Relationships and Related Transactions," "Description of Certain Indebtedness" and "Plan of Distribution." 19 THE EXCHANGE OFFER PURPOSE AND EFFECTS OF THE EXCHANGE OFFER The Old Notes were sold by the Company on the Closing Date to the Initial Purchaser, pursuant to the Purchase Agreement. The Initial Purchaser subsequently resold the Old Notes to qualified institutional buyers within the meaning of Rule 144A under the Securities Act and to non-U.S. persons pursuant to Regulation S under the Securities Act. As a condition to the Purchase Agreement, the Company and the Initial Purchasers entered into the Registration Rights Agreement on June 25, 1998. The Registration Rights Agreement required the Company to file with the Commission following the Closing, a registration statement relating to an exchange offer pursuant to which notes that are substantially identical to the Old Notes would be offered in exchange for the then outstanding Old Notes tendered at the option of the Holders thereof. The form and terms of the New Notes are identical in all material respects to the form and terms of the Old Notes except (i) that the New Notes have been registered under the Securities Act, (ii) that the New Notes are not entitled to certain registration rights which are applicable to the Old Notes under the Registration Rights Agreement, and (iii) that certain contingent interest rate provisions applicable to the Old Notes are generally not applicable to the New Notes. In the event that the applicable interpretations of the staff of the Commission do not permit the Company to effect the Exchange Offer, the Company agreed to use its reasonable best efforts to cause to become effective a shelf registration statement with respect to the resale of the Old Notes ("the Shelf Registration Statement") and to keep such Shelf Registration Statement effective for a period of up to three years. The Exchange Offer is being made to satisfy the contractual obligations of the Company under the Registration Rights Agreement. The Holders of any Old Notes not tendered in the Exchange Offer will not be entitled to require the Company to file the Shelf Registration Statement. The Registration Rights Agreement provides that (i) the Company will file an Exchange Offer Registration Statement with the Commission on or prior to 45 days after the Closing Date, (ii) the Company will use its reasonable best efforts to have the Exchange Offer Registration Statement declared effective by the Commission on or prior to 180 days after the Closing Date, (iii) unless the Exchange Offer would not be permitted by applicable law or Commission policy, the Company will commence the Exchange Offer and use its reasonable best efforts to issue on or prior to 30 business days after the date on which the Exchange Offer Registration Statement was declared effective by the Commission, New Notes in exchange for all Notes tendered prior thereto in the Exchange Offer and (iv) if obligated to file the Shelf Registration Statement, the Company will use its reasonable best efforts to file the Shelf Registration Statement with the Commission on or prior to 45 days after such filing obligation arises and to cause the Shelf Registration to be declared effective by the Commission on or prior to 180 days after such obligation arises. If (a) the Company fails to file any of the Registration Statements required by the Registration Rights Agreement on or before the date specified for such filing, (b) any of such Registration Statements is not declared effective by the Commission on or prior to the date specified for such effectiveness (the "Effectiveness Target Date"), (c) the Company fails to consummate the Exchange Offer within 30 business days of the Effectiveness Target Date with respect to the Exchange Offer Registration Statement or (d) the Shelf Registration Statement or the Exchange Offer Registration Statement is declared effective but thereafter ceases to be effective or usable in connection with resales of Transfer Restricted Securities during the periods specified in the Registration Rights Agreement (each such event referred to in clauses (a) through (d) above a "Registration Default"), then the Company will pay liquidated damages ("Liquidated Damages") to each Holder of Notes, with respect to the first 90-day period immediately following the occurrence of the first Registration Default in an amount equal to $.05 per week per $1,000 principal amount of Notes held by such Holder. The amount of the Liquidated Damages will increase by an additional $.05 per week per $1,000 principal amount of Notes with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of Liquidated Damages of $.25 per week per $1,000 principal amount of Notes. All accrued Liquidated Damages will be paid by the Company on each Damages Payment Date to the Global Note Holder by wire transfer of immediately available funds or by federal funds check and to Holders of Certificated Notes by mailing checks to their registered addresses. Following the cure of all Registration Defaults, the accrual of Liquidated Damages will cease. 20 Based on an interpretation by the staff of the Commission set forth in no-action letters issued to unrelated third parties, the Company believes the New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by the Holders thereof (other than a Restricted Holder) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holders' business and such Holders are not participating, do not intend to participate and have no arrangement or understanding with any person to participate, in a distribution of such New Notes. See "K-III Communications Corporation," SEC No-Action Letter (available May 14, 1993); "Morgan Stanley & Co., Incorporated," SEC No-Action Letter (available June 5, 1991); and "Exxon Capital Holdings Corporation," SEC No-Action Letter (available May 13, 1998). Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any sale of such New Notes. See "Plan of Distribution." If any person were to participate in the Exchange Offer for the purpose of distributing securities in a manner not permitted by the preceding paragraph, such person could not rely on the position of the staff of the Commission and must comply with the Prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. Therefore, each Holder of Old Notes who accepts the Exchange Offer must represent in the Letter of Transmittal that it meets the conditions described above. The Exchange Offer shall be deemed to have been consummated upon the earlier to occur of (i) the Company having exchanged New Notes for all outstanding Old Notes (other than Old Notes held by a Restricted Holder) pursuant to such Exchange Offer and (ii) the Company having exchanged, pursuant to such Exchange Offer, New Notes for all Old Notes that have been validly tendered and not withdrawn on the Expiration Date. In such event, Holders of Old Notes seeking liquidity in their investment would have to rely on exemptions to registration requirements under applicable securities laws, including the Securities Act. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal, the Company will accept all Old Notes validly tendered prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange of New Notes for Old Notes will be made with respect to all Old Notes validly tendered and not withdrawn on or prior to the Expiration Date, promptly following the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. The Company will issue $1,000 principal amount of New Notes in exchange for $1,000 principal amount of outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or all of their Old Notes pursuant to the Exchange Offer in denominations of $1,000 and integral multiples of $1,000 in excess thereof. As of the date of this Prospectus, $115,000,000 aggregate principal amount of the Old Notes is outstanding. This Prospectus, together with the Letter of Transmittal, is being sent to all registered Holders of Old Notes as of , 1998 (the "Record Date"). The Company shall be deemed to have accepted validly tendered Old Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering Holders of Old Notes for the purpose of receiving New Notes from the Company and delivering New Notes to such Holders. If any tendered Old Notes are not accepted for exchange because of an invalid tender or the occurrence of certain other events set forth herein, certificates for any such unaccepted Old Notes will be returned, without expense, to the tendering Holder thereof as promptly as practicable after the Expiration Date. The registration expenses to be incurred in connection with the Exchange Offer, including fees and expenses of the Exchange Agent and Trustee and accounting and legal fees, will be paid by the Company. 21 The Company has agreed to pay, subject to the instructions in the Letter of Transmittal, all transfer taxes, if any, relating to the sale or disposition of such Holders' Old Notes pursuant to the Exchange Offer. See "--Fees and Expenses." EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "Expiration Date" shall mean , 1998, unless the Company, in its sole discretion, extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date to which the Exchange Offer is extended. In order to extend the Expiration Date, the Company will notify the Exchange Agent of any extension by oral or written notice and will mail to the record Holders of Old Notes an announcement thereof, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. Such announcement may state that the Company is extending the Exchange Offer for a specified period of time. The Company reserves the right (i) to delay acceptance of Old Notes, to extend the Exchange Offer or to terminate the Exchange Offer and to refuse to accept Old Notes not previously accepted, if any of the conditions set forth herein under "--Conditions" shall have occurred and shall not have been waived by the Company, by giving oral or written notice of such delay, extension or termination to the Exchange Agent, and (ii) to amend the terms of the Exchange Offer in any manner deemed by it to be advantageous to the Holders of the Old Notes. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendment in a manner reasonably calculated to inform the Holders of the Old Notes of such amendment. Without limiting the manner in which the Company may choose to make public announcements of any delay in acceptance, extension, termination or amendment of the Exchange Offer, the Company shall have no obligation to publish, advertise, or otherwise communicate any such public announcement, other than by making a timely release to a financial news service. INTEREST ON NEW NOTES Interest will accrue on the New Notes from June 25, 1998, or from the most recent interest payment date on the Old Notes surrendered in exchange therefor, and will be payable semi-annually in cash and arrears on January 1 and July 1 of each year, commencing on January 1, 1999 at the rate of 10 1/2% per annum. Holders of Old Notes whose Old Notes are accepted for exchange will be deemed to have waived the right to receive any payment in respect of interest accrued from June 25, 1998 to the date of issuance of the New Notes. PROCEDURE FOR TENDERING To tender in the Exchange Offer, a Holder must complete, sign and date the Letter of Transmittal, or a facsimile thereof and mail or otherwise deliver such Letter of Transmittal or such facsimile, together with the Old Notes (unless such tender is being effected pursuant to the procedure for book-entry transfer described below) and any other required documents, to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" as defined by Rule 17Ad-15 under the Exchange Act (any of the foregoing hereinafter referred to as an "Eligible Institution") unless the Old Notes tendered pursuant thereto are tendered (i) by a registered Holder who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. Any financial institution that is a participant in DTC's Book-Entry Transfer Facility system may make book-entry delivery of the Old Notes by causing DTC to transfer such Old Notes into the Exchange 22 Agent's account in accordance with DTC's procedure for such transfer. Although delivery of Old Notes may be effected through book-entry transfer into the Exchange Agent's account at DTC, the Letter of Transmittal (or facsimile thereof), with any required signature guarantees and any other required documents, must, in any case, be transmitted to and received or confirmed by the Exchange Agent at its addresses set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. The tender by a Holder of Old Notes will constitute an agreement between such Holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. Delivery of all documents must be made to the Exchange Agent at its address set forth herein. Holders may also request that their respective brokers, dealers, commercial banks, trust companies or nominees effect such tender for such Holders. THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDERS. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer. The term "Holder" with respect to the Exchange Offer means any person in whose name Old Notes are registered on the books of the Company or any other person who has obtained a properly completed bond power from the registered holder or any person whose Old Notes are held of record by DTC who desires to deliver such Old Notes at DTC. Any beneficial Holder whose Old Notes are registered in the name of his broker, dealer, commercial bank, trust company or other nominee and who wishes to tender his Old Notes should contact the registered Holder promptly and instruct such registered Holder to tender on his behalf. If such beneficial Holder wishes to tender on his own behalf, such beneficial Holder must, prior to completing and executing the Letter of Transmittal and delivering his Old Notes, either make appropriate arrangements to register ownership of the Old Notes in such Holder's name or obtain a properly completed bond power from the registered Holder. The transfer of record ownership may take considerable time. If the Letter of Transmittal is signed by a person other than the registered Holder of any Old Notes listed therein, such Old Notes must be endorsed or accompanied by appropriate bond powers which authorize such person to tender the Old Notes on behalf of the registered holder, in either case signed as the name of the registered Holder or Holders appears on the Old Notes. If the Letter of Transmittal or any Old Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of a corporation or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by the Company, evidence satisfactory to the Company of their authority to so act must be submitted with the Letter of Transmittal. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of the tendered Old Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Old Notes not validly tendered or any Old Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the absolute right to waive any irregularities or conditions of tender as to particular Old Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes must be cured within such time as the Company shall determine. Neither the Company, the Exchange Agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Old Notes nor shall any of them incur any liability for failure to 23 give such notification. Tenders of Old Notes will not be deemed to have been made until such irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not validly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent without cost to the tendering holder of such Old Notes unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. By tendering, each Holder will represent to the Company that, among other things (i) the New Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of such Holder's business, (ii) such Holder is not participating, does not intend to participate and has no arrangement or understanding with any person to participate, in a distribution of such New Notes, (iii) such Holder is not an "affiliate," as defined under Rule 405 of the Securities Act, of the Company and (iv) such Holder is not a broker-dealer who acquired Old Notes directly from the Company to resell pursuant to Rule 144A or any other available exemption under the Securities Act. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes, the Letter of Transmittal or any other required documents to the Exchange Agent prior to the Early Exchange Date or the Expiration Date, may effect a tender if: (a) The tender is made through an Eligible Institution; (b) Prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed notice of guarantee delivery (the "Notice of Guaranteed Delivery") (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder of the Old Notes, the certificate number or numbers of such Old Notes and the principal amount of Old Notes, the certificate number or numbers of such Old Notes and the principal amount of Old Notes tendered, stating that the tender is being made thereby, and guaranteeing that, within three business days after the date of execution of the Notice of Guaranteed Delivery, the Letter of Transmittal (or facsimile thereof), together with the certificate(s) representing the Old Notes to be tendered in proper form for transfer and any other documents required by the Letter of Transmittal, will be deposited by the Eligible Institution with the Exchange Agent; and (c) Such properly completed and executed Letter of Transmittal (or facsimile thereof), together with the certificate(s) representing all tendered Old Notes in proper form for transfer (or confirmation of a book-entry transfer into the Exchange Agent's account at DTC of Old Notes delivered electronically) and all other documents required by the Letter of Transmittal are received by the Exchange Agent within three business days after the date of execution of the Notice of Guaranteed Delivery. WITHDRAWAL OF TENDERS Except as otherwise provided herein, tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date, unless previously accepted for exchange. To withdraw a tender of Old Notes in the Exchange Offer, a written or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date and prior to acceptance for exchange by the Company. Any such notice of withdrawal must (i) specify the name of the person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the certificate number or numbers and principal amount of such Old Notes), (iii) be signed by the Depositor in the same manner as the original signature on the Letter of Transmittal by which such Old Notes were tendered (including required signature guarantees) or be accompanied by documents of transfer sufficient to permit the trustee with respect to the Old Notes to register the transfer of such Old Notes into the name of the Depositor withdrawing the tender and (iv) specify the name in which any such Old Notes are to be registered, if different from that of the Depositor. All questions as to the validity, form and eligibility (including time of receipt) of such withdrawal notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Old Notes so withdrawn will be deemed not 24 to have been validly tendered for purposes of the Exchange Offer and no New Notes will be issued with respect thereto unless the Old Notes so withdrawn are validly retendered. Any Old Notes which have been tendered but which are not accepted for exchange will be returned by the Exchange Agent to the holder thereof without cost to such holder as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may be retendered by following one of the procedures described above under "--Procedure for Tendering" at any time prior to the Expiration Date. CONDITIONS Notwithstanding any other term of the Exchange Offer, the Company will not be obligated to consummate the Exchange Offer if the New Notes to be received will not be tradeable by the holder, other than in the case of Restricted Holders, without restriction under the Securities Act and the Exchange Act and without material restrictions under the Blue Sky or securities laws of substantially all of the states of the United States. Such condition will be deemed to be satisfied unless a holder provides the Company with an opinion of counsel reasonably satisfactory to the Company to the effect that the New Notes received by such holder will not be tradeable without restriction under the Securities Act and the Exchange Act and without material restrictions under the Blue Sky laws of substantially all of the states of the United States. The Company may waive this condition. If the condition described above exists, the Company will be entitled to refuse to accept any Old Notes and, in the case of such refusal, will return tendered Old Notes to exchanging holders of Old Notes. See "The Exchange Offer." EXCHANGE AGENT IBJ Schroder Bank & Trust Company, the Trustee under the Indenture, has been appointed as Exchange Agent for the Exchange Offer. Questions and requests for assistance and requests for additional copies of this Prospectus or of the Letter of Transmittal should be directed to the Exchange Agent addressed as follows: By Hand and Overnight Delivery: IBJ Schroder Bank & Trust Company One State Street New York, New York 10044 Attn: Securities Processing Window, Subcellar One (SC-1) By Registered or Certified mail: IBJ Schroder Bank & Trust Company P.O. Box 84 Bowling Green Station New York, New York 10274-0084 Attn: Reorganization Operations Department Telephone: (212) 858-2103 Facsimile: (212) 858-2611 (212) 858-2103 to confirm facsimile transmissions 25 FEES AND EXPENSES The expenses of soliciting tenders pursuant to the Exchange Offer will be borne by the Company. The principal solicitation for tenders pursuant to the Exchange Offer is being made by mail. Additional solicitations may be made by officers and regular employees of the Company and its affiliates in person, by facsimile or telephone. The Company will not make any payments to brokers, dealers or other persons soliciting acceptances of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse the Exchange Agent for its reasonable out-of-pocket expenses in connection therewith. The registration expenses to be incurred in connection with the Exchange Offer, including fees and expenses of the Exchange Agent and Trustee and accounting and legal fees, will be paid by the Company. The Company has agreed to pay, subject to the instructions in the Letter of Transmittal, all transfer taxes, if any, relating to the sale or disposition of such Holders' Old Notes pursuant to the Exchange Offer. If, however, certificates representing New Notes or Old Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of any person other than the registered Holder of the Old Notes tendered, or if tendered Old Notes are registered in the name of any person other than the person signing the Letter of Transmittal, or if a transfer tax imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered Holder or any other persons) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. ACCOUNTING TREATMENT No gain or loss for accounting purposes will be recognized by the Company upon the consummation of the Exchange Offer. The expenses of the Exchange Offer will be amortized by the company over the term of the New Notes under generally accepted accounting principles. 26 CAPITALIZATION The following table sets forth the consolidated cash and cash equivalents and capitalization of the Company at March 31, 1998 (i) on an actual basis and (ii) on a pro forma basis giving effect to the Refinancing and the 3M Acquisition. This table should be read in conjunction with "Use of Proceeds," the Company's Consolidated Financial Statements and notes thereto and the Company's Unaudited Pro Forma Condensed Consolidated Financial Data and notes thereto included elsewhere in this Prospectus.
AT MARCH 31, 1998 ---------------------------- ACTUAL PRO FORMA ----------- -------------- (IN THOUSANDS) Cash and cash equivalents ................... $ 988 $ 3,462 ========= ========== Debt: Bridge Notes (1) .......................... $ 123,500 $ -- Credit Agreement (2) ...................... 1,600 -- Notes offered hereby ...................... -- 115,000 Other (3) ................................. 3,679 3,679 --------- ---------- Total debt ............................... 128,779 118,679 --------- ---------- Stockholder's equity: Common stock .............................. -- -- Additional paid-in capital ................ 78,363 100,862 (4) Accumulated deficit ....................... (1,284) (2,938)(5) Cumulative translation adjustment ......... (76) (76) Carryover basis adjustment ................ (15,730) (15,730) --------- ---------- Total stockholder's equity ............... 61,273 82,118 --------- ---------- Total capitalization ........................ $ 190,052 $ 200,797 ========= ==========
- ---------- (1) The Bridge Notes mature on December 15, 1998 and, therefore, are classified on the Company's consolidated balance sheet as a current liability in accordance with GAAP. (2) At March 31, 1998, on a pro forma basis, after giving effect to the Refinancing and the consummation of the 3M Acquisition, the Company expects to have available borrowings of up to $19,400, which is net of outstanding letters of credit, under the Credit Agreement for working capital and general corporate purposes, subject to a borrowing base calculation and the achievement of certain financial ratios and compliance with certain conditions. (3) Includes the Scent Seal Note in the amount of $1,438, which was issued in connection with the Company's acquisition of Scent Seal, Inc. in 1995. See "Description of Certain Indebtedness--Scent Seal Note." Also includes capital lease obligations of $2,241. (4) Reflects the Equity Contribution of the estimated $22,499 in net proceeds from the Debenture Offering. (5) Increase results from the write-off of the unamortized deferred financing costs associated with the Bridge Notes, net of the related tax benefit. 27 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The selected historical consolidated financial data presented below as of June 30, 1993 and November 3, 1993 and for the fiscal year ended June 30, 1993 and the period from July 1, 1993 to November 3, 1993 have been derived from the historical consolidated financial statements of the original predecessor of the Company (the "Original Predecessor") prior to its acquisition by the Predecessor. The selected historical consolidated financial data presented below as of June 30, 1994, 1995, 1996 and 1997, March 31, 1997 and December 15, 1997, and for the fiscal years ended June 30, 1995, 1996 and 1997, the nine months ended March 31, 1997 and the periods from November 4, 1993 to June 30, 1994 and from July 1, 1997 to December 15, 1997 have been derived from the historical consolidated financial statements of the Predecessor. The selected historical consolidated financial data presented below as of March 31, 1998 and for the period from December 16, 1997 to March 31, 1998 have been derived from the historical consolidated financial statements of the Company. The historical financial data as of March 31, 1997 and 1998 and December 15, 1997 and for the nine months ended March 31, 1997, the period from July 1, 1997 to December 15, 1997 and the period from December 16, 1997 to March 31, 1998 have been derived from the unaudited consolidated financial statements of the Predecessor and the Company, which, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial condition and results of operations as of such dates and for such periods. The information contained in this table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Company's Consolidated Financial Statements and the notes thereto included elsewhere in this Prospectus.
ORIGINAL PREDECESSOR PREDECESSOR ------------------------ ------------------------------------------------ FISCAL YEAR JULY 1, NOVEMBER 4, ENDED 1993 TO 1993 TO FISCAL YEAR ENDED JUNE 30, JUNE 30, NOVEMBER 3, JUNE 30, ---------------------------------- 1993 1993 1994 1995 1996 1997 ---------- ------------- ------------- ---------- ---------- ------------ (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales .......................... $ 42,674 $19,941 $ 18,213 $61,794 $ 73,486 $ 77,723 Cost of goods sold ................. 23,214 11,172 12,042 38,333 49,862 49,467 -------- ------- -------- ------- -------- ---------- Gross profit ....................... 19,460 8,769 6,171 23,461 23,624 28,256 Selling, general and administrative expenses ........... 5,627 2,950 4,809 8,483 10,655 13,353 Amortization of goodwill ........... 224 78 723 1,113 1,214 1,214 -------- ------- -------- ------- -------- ---------- Income from operations ............. 13,609 5,741 639 13,865 11,755 13,689 Interest expense, net .............. 478 -- 3,718 6,170 6,762 6,203 Fees to stockholders ............... 300 102 197 470 470 470 Other, net ......................... (4,149) 2,462 2,754 (22) 244 (101) Income tax expense (benefit) ......................... 6,600 1,310 (1,946) 3,114 2,101 3,135 -------- ------- -------- ------- -------- ---------- Net income (loss) .................. $ 10,380 $ 1,867 $ (4,084) $ 4,133 $ 2,178 $ 3,982 ======== ======= ======== ======= ======== ========== BALANCE SHEET DATA (AT END OF PERIOD): Cash and cash equivalents .......... $ 1,425 $ 68 $ 3,728 $ 4,196 $ 626 $ 303 Working capital (deficit) .......... 5,324 2,288 3,593 39 (4,685) (36,957) Total assets ....................... 23,520 28,320 72,754 85,695 82,395 77,142 Total debt and redeemable preferred stock ................... -- 850 61,025 64,655 60,736 54,964 Total stockholder's equity ......... 19,416 16,940 2,927 6,572 7,932 11,225 OTHER DATA: Capital expenditures ............... 2,769 1,109 1,184 1,325 2,051 2,462 Ratio of earnings to fixed charges (2) ....................... n/m n/m -- 2.2x 1.6x 2.1x
(RESTUBBED FROM ABOVE TABLE)
PREDECESSOR THE COMPANY -------------------------- ------------------- NINE MONTHS JULY 1, 1997 DECEMBER 16, ENDED TO 1997 TO MARCH 31, DECEMBER 15, MARCH 31, 1997 1997 1998 ----------- -------------- ------------------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales .......................... $62,367 $ 35,186 $ 21,982 Cost of goods sold ................. 39,529 22,809 13,782 ------- -------- ------------ Gross profit ....................... 22,838 12,377 8,200 Selling, general and administrative expenses ........... 10,470 5,712 3,189 Amortization of goodwill ........... 911 559 1,125 ------- -------- ------------ Income from operations ............. 11,457 6,106 3,886 Interest expense, net .............. 4,694 2,646 5,163 Fees to stockholders ............... 353 215 63 Other, net ......................... (266) 11 (15) Income tax expense (benefit) ......................... 2,852 1,441 (41) ------- -------- ------------ Net income (loss) .................. $ 3,824 $ 1,793 $ (1,284) ======= ======== ============ BALANCE SHEET DATA (AT END OF PERIOD): Cash and cash equivalents .......... $ 628 $ 4,481 $ 988 Working capital (deficit) .......... 2,417 (4,959) (107,821)(1) Total assets ....................... 83,283 77,399 202,667 Total debt and redeemable preferred stock ................... 60,092 55,408 128,779 Total stockholder's equity ......... 11,273 12,716 61,273 OTHER DATA: Capital expenditures ............... 1,839 807 255 Ratio of earnings to fixed charges (2) ....................... 2.4x 2.2x --
28 - ---------- (1) The Bridge Notes mature on December 15, 1998 and, therefore, are classified on the Company's consolidated balance sheet as a current liability in accordance with GAAP, the result of which is a substantial working capital deficit. (2) For purposes of calculating the ratio of earnings to fixed charges, "earnings" represent income (loss) before income taxes plus fixed charges. "Fixed charges" consist of interest on all indebtedness and amortization of deferred financing costs. Earnings were not sufficient to cover fixed charges by $6,030 and $1,325 for the periods from November 4, 1993 to June 30, 1994 and from December 16, 1997 to March 31, 1998, respectively. 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the more detailed information and Consolidated Financial Statements of the Company included elsewhere in this Prospectus. GENERAL The Company's sales are derived from the sale of sampling products to cosmetics and consumer products companies. Substantially all of the Company's sales are made directly to its customers while a small portion are made through advertising agencies. Each customer's sampling program is unique and pricing is negotiated based on estimated costs plus a margin. While the Company and its customers do not enter into long-term contracts, the Company has had long-standing relationships with the majority of its customer base. Historically, the Company's sales have been derived from the Company's traditional fragrance sampling products, while sales from several of the Company's new products, such as BeautiSeal, PowdaTouch and LiquaTouch, are included in the Company's results of operations for only a portion of the periods discussed below or are included in such periods at initial levels of sales that reflect only introductory product volumes. The Company's sales are seasonal due to the timing of its customers' major advertising campaigns, which have traditionally been concentrated prior to the Christmas and spring holiday seasons. Sales are recognized when products are shipped. As a result, a higher level of sales are reflected in the Company's first two fiscal quarters ended December 31 when sales from such advertising campaigns are principally recognized while the Company's fourth fiscal quarter ended June 30 typically reflects the lowest sales level of the fiscal year. Sampling programs are generally quoted to the Company's customers, based on their specifications, four to six months prior to production and firm orders are generally received by the Company one to two months prior to production. See "Risk Factors--Dependence on Fragrance Industry; Seasonality." Cost of goods sold, which represented 63.6% of net sales in Fiscal 1997, consists principally of materials (paper, plastic, foil, ink, packaging materials and outsourced materials), direct labor, depreciation and overhead costs. Materials and direct labor are variable components while overhead is principally fixed. Fixed overhead costs (excluding depreciation) represented approximately 9.4% of net sales in Fiscal 1997 and include indirect departmental compensation, occupancy costs and equipment maintenance. Paper is the primary raw material utilized by the Company and accounted for approximately one-third of cost of goods sold in Fiscal 1997. During the 10-month period from November 1994 to September 1995, paper prices to the Company increased approximately 36.0%. The average price of paper was approximately 14.8% greater in Fiscal 1996 than in Fiscal 1995 and had an adverse impact on the Company's results of operations in Fiscal 1996. As a result of the paper price increases in Fiscal 1996, the Company changed its pricing policy for sampling program quotes to customers and made them subject to paper price increases. However, since the change in such policy, the Company has not sought to change quoted prices to a customer based on paper price increases and there can be no assurance that a customer would accept such change. Accordingly, the Company seeks to reduce its exposure to changes in paper prices by managing its paper inventory and the time between the quoting and actual production of sampling campaigns while still attempting to preserve the ability to adjust quoted pricing based on paper price increases. See "Risk Factors--Raw Materials--Paper." Selling, general & administrative expenses, which represented 17.2% of net sales in Fiscal 1997, consist mainly of employee compensation, marketing and advertising expenses, professional and legal fees and occupancy costs of the sales and laboratory facilities. The cosmetics industry has experienced, and is continuing to experience, significant consolidation. Management believes that such consolidation positively impacts the sampling market, since larger cosmetics companies tend to spend more on product sampling to support their brands throughout the product life cycle, compared with smaller cosmetics companies, which tend to use sampling primarily in 30 new product launches. However, industry consolidation has also negatively impacted the sampling market by temporarily decreasing the amount that smaller companies, which are targets of consolidation, spend on sampling products in anticipation of, and during, the consolidation process. COST REDUCTION PROGRAM The Company is implementing a comprehensive program to reduce annual operating costs by approximately $4.0 million. The comprehensive cost reduction program was developed by the Company in connection with an evaluation of its operations conducted by manufacturing consultants with significant experience in the printing industry and is designed to improve the Company's operating efficiency through (i) reduced materials cost derived from scrap/waste reduction and from more effective purchasing, (ii) streamlined manufacturing processes that reduce the amount of time required to prepare for successive production runs utilizing the same equipment and that reduce the amount of time equipment is under utilized by improved scheduling of production runs and (iii) rationalized staffing in the product support area. Management expects the benefit of the materials cost reductions and rationalized staffing will begin to be realized in the short term, while the benefits of a streamlined manufacturing process are expected to be realized incrementally through June 1999. RESULTS OF OPERATIONS Interim 1998 Period Compared to Interim 1997 Period Net Sales. Net sales for the Interim 1998 Period decreased $5.2 million, or 8.3%, to $57.2 million as compared to $62.4 million for the Interim 1997 Period. The majority of this decrease was attributable to three core customers' advertising decreases on new product launches and existing products as a result of a management restructuring at two of these customers and the sale of one of them. This decrease was partially offset by increased sales of sampling products to other categories of the cosmetics industry as well as increased sales to the consumer products market. In addition, the Company expanded its sales of sampling products in Europe. Gross Profit. Gross profit for the Interim 1998 Period decreased $2.2 million, or 9.6%, to $20.6 million as compared to $22.8 million for the Interim 1997 Period. Gross profit as a percentage of net sales decreased to 36.0% in the Interim 1998 Period from 36.5% in the Interim 1997 Period. The gross profit decline was primarily attributable to the absorption of fixed overhead, depreciation costs and equipment reconfiguration costs created by shorter production runs due to lower volume. Selling, General & Administrative Expenses. Selling, general & administrative expenses for the Interim 1998 Period decreased $1.6 million, or 15.2%, to $8.9 million as compared to $10.5 million for the Interim 1997 Period. The decrease in selling, general & administrative expenses was primarily attributable to a decrease in sales commissions resulting from the decreased level of sales and a decrease in legal costs related to the Company's pursuit of a patent infringement claim in the Interim 1997 Period. In addition, the Company also had decreased expenses in the Interim 1998 Period versus the Interim 1997 Period related to the consolidation of certain acquired technologies and certain expenses relating to reorganizing the management structure at the Company's European subsidiary. As a result of these factors, selling, general & administrative expenses as a percentage of net sales decreased to 15.6% in the Interim 1998 Period from 16.8% in the Interim 1997 Period. Income from Operations. Income from operations for the Interim 1998 Period decreased $1.5 million, or 13.0%, to $10.0 million as compared to $11.5 million for the Interim 1997 Period. Income from operations as a percentage of net sales decreased to 17.5% in the Interim 1998 Period from 18.4% in the Interim 1997 Period principally as a result of the factors described above and the increase in amortization of goodwill resulting from the Acquisition. EBITDA. EBITDA for the Interim 1998 Period decreased $0.8 million, or 5.2%, to $14.5 million as compared to $15.3 million for the Interim 1997 Period. EBITDA as a percentage of net sales increased to 25.3% in the Interim 1998 Period from 24.5% in the Interim 1997 Period principally as a result of the factors described above. 31 Fiscal 1997 Compared to Fiscal 1996 Net Sales. Net sales for Fiscal 1997 increased $4.2 million, or 5.7%, to $77.7 million as compared to $73.5 million in Fiscal 1996. The increase is primarily attributable to volume increases related to core customers' advertising expenditure increases on new product launches and existing products. Gross Profit. Gross profit for Fiscal 1997 increased $4.7 million, or 19.9%, to $28.3 million, as compared to $23.6 million in Fiscal 1996. Gross profit as a percentage of net sales improved to 36.4% in Fiscal 1997 from 32.1% in Fiscal 1996. Gross profit improvements reflected decreased materials costs as a result of paper price decreases and increased operating efficiency gained from moving the production of an acquired business from outside sources to internal facilities. Selling, General & Administrative Expenses. Selling, general & administrative expenses for Fiscal 1997 increased $2.7 million, or 25.2%, to $13.4 million as compared to $10.7 million in Fiscal 1996. The increase in selling, general & administrative expenses was primarily attributable to an increase in legal costs as the Company pursued a patent infringement claim against a competitor. Additional increases were related to reorganizing the management structure of the Company's European subsidiary, increases in customer service and sales staffing and increased commissions related to sales volume increases. As a result of these factors, selling, general & administrative expenses as a percentage of net sales increased to 17.2% in Fiscal 1997 from 14.6% in Fiscal 1996. Income from Operations. Income from operations for Fiscal 1997 increased $1.9 million, or 16.1%, to $13.7 million as compared to $11.8 million in Fiscal 1996. Income from operations as a percentage of net sales increased to 17.6% in Fiscal 1997 from 16.1% in Fiscal 1996 principally as a result of the factors described above. EBITDA. EBITDA for Fiscal 1997 increased $2.6 million, or 16.0% to $18.8 million as compared to $16.2 million in Fiscal 1996. EBITDA as a percentage of net sales increased to 24.2% in Fiscal 1997 from 22.0% in Fiscal 1996 principally as a result of the factors described above. Fiscal 1996 Compared to Fiscal 1995 Net Sales. Net sales for Fiscal 1996 increased $11.7 million, or 18.9%, to $73.5 million as compared to $61.8 million in Fiscal 1995. The Company acquired a new product technology at the end of Fiscal 1995, which was marketed and sold to the Company's customers and accounted for approximately $9.7 million of the increase in net sales. The remaining increase was attributable to sales of another new product in the first year subsequent to its introduction. Gross Profit. Gross profit for Fiscal 1996 increased $0.1 million, or 0.4%, to $23.6 million, as compared to $23.5 million in Fiscal 1995. Gross profit as a percentage of net sales decreased to 32.1% in Fiscal 1996 from 38.0% in Fiscal 1995. The decline in the gross profit percentage was primarily attributable to increases in paper prices and the higher cost of temporarily outsourcing production of product technologies acquired at the end of Fiscal 1995 as compared to the cost of internal production. In addition, plant overhead costs increased primarily as a result of additional plant management personnel and quality control staff required to serve the increased sales volume; shipping costs also increased as new products were sent from U.S. production facilities to the European market. Selling, General & Administrative Expenses. Selling, general & administrative expenses for Fiscal 1996 increased $2.2 million, or 25.9%, to $10.7 million as compared to $8.5 million in Fiscal 1995. The increase was primarily attributable to the acquisition of a new product technology, restructuring costs following the reacquisition of the Company's European license and increased staff and consultant costs related to product improvement and development. As a result of these factors, selling, general & administrative expenses as a percentage of net sales increased to 14.6% in Fiscal 1996 from 13.8% in Fiscal 1995. Income from Operations. Income from operations for Fiscal 1996 decreased $2.1 million, or 15.1%, to $11.8 million as compared to $13.9 million in Fiscal 1995. Income from operations as a percentage of net sales decreased to 16.1% in Fiscal 1996 from 22.4% in Fiscal 1995 principally as a result of the factors described above. 32 EBITDA. EBITDA for Fiscal 1996 decreased $1.3 million, or 7.4% to $16.2 million as compared to $17.5 million in Fiscal 1995. EBITDA as percentage of net sales decreased to 22.0% in Fiscal 1996 from 28.3% in Fiscal 1995 principally as a result of the factors described above. LIQUIDITY AND CAPITAL RESOURCES The Company has substantial indebtedness and significant debt service obligations. As of March 31, 1998, on a pro forma basis after giving effect to the Refinancing and the 3M Acquisition, the Company would have had consolidated indebtedness in an aggregate amount of $118.7 million. For certain information regarding the Company's outstanding indebtedness, see "Description of Certain Indebtedness" and "Description of New Notes." The Indenture under which the Old Notes were and the New Notes will be issued and the Credit Agreement referred to below permit the Company and its Restricted Subsidiaries to incur additional indebtedness, subject to certain limitations. In addition, the Indenture contains certain covenants that, among other things, limit the ability of the Company and its Restricted Subsidiaries to: (i) pay dividends or make certain restricted payments; (ii) incur additional indebtedness and issue preferred stock; (iii) create liens; (iv) incur dividend and other payment restrictions affecting subsidiaries; (v) enter into mergers, consolidations or sales of all or substantially all of the assets of the Company; (vi) enter into certain transactions with affiliates; and (vii) sell certain assets. In addition, the Credit Agreement requires the Company to maintain specified financial ratios and satisfy certain financial condition tests. See "Description of Certain Indebtedness" and "Description of New Notes--Certain Covenants." Borrowings under the Credit Agreement are limited to a maximum amount equal to $20.0 million ($19.4 million as of March 31, 1998, on a pro forma basis, after giving effect to the Refinancing and the consummation of the 3M Acquisition), subject to a borrowing base calculation and the achievement of certain financial ratios and compliance with certain conditions. The interest rate for borrowings under the Credit Agreement are determined from time to time based on the Company's choice of formulas, plus a margin. The Credit Agreement will mature on December 31, 2002. See "Description of Certain Indebtedness--Credit Agreement." The Company's principal liquidity requirements are for (i) debt service requirements under the Notes, the Credit Agreement and the Scent Seal Note, (ii) obligations under the Company's capital leases, (iii) working capital needs and capital expenditures and (iv) certain royalty payments. Historically, the Company has funded its capital, debt service and operating requirements with a combination of net cash provided by operating activities, which were $5.3 million, $8.9 million for Fiscal 1996 and Fiscal 1997, respectively, together with borrowings under revolving credit facilities. In the case of the Interim 1998 Period, cash totaling $4.8 million was used by operating activities as a result of the funding of the costs of the Acquisition. Net cash generated by operating activities in Fiscal 1997 resulted mainly from net income before depreciation and amortization. Key elements of changes in net cash from operating activities were decreases in trade accounts receivable that were principally offset by decreases in income taxes, accounts payable and accrued expenses. In Fiscal 1997, the Company had capital expenditures of approximately $2.5 million. The Company has budgeted approximately $2.0 million for capital expenditures in the fiscal year ended June 30, 1998, $1.1 million of which has been spent as of March 31, 1998. The Company expects to fund capital expenditures budgeted for the remainder of fiscal year 1998 through a combination of borrowings under the Credit Agreement and cash generated from operations. On June 22, 1998, the Company closed the 3M Acquisition, pursuant to which the Company acquired the fragrance sampling business of the Industrial and Consumer Products division of 3M for approximately $7.25 million in cash and the assumption of certain liabilities. The Company intends to relocate all of the business operations acquired in the 3M Acquisition to its existing facilities to utilize current excess capacity at such facilities. See "The Transactions." 33 The Company may from time to time evaluate other potential acquisitions. The Company expects that funding for future acquisitions may come from a variety of sources, depending on the size and nature of any such acquisition. Potential sources of capital include cash generated from operations, borrowings under the Credit Agreement, additional equity investments or other external debt or equity financings. There can be no assurance that such additional capital sources will be available to the Company on terms that the Company finds acceptable, or at all. The Company believes that, in the absence of future acquisitions, its liquidity, capital resources and cash flows from existing operations will be sufficient to fund budgeted capital expenditures, working capital requirements and interest and principal payments on its indebtedness, including the Notes. INFLATION Inflation has not had nor is it expected to have a significant effect on the Company's business or operations. SEASONALITY Historically, the Company's sales and operating results have reflected seasonal variations. The seasonality of the Company's sales and operating results is significantly influenced by the timing of its customers' advertising campaigns, which have traditionally been concentrated prior to the Christmas and spring holiday seasons. See "Risk Factors--Dependence on Fragrance Industry; Seasonality." YEAR 2000 ISSUES The Company has reviewed its computer systems in order to assess its exposure to Year 2000 issues. The Company expects to make the necessary modifications or changes to its computer information systems to enable proper processing of transactions relating to the Year 2000 and beyond. Management does not expect that such modifications will require material expenditures on the part of the Company. The Company has and will continue to evaluate appropriate courses of action, including replacement of certain systems whose associated costs would be recorded as assets and subsequently amortized. However, there can be no assurance that costs and expenses or other matters relating to Year 2000 issues will not have a material impact on the Company's financial condition or results of operations. EUROPEAN MONETARY UNIT The Company has not implemented a strategy to address European monetary unit issues related to its computer system. Management does not expect that any costs related to such strategy will require material expenditures on the part of the Company. ENVIRONMENTAL AND SAFETY REGULATION The Company's operations are subject to extensive laws and regulations relating to the storage, handling, emission, transportation and discharge of materials into the environment and the maintenance of safe conditions in the workplace. The Company's policy is to comply with all legal requirements of applicable environmental, health and safety laws and regulations, and the Company believes it is in general compliance with such requirements and has adequate professional staff and systems in place to remain in compliance, although there can be no assurances that this is the case. The Company considers costs for environmental compliance to be a normal cost of doing business, and includes such costs in pricing decisions. 34 BUSINESS THE COMPANY The Company is the leading global marketer and manufacturer of cosmetics sampling products, including fragrance, skin care and makeup samplers. The Company produces a range of proprietary and patented product samplers that can be incorporated into various print media principally designed to reach the consumer in the home, such as magazine inserts, catalog inserts, remittance envelopes, statement enclosures and blow-ins. The Company is the only sampling company positioned to provide complete marketing and sampling programs to its customers, including creative content and sample production and distribution. The Company's customers include most of the world's largest cosmetics companies, such as Calvin Klein Cosmetics (Unilever Plc), Chanel, Inc., Christian Dior Perfumes Inc., Coty Inc., Elizabeth Arden (Unilever Plc), Estee Lauder, Inc., Giorgio Beverly Hills (The Procter & Gamble Company), L'Oreal S.A./Cosmair, Inc., Revlon, Inc. and Sanofi Beaute, Inc. Sampling is one of the most effective and widely used promotional practices for consumer products. Product sampling expenditures have increased faster than any other form of consumer promotional expenditure from 1992 to 1996, the last year for which data is available. Product sampling is particularly critical to the cosmetics industries, where consumers generally must try products prior to purchase because of their uniquely personal nature. The Company's introduction in 1979 of the ScentStrip (Registered Trademark) sampler, the first pull-apart microencapsulated fragrance sampler, transformed the fragrance industry by providing the first cost-effective means to reach consumers in their homes on a mass scale by combining advertising and product sampling. All of the Company's sampling products are approved by the U.S. Postal Service for inclusion in subscription magazines at periodical postage rates, which is a more cost-effective means of reaching consumers than alternatives such as direct mail or newsstand magazine distribution. While the Company's ScentStrip sampler remains the most widely used technology in the sampling industry, the Company continues to be the leading innovator in the sampling industry through its development of alternative sampling technologies, all of which are designed for cost-effective mass distribution. In recent years, the Company has complemented its fragrance sampling business by focusing its research and development efforts on new product technologies and sampling solutions for the skin care, makeup and consumer products markets. While product sampling is critical to the success of these products, sampling programs for these products have been constrained historically by the characteristics of the available sampling alternatives. Most sampling programs have consisted of relatively limited in-store or direct mail efforts because existing samples have been too costly to produce in mass quantities and have been incapable of being efficiently incorporated into magazines, catalogs and other print advertising. Since June 1997, the Company has introduced three innovative product sampling technologies to address this need, providing the first cost-effective means to reach consumers in their homes on a mass scale with samples of these products. Management believes these new technologies have fundamentally altered the economics and efficiencies of product sampling in these markets. Existing customers such as Chanel, Christian Dior, Estee Lauder, L'Oreal/Cosmair and Revlon have utilized these new technologies in sampling programs for their cosmetics products, such as skin care and liquid makeup. The Company has also created and produced initial sampling programs for new consumer products customers. On June 22, 1998, the Company closed the 3M Acquisition, pursuant to which the Company acquired the fragrance sampling business of the Industrial and Consumer Products division of 3M for approximately $7.25 million in cash and the assumption of certain liabilities. See "The Transactions." COMPETITIVE ADVANTAGES Founded in 1902 as a printing company, the Company has been the market leader in fragrance sampling since its introduction of the ScentStrip sampler almost two decades ago and has recently expanded the application of its sampling technologies to new markets. Management believes that the Company has significant competitive advantages compared to other sampling companies: o Full product line. The Company is unique in the breadth of its product line, which includes a full range of fragrance sampling products and innovative new technologies for sampling skin care and 35 makeup products. The Company offers nine distinct sampling products, while none of the Company's major competitors offers more than three sampling technologies. Although most major cosmetics companies generate significant revenues in each of the fragrance, makeup and skin care categories, the Company is the only sampling provider that offers sampling products for all such categories of products. o Technological leadership. The Company is the technological leader in the cosmetics sampling industry, and has introduced almost every major fragrance sampling technology to the market since its introduction of the ScentStrip sampler in 1979. Management believes that its product development program is the largest and most effective in the cosmetics sampling industry. Over the past three years, the Company's increased emphasis on new product research and development has expanded the size of the potential sampling market through the introduction of new technologies, such as BeautiSeal (Trade Mark) , LiquaTouch (Trade Mark) and PowdaTouch (Trade Mark) samplers, which target the skin care and makeup categories. Seven of the Company's nine major sampling technologies are patented or have patents pending, and all are approved by the U.S. Postal Service for inclusion in subscription magazines. Competing sampling technologies that are not approved for inclusion in subscription magazines are more expensive to mass distribute. In addition, the Company has developed certain proprietary manufacturing techniques that management believes provide the Company with a competitive advantage. o Low cost, highest quality producer. The Company is the most vertically integrated manufacturing company in the sampling industry as all of its major competitors source all or part of their products from third-party manufacturers. Management believes that the Company's high degree of vertical integration, together with the high volume resulting from the Company's market share position, provides the Company with certain cost and quality advantages. In addition, unlike some of its major competitors, which are divisions of large companies, management believes that the Company's focus on the product sampling industry allows it to produce the highest quality product offering in the industry. Management believes this focus on quality is a competitive advantage because the Company's customers are reluctant to jeopardize an expensive product launch by using an unproven sampling source that may not provide consumers with an accurate first exposure to a sampled product. o Strong customer relationships. More than 75% of Fiscal 1997 net sales were generated by sales to customers that have been doing business with the Company for the past five years or longer. The Company is proactive in proposing innovative campaigns and sampling solutions, which result in strong relationships with its customers. The Company has long-standing relationships with the key marketing, purchasing and technical executives at most of the world's leading cosmetics companies. It has also developed relationships with flavor and fragrance companies, media companies and leading retailers servicing the cosmetics industry. o Superior customer service. Managing sampling programs is highly service intensive and the Company has the most experienced customer service representatives in the industry. As cosmetics companies seek to streamline their purchasing operations, the Company's ability to provide complete marketing and sampling programs is becoming increasingly important. Management believes that the Company's ability to provide excellent customer service is a competitive advantage for the Company, particularly with regard to department store sampling programs, such as catalog inserts, billing enclosures and remittance envelopes, which require significant coordination with individual retailers. o Sole global provider. The Company is the only sampling company to provide local sales, service and production capabilities on a global basis. The major cosmetics companies are increasingly global, and the Company's ability to service these customers in Europe, the United States and Southeast Asia is becoming increasingly important. The Company currently has sales offices in New York, San Francisco, Paris, France and London, England and sales agents in Sydney, Australia and Caracas, Venezuela. In addition, the Company has third-party manufacturing capabilities in Europe and Australia to complement its established domestic manufacturing operations. 36 BUSINESS STRATEGY Management's goal is to enhance the Company's position as the leading global marketer and manufacturer of cosmetics sampling products and position itself for growth in the consumer products sampling market, while increasing its profitability. To achieve this goal, management is pursuing a strategy based on the following elements: o Leverage existing customer relationships to expand into new cosmetics categories. Almost all of the Company's sales have historically been in the fragrance category, but for many of the Company's cosmetics customers, fragrance represents a small portion of their total sales. Management estimates that skin care and makeup sales account for approximately two-thirds of all cosmetics industry sales, while sampling for such products accounts for less than one-fourth of all cosmetics sampling units. Historically, most skin care and makeup sampling programs have consisted of relatively limited in-store or direct mail efforts because existing samples have been too costly to produce in mass quantities and too expensive to incorporate into subscription magazines and other forms of distribution. Since June 1997, the Company has introduced three innovative product sampling technologies for the makeup and skin care categories, which provide a cost effective means to reach consumers in their homes. Management believes that these innovative new technologies, together with its established cosmetics industry customer relationships, position the Company for future growth in this area. o Penetrate the consumer products market. Management believes that the Company has significant opportunities to increase its existing sampling business by applying its cost-effective sampling technologies to new end-user categories within the consumer products market. The consumer products market is significantly larger than the Company's traditional fragrance market. o Continue implementation of cost reduction program. The Company is implementing a comprehensive program to reduce annual operating costs by approximately $4.0 million. The comprehensive cost reduction program was developed by the Company in connection with an evaluation of its operations conducted by manufacturing consultants with significant experience in the printing industry and is designed to improve the Company's operating efficiency through (i) reduced materials cost derived from scrap/waste reduction and from more effective purchasing, (ii) streamlined manufacturing processes that reduce the amount of time required to prepare for successive manufacturing jobs utilizing the same equipment and (iii) rationalized staffing in the product support area. Management expects the benefit of the materials cost reductions and rationalized staffing will begin to be realized in the short term, while the benefits of a streamlined manufacturing process are expected to be realized incrementally through June 1999. o Increase international sales. Since reacquiring its European license with respect to its sampling technologies in August 1994, the Company has significantly increased revenues from European customers and is the leading fragrance sampling company in Europe. Management estimates that the fragrance sampling industry in Europe is only approximately 20% of the size of the fragrance sampling industry in the United States, even though the size of the fragrance markets in Europe and the United States are comparable. Management believes that European cosmetics companies have preferred fragrance renditions that contain alcohol rather than microencapsulated renditions. Given product innovations such as the Company's Scent Seal (Registered Trademark) and LiquaTouch samplers (which are alcohol-based sampling systems), the increasing globalization of the cosmetics industry and the success of sampling techniques in the U.S. market, management believes that the use of sampling will continue to become more widespread in Europe. SAMPLING INDUSTRY Market and industry data used throughout this section were obtained from internal surveys and industry publications. Industry publications generally indicate that the information contained therein has been obtained from sources believed by the Company to be reliable, but that the accuracy and completeness of such information is not guaranteed. The Company has not independently verified such market data. Similarly, internal surveys, while believed by the Company to be reliable, have not been verified by any independent source. 37 Sampling is utilized by 90% of packaged goods manufacturers in their consumer promotion mix in support of both established and new products. Product sampling expenditures have increased faster than any other form of consumer promotional expenditure from 1992 to 1996, the last year for which data is available, and is particularly important in the fragrance and cosmetics industries, where consumers generally try products prior to purchase because of the uniquely personal nature of such products. Management believes that the fundamentals of the sampling industry are attractive. Declining store traffic has made the distribution of samples to consumers' homes increasingly important. In addition, cosmetics products have been characterized by shorter product life cycles and increased dependence on new products for growth, both of which tend to increase manufacturer demand for product samples to generate initial product trials. The cosmetics industry has experienced, and is continuing to experience, significant consolidation. Management believes that such consolidation positively impacts the sampling market, since larger cosmetics companies tend to spend more on product sampling to support their brands throughout the product life cycle, compared with smaller cosmetics companies, which tend to use sampling primarily in new product launches. However, industry consolidation has also negatively impacted the sampling market by temporarily decreasing the amount that smaller companies, which are targets of consolidation, spend on sampling products in anticipation of, and during, the consolidation process. Fragrance sampling market. The introduction in 1979 of the ScentStrip sampler, the first pull-apart microencapsulated fragrance sampler, had a significant impact on the fragrance category of the cosmetics industry by providing the first cost-effective means to reach the consumer on a mass scale throughsubscription magazines or direct mail, rather than relying on store traffic to hand out vials or scented blotter cards. This development contributed to significant growth in the U.S. fragrance category from approximately $2.0 billion in 1980 to approximately $6.0 billion in 1996. Shorter product lives and increased reliance on large product launches require more promotional spending by manufacturers in order to distinguish new fragrances. Between approximately $10.0 million and $25.0 million are spent to launch a major new fragrance, with approximately 20% to 30% of the budget allocated to sampling programs. Skin care and makeup sampling market. The skin care category generated approximately $4.5 billion in sales in the United States during 1996 and is the fastest growing category in the cosmetics industry. Such growth is based primarily on changing consumer demographics, as aging baby boomers look for ways to maintain a youthful appearance, and the fast pace of product innovation. Cosmetics companies launched more than 700 new skin care products in 1996, approximately ten times the number of fragrances introduced that year. The makeup category accounted for approximately $3.8 billion in annual sales in the United States in 1997. The skin care category generally includes skin lotions, treatments, toners and astringents, and the makeup category generally includes liquid and powder makeup. Historically, most cosmetic sampling programs have consisted of relatively limited in-store or direct-mail efforts because traditional sampling alternatives including miniatures, vials, packettes, sachets and blisterpacks, have been too costly to produce in mass quantities and too inefficient to incorporate into magazines, catalogs and other print advertising. Management estimates that skin care and makeup sales account for approximately two-thirds of all cosmetics industry sales, while sampling for such products account for less than one-fourth of all cosmetics sampling units. The Company's new product sampling technologies allow marketers for the first time to cost-effectively reach consumers in their homes through subscription magazines. Home sampling for skin care products and makeup is important because such products are ideally sampled on clean skin in the morning or evening. In addition, mass marketers have had limited opportunities to sample their products in-store because there is generally no in-store service person and most current methods of in-store sampling are viewed by consumers as unsanitary. By providing cost-effective sampling technologies that can be delivered on a mass scale to consumers' homes in a sanitary manner, management believes that the Company's new sampling technologies will rapidly become the industry standard for skin care and makeup sampling. 38 Consumer products sampling market. The consumer products market is significantly larger than the Company's traditional fragrance market. The Company believes the household and personal care products industry alone is approximately $75.0 billion, or approximately 12 times the size of the Company's traditional fragrance market. By comparison, the U.S. fragrance market is approximately $6.0 billion, and the entire U.S. cosmetics and toiletries market is approximately $29.0 billion. The Company has a significant opportunity to apply its technology to the food, beverage, household and personal care markets. International sampling market. The fragrance sampling industry in Europe is only approximately 20% of the fragrance sampling industry in the United States, although the size of the fragrance markets in Europe and the United States are comparable in size. Management believes that European cosmetics companies have preferred fragrance renditions that contain alcohol rather than traditional microencapsulated renditions, and the Company's alcohol-based sampling systems, such as Scent Seal samplers and LiquaTouch samplers have been very successful as a result. Scent Seal technology is the leading fragrance sampling product in Europe, and the LiquaTouch technology is being well received as a cost-effective alternative to fragrance vials and miniatures. Management believes that this market will grow as sampling formats successfully used in the United States are adopted in Europe. PRODUCTS The Company offers a broad and unique line of sampling product technologies for the fragrance, skin care, makeup and consumer products markets. The Company's major technologies are described below, including a description of the patent protection of each such product technologies. See "Risk Factors--Competition" and "--Patents and Proprietary Technology."
YEAR OF PATENT TARGET PRODUCT INTRODUCTION ORIGIN PROTECTION MARKET - -------------------------------- -------------- ---------------------- ---------------- ------------------------------------- Fragrance Samplers: ScentStrip .................... 1979 internally developed -- fragrance, consumer products ScentStrip Plus ............... mid 1980's internally developed -- fragrance DiscCover ..................... 1994 licensed patented fragrance, consumer products Scent Seal .................... 1995 acquired patented fragrance Resealable ScentStrip ......... 1997 internally developed patent pending fragrance, consumer products New Products: BeautiSeal .................... 1997 internally developed patent pending liquid makeup, skin care (lotions, treatments) PowdaTouch .................... 1997 internally developed patent pending powder cosmetics LiquaTouch .................... 1997 internally developed patent pending liquid fragrance, skin care (toners, astringents) LipSeal ....................... pending internally developed patent pending lipstick
Fragrance samplers. The Company has five different traditional fragrance sampling products, which have historically accounted for substantially all of the Company's sales. While the ScentStrip product technology continues to be the most widely used technology in the fragrance sampling industry, management believes that the Company's new fragrance sampling technologies have maintained the Company's competitive position as an innovator in the industry. As a result, the Company has played a sampling role in most major fragrance launches in recent years, including such high-profile campaigns as Calvin Klein Cosmetics' launch of CK One in 1994, Estee Lauder's launches of Pleasures in 1996 and Pleasures for Men in 1997, and Tommy Hilfiger's launch of Tommy in 1996 and Tommy Girl in 1997. Other examples of the Company's diverse experience in the fragrance industry include successful sampling programs for (i) private label retailers, including The Gap and Victoria's Secret, (ii) Donna Karan to introduce its home fragrance line and (iii) Coty to introduce its aromatherapy products with an innovative combination of Resealable ScentStrip Plus and Scent Seal samplers. o ScentStrip: The Company's original pull-apart microencapsulated fragrance sampler. ScentStrip delivers to the consumer the most cost-effective rendition of a fragrance. o ScentStrip Plus: Adds a powdery texture to the microencapsulated fragrance of ScentStrip. o Resealable ScentStrip: Adds an innovative closure to ScentStrip that opens and reseals up to 25 times. 39 o DiscCover: A "peel and reveal," non-encapsulated fragrance label sampling technology that opens and reseals up to 25 times, which is versatile and color printable and can be die-cut to nearly any shape and size. o Scent Seal: A heat-sealed, pouch-like label technology that peels open to reveal a moist, wearable gel sample that consumers can actually experience on skin. Scent Seal samplers are the leading fragrance sampling technology in the European market. New products. The Company has recently introduced three innovative new products, which management expects to account for a significant portion of the Company's sales in the future. The Company is also in the final stages of developing LipSeal, a lipstick sampler, which management expects to market in mid-1998. All of these new sampling technologies have been approved by the U.S. Postal Service for inclusion in subscription magazines at periodical postage rates. o BeautiSeal: A heat-sealed, pouch-like label technology that peels open to deliver cream and lotion treatments, liquid makeup and lipstick directly into the hands of consumers in an inexpensive, spill-proof format. The BeautiSeal sampler is less expensive and more versatile than existing skin care sampling alternatives. For example, a two-sided, printed insert incorporating a BeautiSeal sampler generally costs less than half the cost to manufacture and distribute in magazines than an equivalent sample packette. This product is the only skin treatment and liquid makeup sampling technology approved by the U.S. Postal Service for inclusion in subscription magazines at periodical postage rates. Because of these advantages, management believes that the BeautiSeal technology has been extremely well received in the market to date and is a particularly attractive sampling vehicle for mass-cosmetic marketers who have very few cost-effective alternatives to mass sample their products. The product was introduced in featured advertisements for Estee Lauder's flagship skin care product, Fruition Extra, in the August 1997 editions of several magazines. Though the BeautiSeal technology was at the time untested, management believes that Estee Lauder's BeautiSeal campaign was the largest skin treatment sampling program in the history of Estee Lauder. o PowdaTouch: Offers color marketers a superior rendition of the actual powder shade, texture, application and finish of their products. PowdaTouch applies up to four different shades to sample a single item shade range or a complete color line at a much lower cost than competing technologies. Management estimates that PowdaTouch samplers can be produced at a rate that is approximately ten times faster than competing products and at a reduced production cost. o LiquaTouch: The only sampling technology containing an alcohol-formulated fragrance with an applicator that is approved by the U.S. Postal Service for inclusion in subscription magazines at periodical postage rates. LiquaTouch is a finalist of the Fragrance Foundation's prestigious award for "Innovation of the Year" for 1997. Equally appropriate for liquid skin care treatment products, LiquaTouch samplers allow consumers to experience product texture, application and benefit in a format that can be die-cut to nearly any shape or bottle replica. Management believes that this new form of sampling will compete very favorably with fragrance sampling in vials and sachets, in-store handouts and direct-mail pieces in addition to providing a new opportunity for subscription magazines. Management expects to generate additional fragrance and skin treatment sales from its LiquaTouch technology. While BeautiSeal samplers are ideally suited for treatment creams, LiquaTouch samplers are expected to be very attractive for clear liquid products, such as cleansers, astringents and toners. FORMATS The Company's products are versatile and can be incorporated into virtually any print media. All of the Company's sampling products are currently approved by the U.S. Postal Service for inclusion in subscription magazines at periodical postage rates. The most common formats for the Company's products are described below. 40 Magazine Inserts. Magazine inserts are available in half-, full-, two- and four-page formats, can be die-cut and can contain any of the Company's product sampling technologies. Magazine inserts are the most common format for the Company's products, accounting for approximately 45% of Fiscal 1997 sales. Catalog Inserts. This format consists of full color inserts available in a variety of sizes for insertion into catalogs. They are produced with or without built-in return envelopes, which are generally used to order products from the catalog as well as the advertised fragrance or other cosmetics product. Inserts may also be custom imprinted with retail store information. The Company has the capability to develop and fill catalog insert orders for complicated designs and formats. Remittance Envelopes. The Company is the only sampling company to produce remittance envelopes in-house. This is a highly customized service business, which reinforces the Company's position as the only full-service supplier of samplers. The Company can incorporate each of its product technologies (other than BeautiSeal) into this format. Remittance envelopes are inserted into store statement mailings and are customized with the store logo. The Company also provides unscented envelopes. Statement Enclosures. Statement enclosures are available in various formats and sizes. For fragrance sampling, enclosures may contain a single scent in their fold, one or two scents under the fragrance panel, or they may be die-cut so that the fragrance can be sampled by removing the desired die shape. Enclosures are normally imprinted with the individual store logos and product pricing information. The six-inch enclosure is the Company's design and has become the industry's standard size. Blow-Ins. Blow-ins incorporating all of the Company's sampling technologies have become popular in the past two years. These pieces are loosely inserted into store catalogs and newspaper or magazine formats instead of being bound in and are available in all formats and sizes. In-Store Handouts. The Company has made significant inroads into replacing and expanding current methods of in-store cosmetic and fragrance sampling. Because of the lower cost and design flexibility of the Company's products relative to other sampling technologies, marketers of cosmetics and fragrances have greatly expanded the number and type of in-store samples. New and creative formats that the Company has originated in cooperation with its customers include scented postcards, scented stickers, scented wristbands, scented bookmarks and scented CD inserts. Management expects a significant in-store handout business for the BeautiSeal and PowdaTouch technologies (to sample shade ranges and formulae) and for the LiquaTouch technology as an alternative to fragrance vials. PATENTS AND PROPRIETARY TECHNOLOGY The Company currently holds patents covering the proprietary manufacturing processes used to produce two of its products and has submitted applications for patents covering six additional manufacturing processes. The Company has ongoing research efforts and expects to seek additional patents in the future covering patentable results of such research. There can be no assurance that any pending patent applications filed by the Company will result in patents being issued or that any patents now or hereafter owned by the Company will afford protection against competitors with similar technology, will not be infringed upon or designed around by others or will not be challenged by others and held to be invalid or unenforceable. In addition, many of the Company's manufacturing processes are not covered by any patent or patent application. As a result, the business of the Company may be adversely affected by competitors who independently develop technologies substantially equivalent to those employed by the Company. See "Risk Factors--Competition." CUSTOMERS The Company sells its products to prestige and mass cosmetics companies, consumer product companies, department stores and specialty retailers including Calvin Klein Cosmetics (Unilever Plc), Chanel, Inc., Christian Dior Perfumes, Inc., Coty, Inc., Elizabeth Arden (Unilever Plc), Estee Lauder, Inc., Giorgio Beverly Hills (The Procter & Gamble Company), L'Oreal S.A./Cosmair, Inc., Revlon, Inc. and Sanofi Beaute, Inc.. The Company's top ten customers accounted for approximately 61% of total sales 41 in Fiscal 1997 and each of Estee Lauder and The Procter & Gamble Company accounted for in excess of 10% of the Company's net sales in Fiscal 1997. The Company believes that its technical expertise, manufacturing reliability and customer support capabilities have enabled it to develop strong relationships with its customers. The Company employs sales and marketing personnel who possess the requisite technical backgrounds to communicate effectively with both prospective customers and the Company's manufacturing personnel. Historically, the Company has had long-term relationships with its major customers. See "Risk Factors--Reliance Upon Significant Customers." SALES AND MARKETING The Company's President and Chief Executive Officer and the Company's Senior Vice President of Sales and Marketing closely supervise the Company's sales and marketing efforts, which are organized geographically. The U.S. sales and marketing group includes five senior officers, six senior account executives and three sales support staff. In Europe, the sales and marketing group consists of two senior officers, two senior account representatives and three sales support staff. In addition, the Company has ten customer service representatives who manage production details and magazine and store approvals. All sales are organized geographically and by account, with each major account being serviced by one account representative and two customer service representatives. All Company sales representatives and a portion of the Company's customer service representatives are compensated on a commission basis in addition to a base level of compensation. The Company's marketing activities include direct contact with senior executives in the cosmetic and fragrance industry, major support of industry events, extensive joint marketing programs with magazines, retailers and oil houses, press coverage in industry trade publications, trade shows and seminars, advertising in trade publications and promotional pieces. In addition, the Company focuses its sales efforts toward three principal groups within its customer's organization that management believes influence the customer's purchasing decision: (i) marketing, which selects the sampling technology and controls the promotional budget; (ii) product development, which approves the Company's sampling rendition and approves stability testing; and (iii) purchasing, the group responsible for buying the sampling pieces and controlling quality. Management believes that as the pressure for creativity increases with each new product introduction, fragrance marketers are increasingly looking for their vendors to contribute to the overall strategy-building effort for a new fragrance. The Company's executives routinely introduce new sampling formats and ideas based on the Company's technologies to the marketing departments of its customers. The Company's in-house creative and marketing expertise and complete product line provides customers with maximum flexibility in designing promotional programs. MANUFACTURING The Company's manufacturing processes are highly technical and largely proprietary. The Company's sampling products must meet demanding performance specifications regarding fidelity to the product being sampled, shelf-life, resistance to pressure and temperature variations and various other requirements. The manufacturing processes can be broken into three phases: (i) formulation of cosmetic and fragrance bulk in the Company's slurry laboratories for use in sampling products; (ii) manufacturing the sampler, which consists of either printing an encapsulated slurry onto paper or producing sampling labels that contain fragrance or other cosmetic bulk; and (iii) for labeling technologies (DiscCover, Scent Seal, BeautiSeal, LiquaTouch), affixing the labels onto a piece preprinted by the Company or a third party contract supplier. Management believes that the Company's formulation capabilities are the best in the cosmetics sampling industry. The formulation process is highly complex because the Company is trying to replicate the fragrance of a product in a bottle containing an alcohol solution using primarily essential oils and paper. This translation process is very difficult to achieve particularly as the Company's customers have become much more demanding about which particular notes of fragrance they wish the Company to emphasize in its fragrance formulations. Formulation approval is an iterative process between the Company and its customers that can take up to 75 submissions, as the Company uses different formulations to replicate the overall smell of the fragrance and emphasize those fragrance notes which are 42 most important to the customer. The Company has more than 50 different, proprietary formulations that it utilizes in replicating different characteristics of the fragrance to obtain a customer-approved rendition. Certain of these formulations are patented and the majority of the formulation process is based on unique and proprietary methods. Because a supplier of fragrance samples must have its formulation approved before it can be considered for a sampling program, the Company's formulation expertise typically allows it to become the first fragrance sampler manufacturer approved on a new fragrance. Formulation of the fragrance and cosmetic bulk is performed under very strict tolerances and in complete conformity to the formula that the customer has preapproved. Formulation is conducted in the Company's specially designed formulation laboratories by trained specialists. The Company has two different sampling component manufacturing processes: (i) for its formulated paper samplers (ScentStrip, ScentStrip Plus, PowdaTouch) and (ii) for its formulated label samplers (DiscCover, Scent Seal, BeautiSeal, LiquaTouch). Formulated paper samplers are produced in the Company's primary facility where the Company carefully applies microencapsulated slurry onto the paper during the printing process and, in a continuous in-line operation, folds, cuts and trims the samplers for packing. The Company's manufacturing line consists of printing equipment that has been specially modified to apply fragrance or powder in a controllable form. The Company has 24-hour quality control personnel who check the application of the sampling formulation every hour on every press to ensure conformity and rendition with the original, customer-approved formula. This quality control function and hourly accountability provide significant value to the product development personnel at the Company's customers, who are responsible for sample quality. All sampling in a label form is produced on specially modified label and finishing equipment in the Company's second facility. In addition to the patents pending on certain of its manufacturing processes, the Company uses a number of proprietary techniques in producing label samplers. Similar to the formulated paper operation, sampling quality control personnel evaluate all samples by roll and provide full accountability for the Company's production. The artwork for all printed pieces is typically furnished by the customer or its advertising agency. The Company's prepress department has a camera and plate-making department that follows extensive quality control procedures. The Company has the capability to produce printed materials of the highest quality, including the covers of major fashion magazines in connection with fragrance samplers on the inside. SOURCES AND AVAILABILITY OF RAW MATERIALS Historically, the raw materials used by the Company in the manufacturing of its products have been readily available from numerous suppliers and have been purchased by the Company at prices that the Company believes are competitive. Substantially all of the Company's encapsulated paper products for the domestic market products utilize specific grades of paper that are produced exclusively for the Company by one supplier. The Company has not experienced any material supply shortages nor are any anticipated. See "Risk Factors--Raw Materials--Paper." COMPETITION The Company's competitors, some of whom have substantially greater capital resources than the Company, are actively engaged in manufacturing certain products similar to, or in competition with, those of the Company. Competition in the Company's markets is based upon product quality, product technologies, customer relationships, price and customer service. Upon consummation of the 3M Acquisition, the Company's principal competitors in the printed fragrance sampler market will be Webcraft, a subsidiary of Big Flower Holdings, Inc., Orlandi Inc., Retail Communications Corp. and Quebecor Printing (USA) Corp. The Company's fragrance sampler products also compete with other forms of fragrance sampling, including miniatures, vials, packettes, sachets, blisterpacks and scratch and sniff. Such additional forms of fragrance sampling are marketed and manufactured by many different companies including cosmetics companies producing such products for its own fragrance products. The Company's principal competitors in the makeup sampler market are Color Prelude Inc. and Retail Communications Corp. Management believes that the Company currently has no direct competition in 43 the subscription advertising, skin care and liquid makeup sampling market, which has traditionally used packettes that are more costly and less versatile than the Company's product sampling technologies. However, there can be no assurance that competitors will not develop makeup sampling technologies superior to the Company's or introduce attractive alternatives for cosmetics companies to utilize for makeup sampling programs. See "Risk Factors--Competition" and "--The Company." ENVIRONMENTAL AND SAFETY REGULATION The Company's operations are subject to extensive laws and regulations relating to the storage, handling, emission, transportation and discharge of materials into the environment and the maintenance of safe conditions in the workplace. The Company's policy is to comply with all legal requirements of applicable environmental, health and safety laws and regulations, and the Company believes it is in general compliance with such requirements and has adequate professional staff and systems in place to remain in compliance, although there can be no assurances that this is the case. The Company considers costs for environmental compliance to be a normal cost of doing business, and includes such costs in pricing decisions. FACILITIES The Company owns the land and buildings in Chattanooga, Tennessee that are used for production, administration and warehousing. The Company's executive offices and primary facility at 1815 East Main Street are located on 2.55 acres and encloses approximately 67,900 square feet. A second facility housing product development and additional manufacturing areas at 1600 East Main Street is located three blocks away on 2.49 acres and encloses approximately 36,700 square feet. The Company currently has a number of web printing presses with multi-color capability as well as envelope-converting machines and other ancillary equipment. The Company operates a fully equipped production lab for the manufacture of microcapsules and slurry and separate laboratories for the Company's Encapsulated Products Division and the Company's research and development facility. The Company also has a fully staffed and equipped label manufacturing facility, which includes state-of-the-art label manufacturing machines that have been specially modified to produce the Company's products and a complete label attaching operation. The Company also maintains sales offices in New York, San Francisco, Paris, France and London, England. EMPLOYEES As of June 30, 1998, the Company employed 331 persons, which includes 204 hourly and 127 salaried and management personnel. Substantially all of the Company's hourly employees are represented by the Graphics Communications International Union (GCIU) local 197M. Management considers its relations with the union to be good. The current union contract was signed in 1996 and will be in effect through April 1, 1999. LEGAL PROCEEDINGS The Company does not believe that there are any pending legal proceedings that, if adversely determined, would have a material adverse effect on the financial condition or results of operations of the Company, taken as a whole. 44 THE TRANSACTIONS THE ACQUISITION DLJMBII and certain members of the Company's management organized Acquisition Corp. in connection with the Acquisition. The total cost of the Acquisition (including related fees and expenses) was approximately $205.7 million. Non-cash costs of the Acquisition totaling approximately $6.2 million were funded by (i) the assumption of the Scent Seal Note and certain capital lease obligations and (ii) the rollover of equity interests in the Company by the Company's Chief Executive Officer. See "Description of Certain Indebtedness." To provide the cash necessary to fund the Acquisition, including the equity purchase price and the retirement of all existing preferred stock and debt of the Company not assumed, (i) the Company issued $123.5 million in Bridge Notes to an affiliate of DLJMBII and the Initial Purchaser and (ii) Acquisition Corp. received $76.0 million from debt and equity (common and preferred) financings, including equity investments by the Company's Chief Executive Officer and certain other prior stockholders. As of June 22, 1998, (i) DLJMBII held an aggregate of approximately 81.3% of the outstanding common stock of Acquisition Corp. and (ii) the Company's Chief Executive Officer held an aggregate of approximately 12.1% of the outstanding common stock of Acquisition Corp. See "Risk Factors--Control by DLJMBII" and "Security Ownership of Certain Beneficial Owners and Management." Acquisition Corp. has adopted a stock option plan for management of Acquisition Corp., Holding and the Company and granted options thereunder to the Company's Chief Executive Officer. See "Management--Equity-Based Compensation." 3M ACQUISITION On June 22, 1998, the Company closed the 3M Acquisition. The Company intends to relocate all of the business operations acquired in the 3M Acquisition to its existing facilities to utilize current excess capacity at such facilities. Management believes that in order to properly service the incremental sales volume associated with the 3M Acquisition, several additional sales, marketing and administrative employees will be hired. However, the Company believes that due to the similarity of its existing customers and 3M's existing customers, no other additional employee hiring will be required as a result of the 3M Acquisition. THE OFFERINGS On June 25, 1998, the Company consummated the Note Offering. The Old Notes were sold pursuant to exemptions from or in transactions not subject to, the registration requirements of the Securities Act. In addition, on June 25, 1998, Holding consummated the Debenture Offering. The Debentures were sold pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act. The consummation of the Note Offering occurred concurrently with and was conditioned upon, the consummation of the Debenture Offering. 45 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information with respect to the directors and executive officers of the Company.
NAME AGE POSITION - ------------------------------ ----- ------------------------------------------------ Thompson Dean ................ 40 Chairman of the Board and Director Roger L. Barnett ............. 33 President, Chief Executive Officer and Director Barry W. Miller .............. 46 Chief Operating Officer Kenneth A. Budde ............. 49 Chief Financial Officer Hugh R. Kirkpatrick .......... 61 Director Mark Michaels ................ 38 Director David M. Wittels ............. 33 Director
THOMPSON DEAN has served as Chairman of the Board and director of the Company since December 1997. Mr. Dean is the Managing Partner of DLJ Merchant Banking II, Inc. ("DLJ Merchant Banking"), the general partner of DLJ Merchant Banking Partners II, L.P. and an affiliate of the Initial Purchaser. Mr. Dean serves as a director of Commvault Inc., Von Hoffman Press, Inc., Manufacturers' Services Limited and Phase Metrics, Inc. ROGER L. BARNETT has served as President of the Company since 1995 and director of the Company since November 1993. From 1994 to 1995, Mr. Barnett served as Senior Vice President and Vice President of the Company. From 1991 until his employment by the Company, Mr. Barnett was a member of the banking group at Lazard Freres & Company, an investment banking firm. BARRY W. MILLER has served as Chief Operating Officer of the Company since May 1998. From 1994 to 1997, Mr. Miller served as President of Precision Printing and Packaging, Inc., a subsidiary of Anheuser-Busch Companies, Inc. Prior to that, Mr. Miller served as Chief Executive Officer of International Label from 1987 to 1993. KENNETH A. BUDDE has served as Chief Financial Officer of the Company since November 1994. From October 1988 to June 1994, Mr. Budde served as Controller and Chief Financial Officer of Southwestern Publishing Company. Prior to that, Mr. Budde spent 12 years with KPMG Peat Marwick. HUGH R. KIRKPATRICK has served as a director of the Company since June 1998. Mr. Kirkpatrick is a former director of International Flavors & Fragrances, Inc. where he served as Senior Vice President and President, Worldwide Fragrance Division, from 1991 through his retirement in 1996. MARK MICHAELS has served as director of the Company since June 1998. Mr. Michaels has been a Principal of DLJ Merchant Banking since 1997. Prior thereto, Mr. Michaels was a consultant with McKinsey & Company, Inc. from 1987 to 1996. DAVID M. WITTELS has served as a director of the Company since December 1997. Mr. Wittels is a Principal of DLJ Merchant Banking and has served in various capacities with DLJ Merchant Banking since 1986. Mr. Wittels serves as a director of McCulloch Corp. and Wilson Greatbatch Limited. COMPENSATION OF DIRECTORS Except for Hugh R. Kirkpatrick, directors of the Company will not receive compensation for services rendered in that capacity, but will be reimbursed for out-of-pocket expenses incurred by them in connection with their travel to and attendance at board meetings and committees thereof. Mr. Kirkpatrick will receive an annual fee of $20,000 per year plus reasonable out-of-pocket expenses in connection with his travel to and attendance at meetings of the Board of Directors and committees thereof. In addition, it is expected Mr. Kirkpatrick will be granted options to purchase shares of common stock, par value $.01 per share, of Acquisition Corp. ("Acquisition Corp. Common Stock") under the Option Plan (as defined) on terms to be established by the Board of Directors. 46 EXECUTIVE COMPENSATION The following table sets forth certain information for the three most recently completed fiscal years with respect to the compensation of the Company's Chief Executive Officer and its other most highly compensated executive officers (collectively, the "named executive officers") whose total annual compensation exceeded $100,000. SUMMARY COMPENSATION TABLE
FISCAL ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) - ----------------------------------- -------- ----------- ---------- ---------------- Roger L. Barnett .................. 1998 $367,083 $ -- $3,670 President, Chief Executive Officer 1997 210,000 275,000 5,700 and Director 1996 210,000 225,000 6,856 Hugh F. Brown (2) ................. 1998 145,000 100,000 3,384 Executive Vice President 1997 145,000 100,000 5,700 Manufacturing 1996 145,000 100,000 5,636 Kenneth A. Budde .................. 1998 120,000 50,000 -- Chief Financial Officer 1997 100,000 50,000 -- 1996 100,000 20,000 --
- ---------- (1) Represents amounts contributed on behalf of the named executive to the Company's 401(k) retirement savings plan. (2) Mr. Brown resigned from the Company in July 1998. Effective September 1998, Mr. Brown is expected to become a consultant to the Company. EMPLOYMENT AGREEMENTS Barnett Agreement The Company entered into an employment agreement with Mr. Barnett dated as of June 17, 1998 (the "Barnett Agreement"). Pursuant to the Barnett Agreement, Mr. Barnett will serve as President and Chief Executive Officer of the Company for a term of three years. Mr. Barnett will receive an annual base salary of $500,000 plus an annual bonus of up to 100% of his base salary contingent upon the Company achieving certain financial performance targets set forth in the Barnett Agreement. Mr. Barnett is also entitled to receive certain perquisites commensurate with his position with the Company. In the event of Mr. Barnett's resignation with "good reason" or termination by the Company for any reason other than "cause" (each as defined in the Barnett Agreement) or Mr. Barnett's death or disability, Mr. Barnett will be entitled to certain severance payments. The Barnett Agreement also includes a non-competition provision pursuant to which Mr. Barnett may be prohibited for a period of two years following his termination or resignation from engaging in certain activities that are competitive with the Company's business. In connection with the execution of the Barnett Agreement, Mr. Barnett entered into a put option agreement with Acquisition Corp. and DLJMBII dated June 17, 1998 (the "Put Option Agreement"). Pursuant to the Put Option Agreement, Acquisition Corp. granted Mr. Barnett an irrevocable option (the "Put Option") to require Acquisition Corp. to purchase certain preferred equity interests of Mr. Barnett representing 80,000 shares of preferred stock of Acquisition Corp. for $2.0 million in cash. Mr. Barnett exercised the Put Option on July 30, 1998. Miller Agreement Mr. Miller is presently retained as Chief Operating Officer pursuant to an employment agreement that provides for an annual base salary of $220,000 and an annual bonus of up to 100% of his base salary upon achievement by the Company of certain financial performance targets. The Company also supplies 47 Mr. Miller with other customary benefits and perquisites as generally made available to other senior executives of the Company. The term of the employment agreement, which expires on June 30, 2001, automatically renews for additional twelve-month terms, unless either Mr. Miller or the Company elects otherwise. EQUITY-BASED COMPENSATION Acquisition Corp. has adopted a 1998 Stock Option Plan (the "Option Plan") for certain key employees and directors of Acquisition Corp. and any parent or subsidiary corporation of Acquisition Corp. The objectives of the Option Plan are (i) to retain the services of persons holding key positions and to secure the services of persons capable of filling such positions and (ii) to provide persons responsible for the future growth of Acquisition Corp. an opportunity to acquire a proprietary interest in the Company and thus create in such key employees an increased interest in and a greater concern for the welfare of the Company. The Option Plan authorizes the issuance of options to acquire up to 80,000 shares of Acquisition Corp. Common Stock. The Option Plan will be administered by the Board of Directors or the Compensation Committee thereof designated by the Board of Directors (the "Committee"). Pursuant to the Option Plan, Acquisition Corp. may grant options, including options that become exercisable as performance standards determined by the Committee are met, to key employees and directors of Acquisition Corp. and any parent or subsidiary corporation. The terms of any such grant will be determined by the Committee and set forth in a separate grant agreement. The exercise price will be at least equal to the fair market value per share of Acquisition Corp. Common Stock on the date of grant, provided that the exercise price shall not be less than $1.00 per share. Options may be exercisable for up to ten years. The Committee has the right to accelerate the right to exercise any option granted under the Option Plan without effecting the expiration date thereof. Upon the occurrence of a change in control (as defined therein) of Acquisition Corp., each option may, at the discretion of the Committee, be terminated upon notice to the holder thereof and each such holder will receive, in respect of each share of Acquisition Corp. Common Stock for which such option is then exercisable, an amount equal to the excess of the then fair market value of such share of Acquisition Corp. Common Stock over the per share exercise price. On June 17, 1998, Acquisition Corp. granted to Mr. Barnett options to purchase 32,500 shares of Acquisition Corp. Common Stock under the Option Plan, pursuant to option letter agreements between Acquisition Corp. and Mr. Barnett (the "Option Agreements"). Under the terms of the Option Agreements, 16,250 of the options granted to Mr. Barnett are designated as "time-vesting" options (the "Time-Vesting Options") and 16,250 of the options granted to Mr. Barnett are designated as "standard" options (the "Standard Options"). All of the Time-Vesting and Standard Options have an exercise price of $1.00 per share. The Time-Vesting Options become exercisable as to one-third of the Acquisition Corp. Common Shares subject thereto on June 30, 1999, and are thereafter exercisable as to an additional one-third of such Acquisition Corp. Common Shares on June 30, 2000 and 2001, respectively. To the extent not previously exercised or exercisable, upon a Change In Control (as defined in the Option Agreements), the Time-Vesting Options shall immediately become exercisable to purchase 100% of the Acquisition Corp. Common Shares subject thereto. The Standard Options become exercisable as to various percentages of the Acquisition Corp. Common Shares subject thereto beginning June 30, 1999 and on June 30, 2000 and June 30, 2001, based on the achievement of certain established financial performance targets for the years then ended; provided that the Standard Options become exercisable as to 100% of the Shares subject thereto on June 16, 2006. Upon a Change In Control, 100% of the Standard Options eligible to become vested on the date of such Change In Control shall automatically vest and become exercisable if DLJMBII shall have realized certain returns on their equity investment in Acquisition Corp. While no final determinations have been made, it is expected that Mr. Miller and certain other members of management will be granted options under the Option Plan to purchase shares of Acquisition Corp. Common Stock. It is expected that a portion of these options will be Time-Vesting Options and the remainder will be Standard Options. 48 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT All of the Company's issued and outstanding capital stock is owned by Holding. All of Holding's issued and outstanding capital stock is owned by Acquisition Corp. The following table sets forth certain information as of the date of this Prospectus with respect to the beneficial ownership of Acquisition Corp. Common Stock by (i) owners of more than five percent of such Acquisition Corp. Common Stock, (ii) each director and named executive officer of the Company and (iii) all directors and executive officers of Acquisition Corp., Holding and the Company, as a group.
PERCENTAGE OF OUTSTANDING SHARES ACQUISITION CORP. BENEFICIAL OWNER BENEFICIALLY OWNED COMMON STOCK - ------------------------------------------------------------------------ -------------------- ------------------ DLJ Merchant Banking Partners II, L.P. and related investors (1) (2).... 903,111 81.3% Thompson Dean (3) ...................................................... -- -- Roger L. Barnett (2) ................................................... 134,325 12.1 Hugh R. Kirpatrick ..................................................... -- -- Mark Michaels (3) ...................................................... -- -- David M. Wittels (3) ................................................... -- -- Barry W. Miller ........................................................ -- -- Kenneth A. Budde ....................................................... -- -- All directors and executive officers as a group (2) (3) ................ 136,950 12.1
- ---------- (1) Consists of shares held directly by the following affiliated investors: DLJ Merchant Banking Partners II, L.P.; DLJ Merchant Banking Partners II-A, L.P. ("DLJMBII-A"); DLJ Offshore Partners II, C.V. ("Offshore Partners II"); DLJ Diversified Partners, L.P. ("Diversified Partners"); DLJ Diversified Partners-A, L.P. ("Diversified Partners-A"); DLJMB Funding II, Inc. ("DLJ Funding II"); DLJ Millennium Partners, L.P. ("Millennium Partners"); DLJ Millennium Partners-A, L.P., ("Millennium Partners-A"); DLJ EAB Partners, L.P. ("EAB Partners"); UK Investment Plan 1997 Partners ("UK Partners"); and DLJ First ESC L.P. ("First ESC"). See "Certain Relationships and Related Transactions--Transactions with DLJMBII and their Affiliates" and "Plan of Distribution." The address of each of DLJMBII, DLJMBII-A, Diversified Partners, Diversified Partners-A, DLJ Funding II, Millennium Partners, Millennium Partners-A, EAB Partners and First ESC is 277 Park Avenue, New York, New York 10172. The address of Offshore Partners II is John B. Gorsiraweg 14, Willemstad, Curacao, Netherlands Antilles. The address of UK Partners is 2121 Avenue of the Stars, Fox Plaza, Suite 3000, Los Angeles, California 90067. Does not include 18,000 shares of Acquisition Corp. Common Stock held directly by the Bridge Lender, an affiliate of DLJMBII and the Initial Purchaser. (2) See "Certain Relationships and Related Transactions." (3) Messrs. Dean, Michaels and Wittels are officers of DLJ Merchant Banking, an affiliate of DLJMBII and the Initial Purchaser. Share data shown for such individuals excludes shares shown as held by DLJMBII, as to which such individuals disclaim beneficial ownership. The address of each of Messrs. Dean, Michaels and Wittels is 277 Park Avenue, New York, New York 10172. 49 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH DLJMBII AND THEIR AFFILIATES Messrs. Dean, Michaels and Wittels, who are directors of the Company and officers and directors of Holding and Acquisition Corp., are officers of DLJ Merchant Banking. DLJ Merchant Banking, together with DLJMBII, beneficially own, in the aggregate, approximately 81.3% of the outstanding Acquisition Corp. Common Stock. See "Risk Factors--Control by DLJMBII." The Initial Purchaser is also an affiliate of DLJ Merchant Banking and DLJMBII and has acted as financial advisor to the Company in connection with the structuring of the Acquisition. For these financial advisory services, the Initial Purchaser received a customary fee and was reimbursed for its out-of-pocket expenses. In addition, pursuant to an agreement between the Initial Purchaser and Acquisition Corp., the Initial Purchaser will receive a customary annual fee for acting as the exclusive financial and investment banking advisor to the Company ending December 31, 2002. The Company has agreed to indemnify the Initial Purchaser in connection with its acting as Initial Purchaser and as financial advisor. In addition, the Initial Purchaser will receive the discounts and commissions set forth on the cover page of this Prospectus. See "Plan of Distribution." The Bridge Lender, an affiliate of DLJ Merchant Banking, DLJMBII and the Initial Purchaser, is the holder of all of the Bridge Notes, all of which were repaid by the Company with the net proceeds of the Offering and the Equity Contribution. See "Use of Proceeds," "Description of Certain Indebtedness-- Bridge Notes" and "Plan of Distribution." STOCKHOLDERS AGREEMENT In connection with the Acquisition, Acquisition Corp., DLJMBII, certain former investors in the Company prior to the Acquisition, including Roger L. Barnett and Hugh F. Brown (the "Prior Investors") and certain other signatories thereto, entered into a Stockholders Agreement, dated as of December 15, 1997 (the "Stockholders Agreement"), that sets forth certain rights and restrictions relating to the ownership of the capital stock of Acquisition Corp. (including securities exercisable for or convertible or exchangeable into capital stock of Acquisition Corp.) and agreements among the parties thereto as to the governance of Acquisition Corp. and, indirectly, Holding and the Company. Pursuant to the Stockholders Agreement, the Board of Directors of Acquisition Corp. consists of six members. DLJMBII has the right to nominate four of the Directors of Acquisition Corp. and the Prior Investors have the right to nominate one Director of Acquisition Corp., provided that DLJMBII and the Prior Investors maintain a specified minimum level of equity investment in Acquisition Corp. In addition, the Stockholders Agreement provides that the Chief Executive Officer of Acquisition Corp. be nominated as a Director of Acquisition Corp. The Stockholders Agreement contains provisions that, among other things, and subject to certain exceptions, (i) significantly restrict the ability of the holders of capital stock of Acquisition Corp. to transfer their respective ownership interests, (ii) grant certain preemptive rights to the holders of capital stock of Acquisition Corp., (iii) grant certain "drag along" rights to DLJMBII to require the remaining holders of capital stock of Acquisition Corp. to sell a percentage of their ownership and (iv) grant certain "tag along" rights to the holders of Acquisition Corp. Common Stock, other than DLJMBII, with respect to sales of Acquisition Corp. Common Stock by DLJMBII. Pursuant to the Stockholders Agreement, DLJMBII was granted certain customary "demand" registration rights and all stockholders of Acquisition Corp. were granted certain customary "piggyback" registration rights. THE ACQUISITION In connection with the Acquisition, certain current executive officers and directors of the Company sold certain of their options to purchase common stock of the Company to Acquisition Corp. for approximately $12.1 million in cash. Such amount does not include any consideration indirectly attributable to such executive officers and directors. 50 Further, Roger L. Barnett purchased an aggregate of 134,325 shares of Acquisition Corp. Common Stock at the same per share price paid by DLJMBII in connection with the formation of Acquisition Corp. In addition to his purchase of Acquisition Corp. Common Stock, Mr. Barnett exchanged certain options to acquire common stock of the Company for options to acquire preferred stock of Acquisition Corp. On July 30, 1998, Mr. Barnett exercised his option to acquire such shares of preferred stock of Acquisition Corp. See "--Employment Arrangements." Mr. Barnett and DLJMBII also entered into an arrangement pursuant to which certain of the equity interests held by Mr. Barnett could be purchased by DLJMBII at a specified price upon notice from DLJMBII prior to June 30, 1998. Alternatively, Mr. Barnett was given the right to compel DLJMBII to purchase such equity interests at the same price upon notice to DLJMBII prior to June 30, 1998. Such arrangement was terminated in connection with the Barnett Agreement. See "Management--Employment Agreements." PRIOR STOCKHOLDER TRANSACTIONS During Fiscal 1997 and prior to the Acquisition, the Company made payments of approximately $612,000 to a company controlled by a significant prior stockholder for management fees, bonuses and expense reimbursements. In addition, the Company made payments totaling $120,000 to another significant prior stockholder for management fees in Fiscal 1997. EMPLOYMENT ARRANGEMENTS Mr. Barnett is retained as President and Chief Executive Officer of the Company pursuant to the Barnett Agreement which provides for an annual salary of $500,000 per year. Mr. Barnett, Acquisition Corp. and DLJMBII have also entered into the Put Option Agreement pursuant to which Mr. Barnett was granted an irrevocable option to require Acquisition Corp. (or DLJMBII under certain circumstances) to purchase certain preferred equity interests of Mr. Barnett representing 80,000 shares of preferred stock of Acquisition Corp. for $2.0 million in cash. On July 30, 1998, Mr. Barnett exercised such option. See "Management--Employment Agreements." 51 DESCRIPTION OF CERTAIN INDEBTEDNESS CREDIT AGREEMENT On April 30, 1996, the Company entered into the Credit Agreement, which was amended on December 12, 1997, in connection with the Acquisition (the "Credit Agreement"). The Credit Agreement provides for a revolving loan commitment up to a maximum of $20.0 million (subject to a borrowing base calculation), which commitment shall expire on December 31, 2002 or earlier under certain circumstances. In connection with the Refinancing, the Company intends to seek an amendment to certain provisions of the Credit Agreement, including those related to certain financial covenants. There can be no assurance, however, that the Company will obtain any such amendment on the terms it intends to seek. The following description of certain provisions of the Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Credit Agreement. Borrowings under the Credit Agreement will bear interest at a variable rate of interest per annum equal to, at the Company's option, prime plus 0.75% per annum or LIBOR plus 2.50% per annum. The Company is required to pay commitment fees on the unused portion of the revolving loan commitment at a rate of approximately 0.5% per annum. In addition, the Company is required to pay fees equal to 2.5% of the average daily outstanding amount of lender guarantees. The Credit Agreement contains customary restrictive covenants, which, among other things and with certain exceptions, limit the ability of the Company to incur additional indebtedness and liens in connection therewith, enter into certain transactions with affiliates, pay dividends, consolidate, merge or effect certain asset sales and enter into new lines of business. Under the Credit Agreement, the Company is also required to satisfy certain financial covenants, which require it to maintain certain financial ratios and to comply with certain financial tests. The Credit Agreement contains certain events of default, including, among others, those relating to failure to make payments when due, default as to certain other indebtedness of the Company, non-performance of certain covenants, bankruptcy or insolvency, judgments in excess of specified amounts, any dissolution of the Company and certain "changes in control" (as defined in the Credit Agreement). SCENT SEAL NOTE In connection with the acquisition of Scent Seal, Inc. in 1995, the Company executed a Conditional Promissory Note (the "Scent Seal Note") in the principal amount of $1.75 million in favor of the former stockholder of Scent Seal, Inc. The Scent Seal Note did not bear interest. The principal amount of the Scent Seal Note was amortized by quarterly principal payments in the amount of $25,000 and the remaining unpaid principal amount on July 1, 1998 ($1.45 million) was due and was paid at such time. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Scent Seal Note was secured by the Company's "Scent Seal" trademark. BRIDGE NOTES Simultaneously with the Acquisition, the Company entered into a Securities Purchase Agreement with the Bridge Lender, an affiliate of DLJMBII and the Initial Purchaser, pursuant to which the Company issued $123.5 million principal amount of Bridge Notes to the Bridge Lender. In connection with the issuance of the Bridge Notes for the financing of the Acquisition, the Bridge Lender received certain reasonable and customary fees and reimbursements. Messrs. Dean, Michaels and Wittels are officers of DLJ Merchant Banking, an affiliate of the Initial Purchaser and the Bridge Lender. The entire outstanding principal amount of, and accrued and unpaid interest on the Bridge Notes were repaid with the net proceeds of the Offering. See "Use of Proceeds." 52 DESCRIPTION OF NEW NOTES GENERAL The Old Notes were issued and the New Notes will be issued pursuant to an indenture (the "Indenture") between the Company and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and the Trust Indenture Act for a statement thereof. The following summary of the material provisions of the Indenture does not purport to be complete and is qualified in its entirety by reference to the Indenture, including the definitions therein of certain terms used below. Copies of the proposed form of Indenture and Registration Rights Agreement are available as set forth below under "--Additional Information." The definitions of certain terms used in the following summary are set forth below under "--Certain Definitions." The New Notes will be general unsecured obligations of the Company, will rank pari passu in right of payment with all existing and future senior unsecured Indebtedness of the Company and will rank senior in right of payment to all existing and future subordinated Indebtedness of the Company. The Notes, however, will be effectively subordinated to all secured obligations of the Company, including borrowings under the Credit Agreement, to the extent of the assets securing such obligations. As of March 31, 1998, on a pro forma basis, after giving effect to the Refinancing and the consummation of the 3M Acquisition, there would have been no outstanding secured obligations of the Company under the Credit Agreement. The Indenture will permit the incurrence of additional secured Indebtedness in the future. As of the date of the Indenture, all of the Company's Subsidiaries will be Restricted Subsidiaries. However, under certain circumstances, the Company will be able to designate current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the restrictive covenants set forth in the Indenture. PRINCIPAL, MATURITY AND INTEREST The Notes are limited in aggregate principal amount to $115.0 million and will mature on July 1, 2008. Interest on the Notes will accrue at the rate of 10 1/2% per annum from June 25, 1998 and will be payable semi-annually in arrears on January 1 and July 1 of each year, commencing on January 1, 1999, to Holders of record on the immediately preceding June 15 and December 15. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Principal, premium and Liquidated Damages, if any, and interest on the Notes will be payable at the office or agency of the Company maintained for such purpose within the City and State of New York or, at the option of the Company, payment of interest and Liquidated Damages, if any, may be made by check mailed to the Holders of the Notes at their respective addresses set forth in the register of Holders of Notes; provided that all payments of principal, premium and Liquidated Damages, if any, and interest with respect to Notes represented by one or more permanent global Notes will be paid by wire transfer of immediately available funds to the account of The Depository Trust Company or any successor thereto. Until otherwise designated by the Company, the Company's office or agency in New York will be the office of the Trustee maintained for such purpose. The New Notes will be issued in denominations of $1,000 and integral multiples thereof. OPTIONAL REDEMPTION Except as provided below, the Notes will not be redeemable at the Company's option prior to July 1, 2003. Thereafter, the Notes will be subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on July 1 of the years indicated below: 53
YEAR PERCENTAGE ---- ------------ 2003 ........................ 105.250% 2004 ........................ 102.625% 2005 and thereafter ......... 100.000%
Notwithstanding the foregoing, at any time prior to July 1, 2001, the Company may on one or more occasions redeem up to 35% of the original aggregate principal amount of Notes at a redemption price of 110.5% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the redemption date, with the net cash proceeds of one or ast 65% of the original aggregate principal amount of Notes remains outstanding immediately after the occurrence of such redemption; and provided, further, that such redemption shall occur within 90 days of the date of the closing of such Public Equity Offering. SELECTION AND NOTICE If less than all of the Notes are to be redeemed at any time, selection of Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate; provided that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at its registered address. Notices of redemption may not be conditional. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on Notes or portions of them called for redemption. MANDATORY REDEMPTION Except as set forth below under "--Repurchase at the Option of Holders," the Company is not required to make mandatory redemption or sinking fund payments with respect to the Notes. REPURCHASE AT THE OPTION OF HOLDERS Change of Control Upon the occurrence of a Change of Control, each Holder of Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase (the "Change of Control Payment"). Within 60 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Notes on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"), pursuant to the procedures required by the Indenture and described in such notice. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Notes as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the Indenture relating to such Change of Control Offer, the Company will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described in the Indenture by virtue thereof. On the Change of Control Payment Date, the Company will, to the extent lawful, (1) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (2) 54 deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each Holder of Notes so tendered the Change of Control Payment for such Notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; provided that each such new Note will be in a principal amount of $1,000 or an integral multiple thereof. The Change of Control provisions described above will be applicable whether or not any other provisions of the Indenture are applicable. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the Holders of the Notes to require that the Company repurchase or redeem the Notes in the event of a takeover, recapitalization or similar transaction. The Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by the Company and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of the Company and its Subsidiaries taken as a whole. Although there is a developing body of case law interpreting the phrase "substantially all," there is no precise established definition of that phrase under applicable law. Accordingly, the ability of a Holder of Notes to require the Company to repurchase such Notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Company and its Subsidiaries taken as a whole to another Person or group may be uncertain. Asset Sales The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 75% of the consideration therefor received by the Company or such Restricted Subsidiary is in the form of cash or Cash Equivalents; provided that the amount of (x) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet) of the Company or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Notes or any guarantee thereof) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Company or such Restricted Subsidiary from further liability and (y) any securities, notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are converted by the Company or such Restricted Subsidiary into cash or Cash Equivalents within 180 days (to the extent of the cash received), shall be deemed to be cash for purposes of this provision; and provided further that the 75% limitation referred to in clause (ii) above will not apply to any Asset Sale in which the cash or Cash Equivalents portion of the consideration received therefrom, determined in accordance with the foregoing proviso, is equal to or greater than what the after-tax proceeds would have been had such Asset Sale complied with the aforementioned 75% limitation. Within 360 days after the receipt of any Net Proceeds from an Asset Sale, the Company or any such Restricted Subsidiary may apply such Net Proceeds, at its option, (a) to repay or repurchase pari passu Indebtedness of the Company or any Indebtedness of any Restricted Subsidiary or (b) to the acquisition of a controlling interest in another business, the making of a capital expenditure or the acquisition of other long-term assets, in each case, in a Permitted Business. Pending the final application of any such Net Proceeds, the Company may temporarily reduce the revolving Indebtedness under the Credit Agreement or otherwise invest such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net 55 Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company will be required to make an offer to all Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal amount of Notes that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase, in accordance with the procedures set forth in the Indenture. To the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the Indenture relating to such Asset Sale Offer, the Company will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described in the Indenture by virtue thereof. CERTAIN COVENANTS Restricted Payments The Indenture provides that from and after the date of the Indenture the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of the Company's or any of its Restricted Subsidiaries' Equity Interests (including, without limitation, any payment on such Equity Interests in connection with any merger or consolidation involving the Company) or to the direct or indirect holders of the Company's or any of its Restricted Subsidiaries' Equity Interests in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company); (ii) purchase, redeem or otherwise acquire or retire for value (including without limitation, in connection with any merger or consolidation involving the Company) any Equity Interests of the Company or any direct or indirect parent of the Company (other than any such Equity Interests owned by the Company or any Restricted Subsidiary of the Company); (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the Notes, except scheduled payments of interest or principal at Stated Maturity of such Indebtedness; or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (a) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; and (b) the Company would, after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described below under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"; and (c) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the date of the Indenture (excluding Restricted Payments permitted by clauses (i), (ii), (iii), (iv), (viii) (other than those permitted by clause (f) of the definition of "Permitted Investments"), (ix), (xii) and (xiii) of the next succeeding paragraph), is less than the sum of (i) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date of the Indenture to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds 56 received by the Company as a contribution to the Company's capital or received by the Company from the issue or sale since the date of the Indenture of Equity Interests of the Company (other than Disqualified Stock) or of Disqualified Stock or debt securities of the Company that have been converted into such Equity Interests (other than Equity Interests (or Disqualified Stock or debt securities) sold to a Restricted Subsidiary of the Company and other than Disqualified Stock or convertible debt securities that have been converted into Disqualified Stock), plus (iii) to the extent that any Restricted Investment that was made after the date of the Indenture is sold for cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (B) the initial amount of such Restricted Investment, plus (iv) if any Unrestricted Subsidiary (A) is redesignated as a Restricted Subsidiary, the fair market value of such redesignated Subsidiary (as determined in good faith by the Board of Directors) as of the date of its redesignation or (B) pays any cash dividends or cash distributions to the Company or any of its Restricted Subsidiaries, 50% of any such cash dividends or cash distributions made after the date of the Indenture. The foregoing provisions will not prohibit (i) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the Indenture; (ii) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness or Equity Interests of the Company in exchange for, or out of the net cash proceeds of the substantially concurrent sale or issuance (other than to a Restricted Subsidiary of the Company) of, other Equity Interests of the Company (other than Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition shall be excluded from clause (c)(ii) of the preceding paragraph; (iii) the defeasance, redemption, repurchase or other acquisition of subordinated Indebtedness with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any dividend by a Restricted Subsidiary of the Company to the holders of its Equity Interests on a pro rata basis; (v) the declaration or payment of dividends to Acquisition Corp. or Holding for expenses incurred by Acquisition Corp. or Holding in their capacity as holding companies or for services rendered on behalf of the Company, including, without limitation, (a) customary salary, bonus and other benefits payable to officers and employees of Acquisition Corp. or Holding, (b) fees and expenses paid to members of the Board of Directors of Acquisition Corp. or Holding, (c) general corporate overhead expenses of Acquisition Corp. or Holding, (d) management, consulting or advisory fees paid to Acquisition Corp. or Holding not to exceed $4.0 million in any fiscal year, and (e) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of Acquisition Corp. or Holding held by any member or former member of Acquisition Corp.'s, Holding's or the Company's (or any of their Restricted Subsidiaries') management pursuant to any management equity subscription agreement, stockholders agreement or stock option agreement; provided, however, the aggregate amount paid pursuant to the foregoing clauses (a) through (e) does not exceed $5.0 million in any fiscal year (with any unused amounts in any fiscal year being carried over to succeeding fiscal years, subject to a maximum (without giving effect to the following clause (y)) of $10.0 million in any calendar year, plus (y) the aggregate cash proceeds received by the Company from any reissuance of Equity Interests by Acquisition Corp. or Holding to members of management of the Company and its Restricted Subsidiaries; (vi) Investments in any Person (other than the Company or a Restricted Subsidiary) engaged in a Permitted Business in an amount not to exceed $5.0 million; (vii) other Investments in Unrestricted Subsidiaries having an aggregate fair market value, taken together with all other Investments made pursuant to this clause (vii) that are at that time outstanding, not to exceed $2.0 million; (viii) Permitted Investments; (ix) the declaration or payment of dividends or other payments to Acquisition Corp. or Holding pursuant to any tax sharing agreement or other arrangement among Acquisition Corp., Holding or other members of the affiliated corporations of which Acquisition Corp. or Holding is the common parent; (x) other Restricted Payments in an aggregate amount not to exceed $10.0 million; (xi) so long as no Default or Event of Default has occurred and is continuing, the declaration and payment of dividends on Disqualified Stock issued or after the date of the Indenture, the incurrence of which satisfied the covenant set forth in the first paragraph of "--Incurrence of Indebtedness and Issuance of Preferred Stock" below; (xii) the declaration or payment of dividends to Acquisition Corp. or Holding to satisfy any required purchase price adjustment payment arising out of the Acquisition; and (xiii) the declaration or payment of dividends or other payments to 57 Acquisition Corp. or Holding in an amount not to exceed $2.0 million to satisfy redemption obligations in respect of Equity Interests of Acquisition Corp. or Holding that are held by management of Acquisition Corp., Holding or the Company; provided that such amount shall not be applied against expenses incurred pursuant to clause (v)(e) above. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments will be deemed to constitute Investments in an amount equal to the fair market value of such Investments at the time of such designation (as determined in good faith by the Board of Directors). Such designation will only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or such Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any non-cash Restricted Payment shall be determined in good faith by the Board of Directors whose resolution with respect thereto shall be delivered to the Trustee; such determination will be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if such fair market value exceeds $10.0 million. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by the covenant "--Restricted Payments" were computed, together with a copy of any fairness opinion or appraisal required by the Indenture. Incurrence of Indebtedness and Issuance of Preferred Stock The Indenture provides that the Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and that the Company will not issue any Disqualified Stock and will not permit any of its Subsidiaries to issue any shares of preferred stock; provided, however, that the Company may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock or preferred stock and the Company's Restricted Subsidiaries may incur Indebtedness (including Acquired Debt) and issue Disqualified Stock or preferred stock if the Fixed Charge Coverage Ratio for the Company's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock is issued would have been at least 2.0 to 1, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock or preferred stock had been issued, as the case may be, at the beginning of such four-quarter period. The provisions of the first paragraph of this covenant will not apply to the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"): (i) the incurrence by the Company of Indebtedness and letters of credit pursuant to the Credit Agreement; provided that the aggregate principal amount of all such Indebtedness (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of the Company thereunder) then classified as having been incurred in reliance on this clause (i) that remains outstanding under the Credit Agreement after giving effect to such incurrence does not exceed the sum of $20.0 million. (ii) the incurrence by the Company and its Restricted Subsidiaries of the Existing Indebtedness; (iii) the incurrence by the Company of Indebtedness represented by the Notes; 58 (iv) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company or such Restricted Subsidiary (whether through the direct purchase of assets or the Capital Stock of any Person owning such Assets), in an aggregate principal amount or accreted value, as applicable, not to exceed $10.0 million; (v) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness in connection with the acquisition of assets or a new Restricted Subsidiary; provided that such Indebtedness was incurred by the prior owner of such assets or such Restricted Subsidiary prior to such acquisition by the Company or one of its Subsidiaries and was not incurred in connection with, or in contemplation of, such acquisition by the Company or one of its Subsidiaries; provided further that the principal amount (or accreted value, as applicable) of such Indebtedness, together with any other outstanding Indebtedness incurred pursuant to this clause (v), does not exceed $5.0 million; (vi) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness that was permitted by the Indenture to be incurred; (vii) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Company and any of its Restricted Subsidiaries; provided, however, that (i) if the Company is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all Obligations with respect to the Notes and (ii)(A) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Company or a Restricted Subsidiary and (B) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Restricted Subsidiary shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be; (viii) the incurrence by the Company or any of its Restricted Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing or hedging (i) interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Indenture to be outstanding or (ii) exchange rate risk with respect to any agreement or Indebtedness of such Person payable in a currency other than U.S. dollars; (ix) the Guarantee by the Company or any of its Restricted Subsidiaries of Indebtedness of the Company or a Restricted Subsidiary of the Company that was permitted to be incurred by another provision of this covenant; (x) the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse Debt; provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the Company; (xi) Indebtedness incurred by the Company or any of its Restricted Subsidiaries constituting reimbursement obligations with respect to letters of credit issued in the ordinary course of business, including without limitation to letters of credit in respect to workers' compensation claims or self- insurance, or other Indebtedness with respect to reimbursement type obligations regarding workers' compensation claims; provided, however, that upon the drawing of such letters of credit or the incurrence of such Indebtedness, such obligations are reimbursed within 30 days following such drawing or incurrence; (xii) Indebtedness arising from agreements of the Company or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, asset or Subsidiary, other than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or Subsidiary for the purpose of financing such acquisition; provided that (x) such Indebtedness is not reflected on the balance sheet of the Company or any Restricted Subsidiary (contingent obligations referred to in a footnote or footnotes 59 to financial statements and not otherwise reflected on the balance sheet will not be deemed to be reflected on such balance sheet for purposes of this clause (x)) and (y) the maximum assumable liability in respect of such Indebtedness shall at no time exceed 50% of the gross proceeds including non-cash proceeds (the fair market value of such non-cash proceeds being measured at the time received and without giving effect to any such subsequent changes in value) actually received by the Company and/or such Restricted Subsidiary in connection with such disposition; (xiii) obligations in respect of performance and surety bonds and completion guarantees provided by the Company or any Restricted Subsidiary in the ordinary course of business; (xiv) guarantees incurred in the ordinary course of business in an aggregate principal amount not to exceed $5.0 million at any time outstanding; and (xv) the incurrence by the Company or any of its Restricted Subsidiaries of additional Indebtedness, including Attributable Debt incurred after the date of the Indenture, in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any other Indebtedness incurred pursuant to this clause (xv), not to exceed $20.0 million. For purposes of determining compliance with this covenant, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (i) through (xv) above or is entitled to be incurred pursuant to the first paragraph of this covenant, the Company shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this covenant and such item of Indebtedness will be treated as having been incurred pursuant to only one of such clauses or pursuant to the first paragraph hereof. In addition, the Company may, at any time, change the classification of an item of Indebtedness (or any portion thereof) to any other clause or to the first paragraph hereof provided that the Company would be permitted to incur such item of Indebtedness (or portion thereof) pursuant to such other clause or the first paragraph hereof, as the case may be, at such time of reclassification. Accrual of interest, accretion or amortization of original issue discount and the accretion of accreted value will not be deemed to be an incurrence of Indebtedness for purposes of this covenant. Liens The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, create, incur, assume or otherwise cause or suffer to exist or become effective any Lien (other than Permitted Liens) upon any of their property or assets, now owned or hereafter acquired. Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits, or (b) pay any Indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or advances to the Company or any of its Restricted Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) Existing Indebtedness as in effect on the date of the Indenture, (b) the Credit Agreement as in effect as of the date of the Indenture, and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof, provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are no more restrictive in the aggregate (as determined in the good faith judgment of the Company's Board of Directors) with respect to such dividend and other payment restrictions than those contained in the Credit Agreement as in effect on the date of the Indenture, (c) the Indenture and the Notes, (d) any applicable law, rule, regulation or order, (e) any instrument of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not 60 applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of the Indenture to be incurred, (f) by reason of customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices, (g) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (e) above on the property so acquired, (h) Permitted Refinancing Indebtedness, provided that the material restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive, in the good faith judgment of the Company's board of directors, taken as a whole, to the Holders of Notes than those contained in the agreements governing the Indebtedness being refinanced, (i) contracts for the sale of assets, including without limitation customary restrictions with respect to a Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary, (j) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business and (k) other Indebtedness or Disqualified Stock of Restricted Subsidiaries permitted to be incurred subsequent to the Issuance Date pursuant to the provisions of the covenant described under "--Incurrence of Indebtedness and Issuance of Preferred Stock." Merger, Consolidation, or Sale of Assets The Indenture provides that the Company may not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another Person unless (i) the Company is the surviving corporation or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the entity or Person formed by or surviving any such consolidation or merger (if other than the Company) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of the Company under the Notes and the Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii) immediately after such transaction no Default or Event of Default exists; and (iv) the Company or the entity or Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made (a) will, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock" or (b) would (together with its Restricted Subsidiaries) have a higher Fixed Charge Coverage Ratio immediately after such transaction (after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period) than the Fixed Charge Coverage Ratio of the Company and its subsidiaries immediately prior to the transaction. The foregoing clause (iv) will not prohibit (a) a merger between the Company and a Wholly Owned Subsidiary of Acquisition Corp. or Holding created for the purpose of holding the Capital Stock of the Company, (b) a merger between the Company and a Wholly Owned Subsidiary or (c) a merger between the Company and an Affiliate incorporated solely for the purpose of reincorporating the Company in another state of the United States so long as, in each case, the amount of Indebtedness of the Company and its Restricted Subsidiaries is not increased thereby. The Indenture will also provide that the Company may not, directly or indirectly, lease all or substantially all of its properties or assets, in one or more related transactions, to any other Person. The provisions of this covenant will not be applicable to a sale, assignment, transfer, conveyance or other disposition of assets between or among the Company and its Wholly Owned Restricted Subsidiaries. 61 Transactions with Affiliates The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction") unless (i) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $1.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving either aggregate consideration in excess of $5.0 million or an aggregate consideration in excess of $3.0 million where there are no disinterested members of the Board of Directors, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing; provided that the following shall not be deemed Affiliate Transactions: (q) customary directors' fees, indemnification or similar arrangements or any employment agreement or other compensation plan or arrangement entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (r) transactions between or among the Company and/or its Restricted Subsidiaries, (s) Permitted Investments and Restricted Payments that are permitted by the provisions of the Indenture described above under the caption "--Restricted Payments," (t) customary loans, advances, fees and compensation paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of the Company or any of its Restricted Subsidiaries, (u) transactions pursuant to any contract or agreement in effect on the date of the Indenture as the same may be amended, modified or replaced from time to time so long as any such amendment, modification or replacement is no less favorable to the Company and its Restricted Subsidiaries than the contract or agreement as in effect on the Issue Date, (v) transactions between the Company or its Restricted Subsidiaries on the one hand, and Donaldson, Lufkin & Jenrette Securities Corporation or its Affiliates ("DLJ") on the other hand, involving the provision of financial, advisory, placement or underwriting services by DLJ; provided that fees payable to DLJ do not exceed the usual and customary fees of DLJ for similar services, (w) insurance arrangements among Acquisition Corp., Holding and its Subsidiaries that are not less favorable to the Company or any of its Subsidiaries than those that are in effect on the date hereof provided such arrangements are conducted in the ordinary course of business consistent with past practices, (x) payments under any tax sharing agreement or other arrangement among Acquisition Corp., Holding and other members of the affiliated group of corporations of which either is the common parent and (y) payments in connection with the Refinancing (including the payment of fees and expenses with respect thereto). Sale and Leaseback Transactions The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, enter into any sale and leaseback transaction; provided that the Company or any Restricted Subsidiary may enter into a sale and leaseback transaction if (i) the Company or such Restricted Subsidiary could have (a) incurred Indebtedness in an amount equal to the Attributable Debt relating to such sale and leaseback transaction pursuant to the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock" and (b) incurred a Lien to secure such Indebtedness pursuant to the covenant described above under the caption "--Liens," (ii) the gross cash proceeds of such sale and leaseback transaction are at least equal to the fair market value (as determined in good faith by the Board of Directors and set forth in an Officers' Certificate delivered to the Trustee) of the property that is the subject of such sale and leaseback transaction and (iii) the transfer of assets in such sale and leaseback transaction is permitted by, and the Company applies the proceeds of such transaction in compliance with, the covenant described above under the caption "--Repurchase at the Option of Holders--Asset Sales." 62 Limitations on Issuances of Guarantees of Indebtedness The Indenture provides that the Company will not permit any Restricted Subsidiary, directly or indirectly, to incur Indebtedness or Guarantee or pledge any assets to secure the payment of any other Indebtedness of the Company or any Restricted Subsidiary unless either such Restricted Subsidiary (x) is a Subsidiary Guarantor or (y) simultaneously executes and delivers a supplemental indenture to the Indenture and becomes a Subsidiary Guarantor, which Guarantee shall be senior to or pari passu with such Restricted Subsidiary's other Indebtedness or Guarantee of or pledge to secure such other Indebtedness. Notwithstanding the foregoing, any such Guarantee by a Restricted Subsidiary of the Notes shall provide by its terms that it shall be automatically and unconditionally released and discharged upon any sale, exchange or transfer, to any Person not an Affiliate of the Company, of all of the Company's stock in, or all or substantially all the assets of, such Restricted Subsidiary, which sale, exchange or transfer is made in compliance with the applicable provisions of the Indenture. The form of such Guarantee is attached as an exhibit to the Indenture. Additional Guarantees The Indenture provides that (i) if the Company or any of its Restricted Subsidiaries shall, after the date of the Indenture, transfer or cause to be transferred, including by way of any Investment, in one or a series of transactions (whether or not related), any assets, businesses, divisions, real property or equipment having an aggregate fair market value (as determined in good faith by the Board of Directors) in excess of $10.0 million to any Restricted Subsidiary that is not a Subsidiary Guarantor or a Foreign Subsidiary, (ii) if the Company or any of its Restricted Subsidiaries shall acquire another Restricted Subsidiary other than a Foreign Subsidiary having total assets with a fair market value (as determined in good faith by the Board of Directors) in excess of $10.0 million, or (iii) if any Restricted Subsidiary other than a Foreign Subsidiary shall incur Acquired Debt in excess of $10.0 million, then the Company shall, at the time of such transfer, acquisition or incurrence, (i) cause such transferee, acquired Restricted Subsidiary or Restricted Subsidiary incurring Acquired Debt (if not then a Subsidiary Guarantor) to execute a Note Guarantee of the Obligations of the Company under the Notes in the form set forth in the Indenture and (ii) deliver to the Trustee an Opinion of Counsel, in accordance with the terms of the Indenture. Business Activities The Company will not, and will not permit any Restricted Subsidiary to, engage in any business other than a Permitted Business, except to such extent as would not be material to the Company and its Restricted Subsidiaries taken as a whole. Reports The Indenture provides that, whether or not required by the rules and regulations of the Commission, so long as any Notes are outstanding, the Company will furnish to the Trustee and Holders of Notes (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (ii) all current reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports. In addition, following the consummation of the Exchange Offer, whether or not required by the rules and regulations of the Commission, the Company will file a copy of all such information and reports with the Commission for public availability (unless the Commission will not accept such a filing) and make such information available to the Trustee, securities analysts and prospective investors upon request. In addition, for so long as any of the Notes remain outstanding, the Company has agreed to make available to any prospective purchaser of the Notes or Holder of the Notes in connection with the sale thereof, the information required by Rule 144A(d)(4) under the Securities Act. 63 EVENTS OF DEFAULT AND REMEDIES The Indenture provides that each of the following constitutes an Event of Default: (i) default for 30 days in the payment when due of interest on, or Liquidated Damages with respect to, the Notes; (ii) default in payment when due of the principal of or premium, if any, on the Notes; (iii) failure by the Company to comply with the provisions described under the captions "--Repurchase at the Option of Holders--Change of Control" or "--Certain Covenants--Asset Sales"; (iv) failure by the Company for 30 days after notice from the Trustee or at least 25% in principal amount of the Notes then outstanding to comply with the provisions described under the captions "--Restricted Payments" or "--Incurrence of Indebtedness and Issuance of Preferred Stock"; (v) failure by the Company for 60 days after notice from the Trustee or holders of at least 25% in principal amount of the Notes then outstanding to comply with any of its other agreements in the Indenture or the Notes; (vi) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created after the date of the Indenture, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $10.0 million or more; (vii) failure by the Company or any of its Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; and (viii) certain events of bankruptcy or insolvency with respect to the Company or any of its Restricted Subsidiaries that are Significant Subsidiaries. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Company or any of its Subsidiaries all outstanding Notes will become due and payable without further action or notice. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. In the case of any Event of Default occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium that the Company would have had to pay if the Company then had elected to redeem the Notes pursuant to the optional redemption provisions of the Indenture, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law upon the acceleration of the Notes. If an Event of Default occurs prior to July 1, 2003 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding the prohibition on redemption of the Notes prior to July 1, 2003, then the premium specified in the Indenture shall also become immediately due and payable to the extent permitted by law upon the acceleration of the Notes. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the Notes. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. 64 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Notes, the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Company may, at its option and at any time, elect to have all of its obligations discharged with respect to the outstanding Notes ("Legal Defeasance") except for (i) the rights of Holders of outstanding Notes to receive payments in respect of the principal of, premium and Liquidated Damages, if any, and interest on such Notes when such payments are due from the trust referred to below, (ii) the Company's obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payment and money for security payments held in trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee, and the Company's obligations in connection therewith and (iv) the Legal Defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to have the obligations of the Company released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the Notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "--Events of Default" will no longer constitute an Event of Default with respect to the Notes. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the Notes, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium and Liquidated Damages, if any, and interest on the outstanding Notes on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the Notes are being defeased to maturity or to a particular redemption date; (ii) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, subject to customary assumptions and exclusions, the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that, subject to customary assumptions and exclusions, the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit) or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than the Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (vi) the Company must have delivered to the Trustee an opinion of counsel to the effect that after the 91st day following the deposit, the trust funds will not be subject to the effect of Section 547 of the United States Bankruptcy Code or any analogous New York State law provision to any other 65 applicable federal or New York bankruptcy, insolvency, reorganization or similar law affecting creditors' rights generally; (vii) the Company must deliver to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Notes over the other creditors of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (viii) the Company must deliver to the Trustee an Officers' Certificate and an opinion of counsel (which opinion may be subject to customary assumptions and exclusions), each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. TRANSFER AND EXCHANGE A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company is not required to transfer or exchange any Note selected for redemption. Also, the Company is not required to transfer or exchange any Note for a period of 15 days before a selection of Notes to be redeemed. The registered Holder of a Note will be treated as the owner of it for all purposes. AMENDMENT, SUPPLEMENT AND WAIVER Except as provided in the next two succeeding paragraphs, the Indenture and the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes), and any existing default or compliance with any provision of the Indenture or the Notes may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes (including consents obtained in connection with a tender offer or exchange offer for Notes). Without the consent of each Holder affected, an amendment or waiver may not (with respect to any Notes held by a non-consenting Holder): (i) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; (ii) reduce the principal of or change the fixed maturity of any Note or alter the provisions with respect to the redemption of the Notes (other than provisions relating to the covenants described above under the caption "--Repurchase at the Option of Holders"); (iii) reduce the rate of or change the time for payment of interest on any Note; (iv) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the Notes (except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration); (v) make any Note payable in money other than that stated in the Notes; (vi) make any change in the provisions of the Indenture relating to waivers of (a) past Defaults or (b) the rights of Holders of Notes to receive payments of principal of or premium, if any, or interest on the Notes; (vii) waive a redemption payment with respect to any Note (other than a payment required by one of the covenants described above under the caption "--Repurchase at the Option of Holders") or (viii) make any change in the foregoing amendment and waiver provisions. Notwithstanding the foregoing, without the consent of any Holder of Notes, the Company and the Trustee may amend or supplement the Indenture or the Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for the assumption of the Company's obligations to Holders of Notes in the case of a merger or consolidation or the sale of all or substantially all of the assets of the Company, to make any change that would provide any additional rights or benefits to the Holders of Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, to comply with requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act or to allow any Subsidiary to guarantee the Notes. 66 CONCERNING THE TRUSTEE The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue or resign. The Holders of a majority in principal amount of the then outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that in case an Event of Default shall occur (which shall not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holder of Notes, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. ADDITIONAL INFORMATION Anyone who receives this Prospectus may obtain a copy of the Indenture and Registration Rights Agreement without charge by writing to AKI, Inc., 1815 East Main Street, Chattanooga, Tennessee 37404; Attention: Chief Financial Officer. FORM, DENOMINATION AND BOOK-ENTRY PROCEDURES The Old Notes were initially sold to qualified institutional buyers in reliance on Rule 144A under the Securities Act ("Rule 144A Notes"). Old Notes also were offered and sold in offshore transactions in reliance on Regulation S ("Regulation S Notes"). Rule 144A Notes and Regulation S Notes were each initially represented by one or more Notes in registered, global form without interest coupons (the "Old Global Notes"). The Old Global Notes were deposited upon issuance with the Trustee as custodian for The Depository Trust Company ("DTC"), in New York, New York, and registered in the name of a nominee of DTC, in each case for credit to an account of a direct or indirect participant as described below. Regulation S Notes were deposited upon issuance with the Trustee as custodian for DTC, and registered in the name of a nominee of DTC, in each case for credit to the accounts of Euroclear System ("Euroclear") and Cedel Bank, S.A. ("CEDEL"). The New Notes will be represented by one or more new notes in registered, global form without interest coupons (collectively, the "New Global Notes") and deposited with the Trustee as custodian and registered in the name of a nominee of DTC. The Old Global Notes, to the extent directed by holders thereof in their Letters of Transmittal, will be exchanged through book-entry electronic transfer for one or more New Global Notes for credit to an account of a direct or indirect participant as described below. No service charge will be made for any registration of transfer or exchange of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. New Notes issued to non-qualified institutional buyers in exchange for Old Notes held by such investors, if any, will be issued only in certificated, fully registered, definitive form. The New Global Note will, upon request, be exchangeable for other New Notes in definitive, fully registered form without coupons in denominations of $1,000 and integral multiples thereof, but only in accordance with DTC's customary procedures. The New Global Note will also be exchangeable in certain other limited circumstances. See "--Exchange of Book-Entry Notes for Certificated Notes." The Company, the Trustee and any other agent thereof will be entitled to treat DTC's nominee as the sole owner and holder of the unexchanged portion of the New Global Note for all purposes. Depositary Procedures DTC has advised the Company that DTC is a limited-purpose trust company created to hold securities for its participating organizations (collectively, the "Participants") and to facilitate the clearance 67 and settlement of transactions in those securities between the Participants through electronic book-entry changes in accounts of the Participants. The Participants include securities brokers and dealers (including the Initial Purchasers), banks, trust companies, clearing corporations and certain other organizations. Access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly (collectively, the "Indirect Participants"). Persons who are not Participants may beneficially own securities held by or on behalf of DTC only through the Participants or the Indirect Participants. The ownership interest and transfer of ownership interest of each actual purchaser of each security held by or on behalf of DTC are recorded on the records of the Participants and the Indirect Participants. DTC has also advised the Company that pursuant to procedures established by it, (i) upon deposit of the New Global Note, DTC will credit the accounts of Participants designated by the Participants with portions of the principal amount of the Old Global Notes and (ii) ownership of such interests in the New Global Note will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC (with respect to the Participants) or by the Participants and the Indirect Participants (with respect to other owners of beneficial interests in the New Global Note). Investors in the New Global Note may hold their interests therein directly through DTC, if they are Participants in such system, or indirectly through organizations (including Euroclear and CEDEL) which are Participants in such system. All interests in the New Global Note, including those held through Euroclear or CEDEL, may be subject to the procedures and requirements of DTC. Those interests held through Euroclear or CEDEL may also be subject to the procedures and requirements of such system. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interests in the Old Global Notes or the New Global Note to such persons may be limited to that extent. Because DTC can act only on behalf of the Participants, which in turn act on behalf of the Indirect Participants and certain banks, the ability of a person having beneficial interests in the New Global Note to pledge such interests to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests. For certain other restrictions on the transferability of the Notes, see "--Exchange of Book-Entry Notes for Certificated Notes." Except as described below, owners of interests in the New Global Note will not have New Notes registered in their names, will not receive physical delivery of New Notes in certificated form and will not be considered the registered owners or holders thereof under the Indenture for any purpose. Payments in respect of the principal of (and premium, if any) and interest on the New Global Note registered in the name of DTC or its nominee will be payable by the Trustee to DTC or its nominee in its capacity as the registered holder under the Indenture. Under the terms of the Indenture, the Company and the Trustee will treat the persons in whose names the New Notes, including the New Global Note, are registered as the owners thereof for the purpose of receiving such payments and for any and all other purposes whatsoever. Consequently, neither the Company, the Trustee or any agent of the Company or the Trustee has or will have any responsibility or liability for (i) any aspect or accuracy of DTC's records or any Participant's or Indirect Participant's records relating to or payments made on account of beneficial ownership interests in the New Global Note, or for maintaining, supervising or reviewing any of DTC's records or any Participant's or Indirect Participant's records relating to the beneficial ownership interests in the New Global Note, or (ii) any other matter relating to the actions and practices of DTC or any of the Participants or the Indirect Participants. DTC has advised the Company that its current practice, upon receipt of any payment in respect of securities such as the New Notes (including principal and interest), is to credit the accounts of the relevant Participants with the payment on the payment date, in amounts proportionate to their respective holdings in principal amount of beneficial interests in the relevant security as shown on the records of DTC. Payments by the Participants and the Indirect Participants to the beneficial owners of New Notes will be governed by standing instructions and customary practices and will not be the responsibility of DTC, the Trustee or the Company. Neither the Company nor the Trustee will be liable for any delay by DTC or any 68 of the Participants in identifying the beneficial owners of the New Notes, and the Company and the Trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee as the registered owner of the New Global Note for all purposes. DTC has advised the Company that it will take any action permitted to be taken by a holder of Notes only at the direction of one or more Participants to whose account with DTC interests in the Old Global Notes or the New Global Note are credited and only in respect of such portion of the aggregate principal amount of the Notes as to which such Participant or Participants has or have given such direction. However, if any of the events described under "-- Exchange of Book Entry Notes for Certificated Notes" occurs, DTC reserves the right to exchange the New Global Note for New Notes in certificate form and to distribute such New Notes to its Participants. Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures to facilitate transfers of interests in the Old Global Notes and the New Global Note among accountholders in DTC and accountholders of Euroclear and CEDEL, they are under no obligation to perform or to continue to perform such procedures, and such procedures may be discontinued at any time. None of the Company or the Trustee nor any agent of the Company or the Trustee will have any responsibility for the performance by DTC, Euroclear or CEDEL or their respective participants, indirect participants or accountholders of their respective obligations under the rules and procedures governing their operations. EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES The New Global Note is exchangeable for definitive New Notes in registered certificated form if (i) DTC (x) notifies the Company that it is unwilling or unable to continue as depository for the New Global Note and the Company thereupon fails to appoint a successor depository or (y) has ceased to be a clearing agency registered under the Exchange Act, (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of the New Notes in certificated form or (iii) there shall have occurred and be continuing a Default or an Event of Default with respect to the New Notes. In all cases, certificated New Notes delivered in exchange for the New Global Note or beneficial interests therein will be registered in the names, and issued in any approved denominations, requested by or on behalf of the depository (in accordance with its customary procedures). In addition, subject to certain restrictions on the transferability of the New Notes, New Notes in definitive form will be issued upon the resale, pledge or other transfer of any New Notes or interest therein to any person or entity that is not a qualified institutional buyer or that does not participate in DTC. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the Company believes to be reliable, but the Company takes no responsibility for the accuracy thereof. SAME DAY SETTLEMENT AND PAYMENT The Indenture requires that payments in respect of the Notes represented by the Global Note (including principal, premium, if any, interest and Liquidated Damages, if any) be made by wire transfer of immediately available next day funds to the accounts specified by the Global Note Holder. With respect to Certificated Notes, the Company will make all payments of principal, premium, if any, interest and Liquidated Damages, if any, by wire transfer of immediately available funds to the accounts specified by the Holders thereof or, if no such account is specified, by mailing a check to each such Holder's registered address. The Company expects that secondary trading in the Certificated Notes will also be settled in immediately available funds. CERTAIN DEFINITIONS Set forth below are certain defined terms used in the Indenture. Reference is made to the Indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "Acquired Debt" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified 69 Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise. "Asset Sale" means (i) the sale, lease, conveyance or other disposition (a "Disposition") of any assets or rights (including, without limitation, by way of a sale and leaseback) provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the (Company and its Restricted Subsidiaries taken as a whole will be governed by the provisions of the Indenture described above under the caption "--Repurchase at the Option of Holders--Change of Control" and/or the provisions described above under the caption "--Certain Covenants--Merger, Consolidation or Sale of Assets" and not by the provisions of the Asset Sale covenant), and (ii) the issue or sale by the Company or any of its Restricted Subsidiaries of Equity Interests of any of the Company's Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $3.0 million or (b) for net proceeds in excess of $3.0 million. Notwithstanding the foregoing the following items shall not be deemed to be Asset Sales: (i) a disposition of assets by the Company to a Restricted Subsidiary or by a Restricted Subsidiary to the Company or to another Restricted Subsidiary, (ii) an issuance of Equity Interests by a Restricted Subsidiary to the Company or to another Restricted Subsidiary, (iii) a Restricted Payment that is permitted by the covenant described above under the caption "--Certain Covenants--Restricted Payments"; (iv) a disposition in the ordinary course of business, (v) the sale and leaseback of any assets within 90 days of the acquisition thereof, (vi) foreclosures on assets and (vii) any exchange of property pursuant to Section 1031 on the Internal Revenue Code of 1986, as amended, for use in a Related Business. "Attributable Debt" in respect of a sale and leaseback transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means (i) United States dollars, (ii) Government Securities having maturities of not more than six months from the date of acquisition, (iii) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any lender party to the Credit Agreement or with any domestic commercial bank having capital and surplus in excess of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above, (v) commercial paper having the rating of "P-2" (or higher) from Moody's Investors Service, Inc. or "A-3" (or higher) from Standard & Poor's Corporation and in each case maturing within six months after the date of acquisition and (vi) any fund investing exclusively in investments of the type described in clauses (i) through (v) above. 70 "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than the Principals or their Related Parties (as defined below), (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), other than the Principals and their Related Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, directly or indirectly, of more than 50% of the Voting Stock of the Company (measured by voting power rather than number of shares), or (iv) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors. "Consolidated Cash Flow" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period plus (i) an amount equal to any extraordinary loss plus any net loss realized in connection with an Asset Sale (to the extent such losses were deducted in computing such Consolidated Net Income), plus (ii) provision for taxes based on income or profits of such Person and its Subsidiaries for such period, to the extent that such provision for taxes was included in computing such Consolidated Net Income, plus (iii) consolidated interest expense of such Person and its Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income, plus (iv) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash expenses were deducted in computing such Consolidated Net Income, plus (v) expenses and charges of the Company related to the Refinancing which are paid, taken or otherwise accounted for within 90 days of the consummation of the Refinancing, plus (vi) any non-capitalized transaction costs incurred in connection with actual or proposed financings, acquisitions or divestitures (including, but not limited to, financing and refinancing fees and costs incurred in connection with the Refinancing). Notwithstanding the foregoing, the provision for taxes on the income or profits of, and the depreciation and amortization and other non-cash charges of, a Subsidiary of the referent Person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent (and in the same proportion) that Net Income of such Subsidiary was included in calculating Consolidated Net Income of such Person. "Consolidated Interest Expense" means, with respect to any Person for any period, the sum of, without duplication, (a) the interest expense of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP (including amortization of original issue discount, non-cash interest payments, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments, if any, pursuant to Hedging Obligations; provided that in no event shall any amortization of deferred financing costs be included in Consolidated Interest Expense); and (b) the consolidated capitalized interest of such Person and its Restricted Subsidiaries for such period, whether paid or accrued. Notwithstanding the foregoing, the Consolidated Interest Expense with respect to any Restricted Subsidiary that is not a Wholly Owned Restricted Subsidiary shall be included only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, 71 determined in accordance with GAAP; provided that (i) the Net Income (but not loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Restricted Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iv) the cumulative effect of a change in accounting principles shall be excluded and (v) the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the Company or one of its Restricted Subsidiaries for purposes of the covenant described under the caption "Incurrence of Indebtedness and Issuance of Preferred Stock" and shall be included for purposes of the covenant described under the caption "Restricted Payments" only to the extent of the amount of dividends or distributions paid in cash to the Company or one of its Restricted Subsidiaries. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on the date of the Indenture or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Credit Agreement" means that certain Credit Agreement, dated as of April 30, 1996, as amended on December 12, 1997, between the Company and Heller Financial, Inc., providing for revolving credit borrowings, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, modified, renewed, refunded, replaced or refinanced from time to time. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the Holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the Notes mature; provided, however, that any Capital Stock that would not qualify as Disqualified Stock but for change of control provisions shall not constitute Disqualified Stock if the provisions are not more favorable to the holders of such Capital Stock than the provisions described under "--Change of Control" applicable to the Holders of the Notes. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Existing Indebtedness" means Indebtedness of the Company and its Subsidiaries (other than Indebtedness under the Credit Agreement) in existence on the date of the Indenture, until such amounts are repaid. "Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of (i) the Consolidated Interest Expense of such Person for such period, (ii) any interest expense on Indebtedness of another Person that is Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iii) the product of (a) all dividend payments, whether or not in cash, on any series of preferred stock of such Person or any of its Restricted Subsidiaries, other than dividend payments on Equity Interests payable solely in Equity Interests of the Company, times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. 72 "Fixed Charge Coverage Ratio" means with respect to any Person for any period, the ratio of the Consolidated Cash Flow of such Person for such period to the Fixed Charges of such Person for such period. In the event that the Company or any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any Indebtedness (other than revolving credit borrowings) or issues preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such issuance or redemption of preferred stock, as if the same had occurred at the beginning of the applicable four-quarter reference period. In addition, for purposes of making the computation referred to above, (i) acquisitions that have been made by the Company or any of its Restricted Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be calculated to include the Consolidated Cash Flow of the acquired entities on a pro forma basis after giving effect to cost savings resulting from employee terminations, facilities consolidations and closings, standardization of employee benefits and compensation policies, consolidation of property, casualty and other insurance coverage and policies, standardization of sales and distribution methods, reductions in taxes other than income taxes and other cost savings reasonably expected to be realized from such acquisition, shall be deemed to have occurred on the first day of the four-quarter reference period and Consolidated Cash Flow for such reference period shall be calculated without giving effect to clause (iii) of the proviso set forth in the definition of Consolidated Net Income, (ii) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such Fixed Charges will not be obligations of the referent Person or any of its Restricted Subsidiaries following the Calculation Date. "Foreign Subsidiary" means any Subsidiary of the Company that is not organized under the laws of a state or territory of the United States or the District of Columbia. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date of the Indenture. "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States is pledged. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency exchange rates. "Indebtedness" means, with respect to any Person, any indebtedness of such Person, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or bankers' acceptances or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as 73 well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such Indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person; provided that Indebtedness shall not include the pledge by the Company of the Capital Stock of an Unrestricted Subsidiary of the Company to secure Non-Recourse Debt of such Unrestricted Subsidiary. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness that does not require current payments of interest, and (ii) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Restricted Subsidiary of the Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Restricted Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of the covenant described above under the caption "--Restricted Payments." "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), the amounts required to be applied to the payment of Indebtedness (other than Indebtedness incurred pursuant to the Credit Agreement), secured by a Lien on the asset or assets that were the subject of the Asset Sale, and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "Non-Recourse Debt" means Indebtedness (i) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor or otherwise), or (c) constitutes the lender; (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness (other than the Notes being 74 offered hereby) of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the lenders have been notified in writing that they will not have any recourse to the stock (other than stock of an Unrestricted Subsidiary pledged by the Company to secure debt of such Unrestricted Subsidiary) or assets of the Company or any of its Restricted Subsidiaries. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Permitted Business" means any business in which the Company and its Restricted Subsidiaries are engaged on the date of the Indenture or any business reasonably related, incidental or ancillary thereto. "Permitted Investments" means (a) any Investment in the Company or in a Restricted Subsidiary of the Company that is engaged in a Permitted Business; (b) any Investment in Cash Equivalents; (c) any Investment by the Company or any Restricted Subsidiary of the Company in a Person, if as a result of such Investment (i) such Person becomes a Restricted Subsidiary of the Company that is engaged in a Permitted Business or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Restricted Subsidiary of the Company that is engaged in a Permitted Business; (d) any Restricted Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with the covenant described above under the caption "--Repurchase at the Option of Holders--Asset Sales"; (e) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Company; and (f) other Investments made after the date of the Indenture in any Person having an aggregate fair market value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (f) that are at the time outstanding, not to exceed $10.0 million. "Permitted Liens" means (i) Liens securing Indebtedness under the Credit Agreement that was permitted by the terms of the Indenture to be incurred or other Indebtedness allowed to be incurred under clause (i) of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"; (ii) Liens in favor of the Company; (iii) Liens on property of a Person existing at the time such Person is merged into or consolidated with the Company or any Restricted Subsidiary of the Company, provided that such Liens were not incurred in contemplation of such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with the Company or any Restricted Subsidiary; (iv) Liens on property existing at the time of acquisition thereof by the Company or any Restricted Subsidiary of the Company, provided that such Liens were not incurred in contemplation of such acquisition; (v) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (vi) Liens existing on the date of the Indenture; (vii) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded, provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (viii) Liens to secure Indebtedness (including Capital Lease Obligations) permitted by clause (iv) of the second paragraph of the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock"; (ix) Liens securing Permitted Refinancing Indebtedness where the Liens securing the Permitted Refinancing Indebtedness were permitted under the Indenture; (x) Liens incurred in the ordinary course of business of the Company or any Restricted Subsidiary of the Company with respect to obligations that do not exceed $5.0 million at any one time outstanding and that (a) are not incurred in connection with the borrowing of money or the obtaining of advances or credit (other than trade credit in the ordinary course of business) and (b) do not in the aggregate materially detract from the value of the property or materially impair the use thereof in the operation of business by the Company or such Restricted Subsidiary; and (xi) Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries. "Permitted Refinancing Indebtedness" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, 75 renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries; provided that: (i) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accreted value, if applicable), plus accrued interest on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity date no earlier than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Notes on terms at least as favorable to the Holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Principals" means Roger L. Barnett, DLJ Merchant Banking Partners II, L.P., DLJ Merchant Banking Partners II-A, L.P., DLJ Offshore Partners II, L.P., DLJ Offshore Partners II, C.V., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJMB Funding II, Inc., DLJ Millennium Partners, L.P., DLJ Millennium Partners-A, L.P., DLJ EAB Partners, L.P., UK Investment Plan 1997 Partners and DLJ First ESC L.P. "Public Equity Offering" means a public offering of Equity Interests (other than Disqualified Stock) of (i) the Company or (ii) Acquisition Corp. or Holding to the extent the net proceeds thereof are contributed to the Company as a capital contribution, that, in each case, results in net proceeds to the Company of at least $25.0 million. "Related Party" with respect to any Principal means (A) any controlling stockholder or partner, 80% (or more) owned Subsidiary, or spouse or immediate family member (in the case of an individual) of such Principal or (B) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding (directly or through one or more Subsidiaries) a 51% or more controlling interest of which consist of the Principals and/or such other Persons referred to in the immediately preceding clause (A). "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "Rule 144A" means Rule 144A promulgated under the Securities Act. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Act, as such Regulation is in effect on the date hereof. "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership or limited liability company (a) the sole general partner or the managing general partner or managing member of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). 76 "Subsidiary Guarantor" means any Restricted Subsidiary that executes a supplemental indenture providing for the Guarantee of the payment of the Notes by such Restricted Subsidiary. "Unrestricted Subsidiary" means any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution; but only to the extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (c) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; and (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by the covenant described above under the caption "Certain Covenants--Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under the caption "Incurrence of Indebtedness and Issuance of Preferred Stock," the Company shall be in default of such covenant). The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall be permitted only if (i) such Indebtedness is permitted under the covenant described under the caption "Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," and (ii) no Default or Event of Default would be in existence following such designation. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one- twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person and one or more Wholly Owned Subsidiaries of such Person. 77 CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES Subject to the qualifications set forth below, in the opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P., tax counsel to the Company, the following accurately sets forth the anticipated material U.S. federal income tax consequences applicable to the exchange of Old Notes for New Notes and the ownership and disposition of the New Notes by Holders who acquire the New Notes pursuant to the Exchange Offer. It is limited solely to U.S. federal income tax matters and is based upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations (including proposed regulations, administrative rulings and pronouncements of the Internal Revenue Service "IRS"), and judicial decisions, all as of the date hereof and all of which are subject to change at any time, possibly with retroactive effect. The following is limited to Holders who hold the Notes as "capital assets" for U.S. federal income tax purposes and does not cover all aspects of federal income taxation that may be relevant to, or the actual tax effect that any of the matters described herein will have on, particular Holders. The following does not address U.S. federal income tax consequences that may be applicable to particular categories of shareholders, including insurance companies, tax-exempt persons, financial institutions, dealers securities, persons with significant holdings of company stock, and non-United States persons, including foreign corporations and nonresident alien individuals. The following does not address any tax considerations under the laws of any state, locality, or foreign country. The Company has not sought, nor does it intend to seek, a ruling from the IRS as to any of the matters covered by this discussion, and there can be no assurance that the IRS will not successfully challenge the conclusions reached in this discussion. BECAUSE THE U.S. FEDERAL INCOME TAX CONSEQUENCES DISCUSSED BELOW DEPEND UPON EACH HOLDER'S PARTICULAR TAX STATUS, AND DEPEND FURTHER UPON U.S. FEDERAL INCOME TAX LAWS, REGULATIONS, RULINGS AND DECISIONS WHICH ARE SUBJECT TO CHANGE (WHICH CHANGES MAY BE RETROACTIVE IN EFFECT), HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES OF THE EXCHANGE OF OLD NOTES FOR NEW NOTES AND THE OWNERSHIP AND DISPOSITION OF THE NEW NOTES. EXCHANGE The exchange of Old Notes for New Notes pursuant to the Exchange Offer will not be treated as an exchange or other tax event for federal income tax purposes because the New Notes should not be considered to differ materially in kind or extent from the Old Notes. A Holder will have the same adjusted tax basis and holding period in the New Notes as it had in the Old Notes immediately before the exchange. INTEREST A Holder of New Notes will be required to report interest income for federal income tax purposes for any interest earned on the Notes in accordance with such Holder's method of tax accounting. ORIGINAL ISSUE DISCOUNT The Old Notes do not have original issue discount ("OID") for federal income tax purposes. Accordingly, the New Notes also will not have OID since the New Notes should be treated as a continuation of the Old Notes for federal income tax purposes. MARKET DISCOUNT Under the market discount rules of the Code, an exchanging Holder (other than a Holder who made the election described below) who purchased an Old Note with "market discount" (generally defined as the amount by which the stated redemption price of the Old Note on the Holder's date of purchase exceeded the Holder's purchase price) will be required to treat any gain recognized on the redemption, sale or other disposition of the New Note received in the exchange as ordinary income to the extent of 78 the market discount that accrued during the Holder's holding period for such New Note (which period will include such holder's holding period for the Old Note). In addition, a Holder of a Note acquired at market discount may be required to defer the deduction of all or a portion of the interest expense on any indebtedness incurred or continued to purchase or carry such Note. A Holder who has elected under applicable Code provisions to include market discount in income annually as such discount accrues will not be required to treat any gain recognized as ordinary income (or defer interest deductions) under the market discount rules described above. Holders should consult their tax advisors as to the portion of any gain that would be taxable as ordinary income under these provisions. AMORTIZABLE BOND PREMIUM In general, if a holder's initial tax basis in the Old Notes at acquisition exceeded the amount payable at maturity, the excess will be treated as "amortizable bond premium" (including after the exchange of such Old Notes for New Notes). In such case, the Holder may elect under section 171 of the Code to amortize the bond premium annually under a constant yield method. The Holder's adjusted tax basis in the Note is decreased by the amount of the allowable amortization. Because the Notes have early call provisions, Holders must take such call provisions into account to determine the amount of amortizable bond premium. Amortizable bond premium is treated as an offset to interest received on the obligation rather than as an interest deduction, except as may be provided in Treasury regulations. An election to amortize bond premium would apply to amortizable bond premium on all taxable bonds held on or acquired after the beginning of the Holder's taxable year for which the election is made, and may be revoked only with the consent of the IRS. Holders who acquire their Notes with amortizable bond premium should consult their own tax advisors. SALE, EXCHANGE, REDEMPTION OR OTHER DISPOSITION OF NOTES On sale, exchange, redemption or other disposition of the Notes, and except to the extent that the cash received is attributable to accrued interest (which generally represents ordinary interest income) or market discount (the tax consequences of which are described above), a Holder generally will recognize capital gain or loss measured by the difference between the amount realized and such Holder's adjusted tax basis in the Notes redeemed, and any applicable capital gain generally would be taxed at a reduced rate of 20 percent for a Holder that is not a corporation and who holds the Notes for more than one year. BACKUP WITHHOLDING Federal income tax backup withholding at a rate of 31 percent on dividends, interest payments, and proceeds from a sale, exchange, or redemption of New Notes will apply unless the Holder (i) is a corporation or comes within certain other exempt categories (and, when required, demonstrates this fact) or (ii) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. The amount of any backup withholding from a payment to a Holder will be allowed as a credit against the Holder's federal income tax liability and may entitle such Holder to a refund, provided that the required information is furnished to the IRS. A Holder of Notes who does not provide the Company with his correct taxpayer identification number may be subject to penalties imposed by the IRS. The Company will report to the Holders of the Notes and the IRS the amount of any "reportable payments" and any amount withheld with respect to the Notes during the calendar year. PLAN OF DISTRIBUTION Subject to the terms and conditions set forth in the Purchase Agreement dated June 22, 1998, the Company sold the Old Notes to the Initial Purchaser. The Initial Purchaser received a 3.0% discount and commissions totalling $3,450,000 in connection with the Offering. The Initial Purchaser received customary advisory fees and was reimbursed for its expenses in connection with advice rendered regarding the Acquisition. In addition, the Company has retained the Initial Purchaser as its financial advisor until December 31, 2002. An affiliate of the Initial Purchaser 79 provided the Bridge Financing for the Acquisition for which it was paid customary fees and reimbursed its expenses. A portion of the proceeds from the Offering was used to repay the Bridge Notes. Other affiliates of the Initial Purchaser own significant amounts of Acquisition Corp. Common Stock. See "Use or Proceeds," "Security Ownership of Certain Beneficial Owners and Management" and "Certain Relationships and Related Transactions--Transactions with DLJMBII and their Affiliates." Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale for a period until 180 days after the Exchange Offer Registration Statement has been declared effective, or such shorter period as will terminate when all Old Notes acquired by broker-dealers for their own accounts as a result of market-making activities or other trading activities have been exchanged for New Notes and resold by such broker-dealers. The Company will not receive any proceeds from any sale of New Notes by broker-dealers. New Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer that resells New Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of New Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period until 180 days after the Exchange Offer Registration Statement has been declared effective, or such shorter period as will terminate when all Old Notes acquired by broker-dealers for their own accounts as a result of market-making activities or other trading activities have been exchanged for New Notes and resold by such broker-dealers, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange Offer, other than commissions or concessions of any brokers or dealers and the fees of any counsel or other advisors or experts retained by the Holders of the Notes, except as expressly set forth in the Registration Rights Agreement and will indemnify the Holders of the Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. NOTICE TO HOLDERS The New Notes may not be sold or transferred to, and each Holder of Old Notes, by its exchange of Old Notes for New Notes shall be deemed to have represented and covenanted that it is not acquiring the New Notes for or on behalf of, and will not transfer the New Notes to, any pension or welfare plan (as defined in Section 3 of the Employee Retirement Income Security Act of 1974; "ERISA") except that such a purchase for or on behalf of a pension or welfare plan shall be permitted: (1) to the extent such purchase is made by or on behalf of a bank collective investment fund maintained by the Holder in which no plan (together with any other plans maintained by the same employer or employee organization) has an interest in excess of 10% of the total assets in such collective investment fund and the conditions of Section III of Prohibit Transaction Class Exemption 91-38 issued by the Department of Labor are satisfied; 80 (2) to the extent such purchase is made by or on behalf of an insurance company pooled separate account maintained by the Holder in which, at any time while the New Notes are outstanding, no plan (together with any other plans maintained by the same employer or employee organization) has an interest in excees of 10% of the total of all assets in such pooled separate account and the conditions of Section III of Prohibit Transaction Class Exemption 90-1 issued by the Department of Labor are satisfied; (3) to the extent such purchase is made on behalf of a plan by (i) an investment advisor registered under the Investment Advisers Act of 1940 that had as of the last day of its most recent fiscal year total assets under its management and control in excess of $50,000,000 and had stockholders' or partners' equity in excess of $750,000, as shown in its most recent balance sheet prepared in accordance with generally accepted accounting principles, or (ii) a bank as defined in Section 202(a)(2) of the Investment Advisers Act of 1940 with equity capital in excess of $1,000,000 as of the last day of its most recent fiscal year, or (iii) an insurance company which is qualified under the laws of more than one state to manage, acquire or dispose of any assets of a plan, which insurance company has as of the last day of its most recent fiscal year, net worth in excess of $1,000,000 and which is subject to supervision and examination by state authority having supervision over insurance companies and, in any case, such investment adviser, bank or insurance company is otherwise a qualified professional asset manager, as such term is used in Prohibited Transaction Class Exemption 84-14 issued by the Department of Labor, and the assets of such plan when combined with the assets of other plans established or maintained by the same employer (or affiliate thereof) or employee organization and managed by such investment advisor, bank or insurance company, do not represent more than 20% of the total client assets managed by such investment advisor, bank or insurance company, and the conditions of Section I of such exemption are otherwise satisfied; (4) to the extent such purchase is made with funds from an insurance company general account, the conditions of Sections I and IV of Prohibited Transactions Class Exemption 95-60 issued by the Department of Labor are satisfied; (5) to the extent such plan is a governmental plan (as defined in Section 3 of ERISA) which is not subject to the provisions of Title I of ERISA of Section 401 of the Internal Revenue Code; or (6) to the extent such purchase is on behalf of a plan by an in-house asset manager and the conditions of Part I of Prohibited Transactions Class Exemptions 96-23 issued by the Department of Labor are satisfied. LEGAL MATTERS Certain legal matters with respect to the validity of the New Notes will be passed upon for the Company by Akin, Gump, Strauss, Hauer & Feld, L.L.P., New York, New York. EXPERTS The consolidated financial statements of AKI, Inc. and its subsidiaries as of June 30, 1996 and 1997 and for each of the three years in the period ended June 30, 1997 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 81 INDEX TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
PAGE ----- Introduction to Unaudited Pro Forma Condensed Consolidated Financial Data ..... P-2 Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1998 . P-4 Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1998 ......................................................... P-5 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year Ended June 30, 1997 ............................................. P-6 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Nine Months Ended March 31, 1998 .................................................. P-7 Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations .. P-8
P-1 AKI, INC. AND SUBSIDIARIES INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA DLJ Merchant Banking Partners II, L.P. and certain related investors (collectively, "DLJMBII") and certain members of Arcade Holding Corporation (the "Predecessor") organized ACH I Acquisition Corp. ("Acquisition Corp.") and AHC I Merger Corp. ("Merger Corp.") for purposes of acquiring the Predecessor. Merger Corp. was capitalized by an equity contribution from Acquisition Corp. and the issuance of senior increasing rate notes. On December 15, 1997, Merger Corp. acquired all of the equity interests of the Predecessor (the "Acquisition"), merged with and into the Predecessor and the combined entity assumed the name AKI, Inc. (the "Company"). Subsequent to the Acquisition, Acquisition Corp. contributed all of its equity interest in the Company to AKI Holding Corp. ("Holding"). On June 22, 1998, the Company acquired the fragrance sampling business, including certain fixed assets, of the Industrial and Consumer Products division of the Minnesota Mining and Manufacturing Company ("3M") for approximately $7.25 million in cash and the assumption of certain liabilities (the "3M Acquisition"). The following unaudited pro forma condensed consolidated financial data of the Company are based upon historical financial statements of the Company or the Predecessor as adjusted to give effect to the Acquisition and the offering (the "Offering") by the Company of the Senior Notes offered hereby (the "Notes"), together with a capital contribution (the "Equity Contribution") to the Company of the net proceeds from the concurrent offering (the "Debenture Offering") by Holding, and the application of the net proceeds therefrom as discussed under the caption "Use of Proceeds" (collectively, the "Refinancing") and the 3M Acquisition. The accompanying unaudited pro forma condensed consolidated balance sheet as of March 31, 1998 gives effect to the Refinancing and the 3M Acquisition as if they had occurred on March 31, 1998. The unaudited historical balance sheet as of March 31, 1998 includes the effects of the Acquisition as such Acquisition occurred on December 15, 1997. The accompanying unaudited pro forma condensed consolidated statements of operations for the year ended June 30, 1997 and for the nine months ended March 31, 1998 give effect to the Acquisition, the Refinancing and the 3M Acquisition as if they had occurred at the beginning of the earliest period presented. Pro forma adjustments are described in the accompanying notes and are applied to the historical consolidated balance sheet and consolidated statements of operations of the Company or the Predecessor to account for the Acquisition and the 3M Acquisition under the purchase method of accounting and the Refinancing. In accordance with the consensus reached by the Emerging Issues Task Force of the Financial Accounting Standards Board in Issue 88-16, "Basis in Leveraged Buyout Transactions," the purchase price allocation required an adjustment for the continuing interest attributable to management's ownership interest in Predecessor carried over in connection with the Acquisition. As a result, a reduction in stockholder's equity was recorded which represents the difference between the fair value of the Company's assets and the related book value attributable to the interest of the continuing stockholders' investment in the Predecessor. The remaining purchase price has been allocated to assets and liabilities based upon estimates of their respective fair value as determined by management and a third-party appraisal with respect to property, plant and equipment. Final allocations of certain liabilities may be different from the amounts reflected; however, it is not anticipated that any significant changes will be made to the preliminary allocations. For the 3M Acquisition, the purchase price has been allocated to assets purchased and liabilities assumed based upon estimates of their respective fair value as of March 31, 1998 as determined by management. Accordingly, the final allocations may be different from the amounts reflected; however, it is not anticipated that any significant changes will be made to the preliminary allocations. The Company has preliminarily analyzed the savings it expects to realize from reductions in management fees, total depreciation expense, salaries, benefits, material costs and other operating expenses as a result of the Acquisition. To the extent that the Company has agreed prospectively to reductions in management fees (which represent the difference between the Predecessor's management fees and the new financial advisory fees to which the Company is contractually obligated through the P-2 AKI, INC. AND SUBSIDIARIES INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA--(CONTINUED) Acquisition agreement) and has quantified the expected reduction in total depreciation expense (useful lives of certain property, plant and equipment were extended based upon the third-party appraisal), these reductions have been reflected in the unaudited pro forma condensed consolidated statements of operations. Other potential cost savings have not been included in the unaudited pro forma condensed consolidated statements of operations. Additionally, the unaudited pro forma financial statements do not include any charges for a proposed stock option plan. As noted above, the Company has acquired the fragrance sampling business of 3M. 3M's fragrance sampling business is predominantly a sales and distribution business as it outsources the production of the majority of the products it sells. The Company intends to terminate all such outsourcing arrangements and relocate all of the purchased business' operations to its Chattanooga facilities as the Company has excess manufacturing capacity at such facilities. In addition, except for several sales and marketing employees, the Company does not intend to extend employment to any employees from 3M; the Company's management has preliminarily determined that additional personnel will be required at its Chattanooga facilities in the selling, general and administrative functions in order to serve the incremental sales volume. As described in the notes to the unaudited pro forma condensed consolidated statements of operations, the Company has adjusted the historical operating results of this business to reflect the cost of producing and selling such products by the Company. The adjustments to 3M's historical results are based on the Company's historical production and selling, general and administrative cost structure, modified as described to account for the increased sales volume. The pro forma adjustments are based on estimates, available information and certain assumptions and may be revised as additional information becomes available. The unaudited pro forma condensed consolidated financial data do not purport to represent what the Company's results of operations or financial position that would actually have resulted if the Acquisition, the Refinancing or the 3M Acquisition had occurred on the dates indicated and are not necessarily representative of the Company's results of operations for any future period. The unaudited pro forma condensed consolidated balance sheet and consolidated statements of operations should be read in conjunction with the Consolidated Financial Statements and the notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other financial information appearing elsewhere in this Prospectus. P-3 AKI, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 (DOLLARS IN THOUSANDS)
PRO FORMA 3M REFINANCING FOR ACQUISITION AKI, INC. ADJUSTMENTS REFINANCING ADJUSTMENTS PRO FORMA ----------- ------------------- ------------- ------------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents ............. $ 988 $ 6,899(a) $ 7,887 $ (7,250)(c) $ 637 Accounts receivable, net .............. 15,377 -- 15,377 -- 15,377 Inventory ............................. 2,278 -- 2,278 -- 2,278 Income tax refund receivable .......... 5,822 -- 5,822 -- 5,822 Prepaid expenses ...................... 268 -- 268 -- 268 Deferred income taxes ................. 1,983 1,013 (b) 2,996 -- 2,996 --------- ----------- --------- --------- --------- TOTAL CURRENT ASSETS ............... 26,716 7,912 34,628 (7,250) 27,378 Property, plant and equipment, net 18,812 -- 18,812 143 (c) 18,955 Goodwill, net ......................... 152,804 -- 152,804 7,365 (c) 160,169 Deferred charges ...................... 3,207 4,850 (a) 5,390 -- 5,390 (2,667)(b) Deferred income taxes ................. 922 -- 922 -- 922 Other assets .......................... 206 -- 206 -- 206 --------- ----------- --------- --------- --------- TOTAL ASSETS ....................... $ 202,667 $ 10,095 $ 212,762 $ 258 $ 213,020 ========= =========== ========= ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Current portion of capital lease obligation ........................... $ 595 $ -- $ 595 $ -- $ 595 Current portion of other notes payable .............................. 1,438 -- 1,438 -- 1,438 Senior increasing rate notes .......... 123,500 (123,500)(a) -- -- -- Accounts payable and accrued expenses ............................. 9,004 (650)(a) 8,354 258 (c) 8,612 --------- ----------- --------- --------- --------- TOTAL CURRENT LIABILITIES .......... 134,537 (124,150) 10,387 258 10,645 Revolving line of credit .............. 1,600 (1,600)(a) -- -- -- Long-term portion of capital lease obligations .......................... 1,646 -- 1,646 -- 1,646 Long-term debt ........................ - 115,000 (a) 115,000 -- 115,000 Deferred income taxes ................. 3,611 -- 3,611 -- 3,611 --------- ----------- --------- --------- --------- TOTAL LIABILITIES .................. 141,394 (10,750) 130,644 258 130,902 --------- ----------- --------- --------- --------- STOCKHOLDER'S EQUITY Common stock .......................... -- -- -- -- -- Additional paid-in capital ............ 78,363 22,499 (a) 100,862 -- 100,862 Accumulated deficit ................... (1,284) (1,654)(b) (2,938) -- (2,938) Cumulative translation adjustment (76) -- (76) -- (76) Carryover basis adjustment ............ (15,730) -- (15,730) -- (15,730) --------- ----------- --------- --------- --------- TOTAL STOCKHOLDER'S EQUITY ......... 61,273 20,845 82,118 -- 82,118 --------- ----------- --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY .............. $ 202,667 $ 10,095 $ 212,762 $ 258 $ 213,020 ========= =========== ========= ========= =========
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet. P-4 AKI, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 (DOLLARS IN THOUSANDS) REFINANCING ADJUSTMENTS (a) Reflects the impact of the Refinancing, including (i) the sale of $115,000 of the Notes, net of underwriting discounts ($3,450), (ii) the equity contribution to the Company by Holding of the gross proceeds ($25,962) from the Debenture Offering, net of estimated expenses (including underwriting discounts) of $1,263 and amount retained at Holding of $2,200, (iii) the estimated expenses of $1,400 to be paid in connection with the sale of the Notes and (iv) the repayment of the senior increasing rate notes ($123,500), revolving line of credit ($1,600) and accrued interest on the senior increasing rate notes and revolving line of credit ($650) from the proceeds of the sale of the Notes and the equity contribution. SUMMARY OF SOURCES AND USES OF PROCEEDS OF THE REFINANCING: Sources of Funds: Notes offered hereby, net of discounts ............ $111,550 Equity contribution ............................... 22,499 -------- Total sources ..................................... 134,049 -------- Use of Funds: Expenses .......................................... 1,400 Repayment of senior increasing rate notes ......... 123,500 Repayment of revolving line of credit ............. 1,600 Accrued interest .................................. 650 -------- Total uses ........................................ 127,150 -------- Net increase in cash .............................. $ 6,899 ========
(b) Reflects the write-off of the unamortized deferred financing costs associated with the senior increasing rate notes ($2,667) and the recognition of the related tax benefit ($1,013). 3M ACQUISITION ADJUSTMENTS (c) Reflects the Company's purchase of 3M's fragrance sampling business, including the acquisition of certain fixed assets ($143) through cash ($7,250) and the assumption of certain liabilities ($258). Goodwill represents the excess purchase price paid over the fair value of net identifiable assets acquired and is amortized over forty years using the straight-line method. P-5 AKI, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997 (I) (DOLLARS IN THOUSANDS)
PRO FORMA ACQUISITION FOR AKI, INC. ADJUSTMENTS ACQUISITION ----------- ----------------- ------------- Net sales ........................ $ 77,723 $ -- $ 77,723 Cost of goods sold ............... 49,467 (677)(a) 48,790 -------- ---------- --------- Gross profit .................. 28,256 677 28,933 Selling, general and administrative expenses ......... 13,353 115 (a) 13,468 Amortization of goodwill ......... 1,214 2,634 (b) 3,848 -------- ---------- --------- Income (loss) from operations ................... 13,689 (2,072) 11,617 Other expenses (income): Interest expense, net ........... 6,203 11,297 (c) 17,500 Management fees to stockholder(s) ................ 470 (220)(d) 250 Other, net ...................... (101) -- (101) -------- ---------- --------- Income (loss) before income taxes ................. 7,117 (13,149) (6,032) Income tax expense (benefit) ..... 3,135 (3,953)(e) (818) -------- ---------- --------- Net income (loss) ............. $ 3,982 $ (9,196) $ (5,214) ======== ========== =========
(RESTUBBED FROM ABOVE TABLE)
PRO FORMA FOR 3M REFINANCING ACQUISITION AND ACQUISITION ADJUSTMENTS REFINANCING ADJUSTMENTS (H) PRO FORMA ------------------- ----------------- ----------------- ---------- Net sales ........................ $ -- $ 77,723 $10,048 $87,771 Cost of goods sold ............... -- 48,790 5,367 54,157 ----------- -------- ------- ------- Gross profit .................. -- 28,933 4,681 33,614 Selling, general and administrative expenses ......... -- 13,468 867 14,335 Amortization of goodwill ......... -- 3,848 184 4,032 ----------- -------- ------- ------- Income (loss) from operations ................... -- 11,617 3,630 15,247 Other expenses (income): Interest expense, net ........... (4,539) (f) 12,961 -- 12,961 Management fees to stockholder(s) ................ -- 250 -- 250 Other, net ...................... -- (101) -- (101) ----------- -------- ------- ------- Income (loss) before income taxes ................. 4,539 (1,493) 3,630 2,137 Income tax expense (benefit) ..... 1,711 (g) 893 1,365 2,258 ----------- -------- ------- ------- Net income (loss) ............. $ 2,828 $ (2,386) $ 2,265 $ (121) =========== ======== ======= =======
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations. P-6 AKI, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998 (I) (DOLLARS IN THOUSANDS)
PRO FORMA ACQUISITION FOR AKI, INC. ADJUSTMENTS ACQUISITION -------------- ----------------- --------------- Net sales ........................ $ 57,168 $ -- $ 57,168 Cost of goods sold ............... 36,591 (387)(a) 36,204 -------- ---------- -------- Gross profit .................. 20,577 387 20,964 Selling, general and administrative expenses ......... 8,901 86 (a) 8,987 Amortization of goodwill ......... 1,684 1,206 (b) 2,890 -------- ---------- -------- Income (loss) from operations ................... 9,992 (905) 9,087 Other expenses (income): Interest expense, net ........... 7,809 5,237 (c) 13,046 Management fees to stockholder(s) ................ 278 (90)(d) 188 Other, net ...................... (4) -- (4) ---------- ---------- ----------- Income (loss) before income taxes ................. 1,909 (6,052) (4,143) Income tax expense (benefit) ..... 1,400 (1,889)(e) (489) --------- ---------- ---------- Net income (loss) ............. $ 509 $ (4,163) $ (3,654) ========= ========== ==========
(RESTUBBED FROM ABOVE TABLE)
PRO FORMA FOR 3M REFINANCING ACQUISITION AND ACQUISITION ADJUSTMENTS REFINANCING ADJUSTMENTS (H) PRO FORMA ------------------- ----------------- ----------------- ------------- Net sales ........................ $ -- $ 57,168 $6,870 $64,038 Cost of goods sold ............... -- 36,204 3,452 39,656 ----------- -------- ------ ------- Gross profit .................. -- 20,964 3,418 24,382 Selling, general and administrative expenses ......... -- 8,987 660 9,647 Amortization of goodwill ......... -- 2,890 138 3,028 ----------- -------- ------ ------- Income (loss) from operations ................... -- 9,087 2,620 11,707 Other expenses (income): Interest expense, net ........... (3,404) (f) 9,642 -- 9,642 Management fees to stockholder(s) ................ -- 188 -- 188 Other, net ...................... -- (4) -- (4) ----------- ----------- ------ --------- Income (loss) before income taxes ................. 3,404 (739) 2,620 1,881 Income tax expense (benefit) ..... 1,328 (g) 839 1,022 1,861 ----------- ---------- ------ -------- Net income (loss) ............. $ 2,076 $ (1,578) $1,598 $ 20 =========== ========== ====== ========
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations. P-7 AKI, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) ACQUISITION ADJUSTMENTS (a) Represents the net reduction of depreciation expense ($562 in the year ended June 30, 1997 and $301 in the nine months ended March 31, 1998) as a result of the fair values assigned to property, plant and equipment and estimated useful lives which were extended as determined from the property, plant and equipment appraisal commissioned by the Company in connection with the application of purchase accounting associated with the Acquisition. (b) Adjusts goodwill amortization to $3,848 in the year ended June 30, 1997 and $2,890 in the nine months ended March 31, 1998 based upon goodwill arising from the Acquisition of $153,929 amortized using the straight-line method over 40 years. (c) Reflects incremental interest expense and amortization of deferred charges ($11,297 in the year ended June 30, 1997 and $5,237 in the nine months ended March 31, 1998) on the senior increasing rate notes issued in connection with the Acquisition as though such issuance had occurred at the beginning of the period. (d) Reflects the elimination of management fees and expenses paid to former stockholders, net of financial advisor fees agreed to on a prospective basis through the Acquisition agreement ($220 in the year ended June 30, 1997 and $90 in the nine months ended March 31, 1998). (e) Reflects incremental income tax benefit relating to pro forma consolidated statements of operations' adjustments in (c) and (d) above ($3,953 in the year ended June 30, 1997 and $1,889 in the nine months ended March 31, 1998). Goodwill is not tax deductible. REFINANCING ADJUSTMENTS (f) Reflects incremental reduction in interest expense and amortization of deferred charges ($4,539 in the year ended June 30, 1997 and $3,404 in the nine months ended March 31, 1998) associated with the Refinancing as though such Refinancing had occurred at the beginning of the period. (g) Reflects the incremental provision for income taxes ($1,711 in the year ended June 30, 1997 and $1,328 in the nine months ended March 31, 1998) on the incremental reduction in interest expense associated with the Refinancing. 3M ACQUISITION ADJUSTMENTS (h) Reflects the incremental impact of the Company's acquisition of 3M's fragrance sampling business. The tables presented below set forth the 3M fragrance sampling business' historical statements of operations conformed to the periods indicated as well as the adjustments required to adjust those historical results for contract alterations on a prospective basis and to reflect the costs of producing and selling such products by the Company. P-8 AKI, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS--(CONTINUED) (DOLLARS IN THOUSANDS) FOR THE YEAR ENDED JUNE 30, 1997
3M 3M HISTORICAL ADJUSTMENTS ADJUSTED ------------ --------------------- --------- Net sales ............................................ $15,342 $ (5,294)(i) $10,048 Cost of goods sold ................................... 10,195 (4,828)(ii) 5,367 ------- ---------- ------- Gross profit ........................................ 5,147 (466) 4,681 Selling, general and administrative expenses ......... 4,694 (3,827)(iii) 867 Amortization of goodwill ............................. -- 184 (iv) 184 ------- ---------- ------- Income before income taxes .......................... 453 3,177 3,630 Income tax expense (benefit) ......................... 163 1,202 (v) 1,365 ------- ---------- ------- Net income .......................................... $ 290 $ 1,975 $ 2,265 ======= ========== =======
FOR THE NINE MONTHS ENDED MARCH 31, 1998
3M 3M HISTORICAL ADJUSTMENTS ADJUSTED ------------ --------------------- --------- Net sales ............................................ $12,603 $ (5,733)(i) $6,870 Cost of goods sold ................................... 9,131 (5,679)(ii) 3,452 ------- ---------- ------ Gross profit ........................................ 3,472 (54) 3,418 Selling, general and administrative expenses ......... 3,834 (3,174)(iii) 660 Amortization of goodwill ............................. -- 138 (iv) 138 ------- ---------- ------ Income (loss) before income taxes ................... (362) 2,982 2,620 Income tax expense (benefit) ......................... (130) 1,152 (v) 1,022 ------- ---------- ------ Net income (loss) ................................... $ (232) $ 1,830 $1,598 ======= ========== ======
- ---------- (i) Reflects the decrease in net sales resulting from a change in the customer base. (ii) Reflects the decrease in production costs resulting from the change in customer base noted in (i) above ($3,518 for the year ended June 30, 1997 and $4,154 for the nine months ended March 31, 1998) and from the consolidation of all production into the Company's Chattanooga facilities. The decrease takes into account the Company's available manufacturing capacity at such facilities as well as the variable costs (primarily materials and direct labor) of such incremental sales. Due to the Company's existing capacity, fixed costs (primarily depreciation and overhead) will not be affected by such incremental sales. P-9 AKI, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS--(CONTINUED) (DOLLARS IN THOUSANDS) (iii) Reflects the net decrease in selling, general and administrative expenses due to the consolidation of these activities into the Company. Upon the consummation of the 3M Acquisition, the Company intends to add several additional sales and marketing employees as well as certain additional administrative employees. The salaries, benefits and commissions, if applicable, of these employees have been accounted for in the adjustment. The Company believes that due to the similarity of its existing customers and 3M's fragrance sampling customers, no other additional employees will be required. The adjustment also reflects the elimination of corporate expense allocations that will be discontinued as a result of the transfer of the 3M fragrance sampling business to the Company. (iv) Represents amortization expense based upon goodwill of $7,365 arising from the 3M Acquisition amortized over 40 years using the straight-line method. (v) Reflects incremental income tax expense relating to the 3M adjustments in (i) through (iv) above. OTHER DATA (i) EBITDA on a pro forma basis was $22,587 in the year ended June 30, 1997 and $17,213 in the nine months ended March 31, 1998. EBITDA represents income from operations plus depreciation and amortization. EBITDA is discussed because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles ("GAAP") in the United States and is not indicative of operating income or cash flow from operations as determined under GAAP. The ratio of earnings to fixed charges on a pro forma basis was 1.2x for the year ended June 30, 1997 and 1.2x for the nine months ended March 31, 1998. Earnings used in computing the ratio of earnings to fixed charges consists of income (loss) before income tax expense (benefit) plus fixed charges. Fixed charges are defined as interest expense, which includes amortization of deferred financing costs. P-10 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants ....................................................... F-2 Consolidated Balance Sheets at June 30, 1996 and 1997, and Unaudited Consolidated Balance Sheet at March 31, 1998 ................................................................ F-3 Consolidated Statements of Operations for the Three Years Ended June 30, 1997 and Unaudited Consolidated Statements of Operations for the Nine Months Ended March 31, 1997 and the Periods from July 1, 1997 through December 15, 1997 and from December 16, 1997 through March 31, 1998 ............................................................ F-4 Consolidated Statements of Changes in Stockholder(s) Equity for the Three Years Ended June 30, 1997 and Unaudited Consolidated Statements of Changes in Stockholder(s) Equity for the Periods from July 1, 1997 through December 15, 1997 and from December 16, 1997 through March 31, 1998 ................................................................. F-5 Consolidated Statements of Cash Flows for the Three Years Ended June 30, 1997 and Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1997 and the Periods from July 1, 1997 through December 15, 1997 and from December 16, 1997 through March 31, 1998 ............................................................ F-6 Notes to Consolidated Financial Statements .............................................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of AKI, Inc. and Subsidiaries In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of AKI, Inc. and Subsidiaries, formerly known as Arcade Holding Corporation (the "Predecessor") at June 30, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Predecessor's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Nashville, Tennessee April 22, 1998 F-2 AKI, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
PREDECESSOR SUCCESSOR ------------------------- --------------- JUNE 30, MARCH 31, 1998 ------------------------- --------------- 1996 1997 ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents ................................ $ 626 $ 303 $ 988 Accounts receivable, net ................................. 12,746 10,200 15,377 Inventory ................................................ 2,236 2,786 2,278 Income tax refund receivable ............................. -- -- 5,822 Prepaid expenses ......................................... 285 221 268 Deferred income taxes .................................... 499 424 1,983 -------- ------- --------- TOTAL CURRENT ASSETS .................................. 16,392 13,934 26,716 Property, plant and equipment, net ....................... 19,625 18,156 18,812 Goodwill, net ............................................ 45,507 44,293 152,804 Deferred charges ......................................... 807 555 3,207 Deferred income taxes .................................... -- -- 922 Other assets ............................................. 64 204 206 -------- ------- --------- TOTAL ASSETS ........................................... $ 82,395 $77,142 $ 202,667 ======== ======= ========= LIABILITIES AND STOCKHOLDER(S) EQUITY CURRENT LIABILITIES Current portion of loans payable to stockholder .......... $ 7,004 $37,892 $ -- Current portion of capital lease obligations ............. 2,467 557 595 Current portion of other notes payable ................... 1,200 100 1,438 Revolving line of credit ................................. -- 4,338 -- Senior increasing rate notes ............................. -- -- 123,500 Accounts payable, trade .................................. 4,862 3,435 4,200 Accrued income taxes ..................................... 1,188 26 -- Accrued bonuses .......................................... 1,017 1,396 682 Accrued expenses ......................................... 3,339 3,147 4,122 -------- ------- --------- TOTAL CURRENT LIABILITIES .............................. 21,077 50,891 134,537 Revolving line of credit ................................. -- -- 1,600 Loans payable to stockholder, net ........................ 37,532 -- -- Long-term portion of capital lease obligations ........... 2,654 2,098 1,646 Other notes payable, net ................................. 1,201 1,301 -- Deferred income taxes .................................... 3,321 2,949 3,611 -------- ------- --------- TOTAL LIABILITIES ..................................... 65,785 57,239 141,394 -------- ------- --------- Commitments and contingencies (Note 10) Redeemable preferred stock ............................... 8,678 8,678 STOCKHOLDER(S) EQUITY Common stock, $0.01 par, 100,000 shares authorized; 48,000 shares issued and outstanding at June 30, 1996 and 1997 ................................................ 1 1 Preferred stock, $0.01 par, 8,700 shares authorized; no shares issued or outstanding at March 31, 1998 .......... -- Common stock, $0.01 par, 100,000 shares authorized; 1,000 shares issued and outstanding at March 31, 1998 ......... -- Additional paid-in capital ............................... 4,889 4,889 78,363 Stock purchase warrants .................................. 1,923 1,923 -- Retained earnings (deficit) .............................. 1,199 4,565 (1,284) Cumulative translation adjustment ........................ (80) (153) (76) Carryover basis adjustment ............................... -- -- (15,730) -------- ------- --------- TOTAL STOCKHOLDER(S) EQUITY ............................ 7,932 11,225 61,273 -------- ------- --------- TOTAL LIABILITIES AND STOCKHOLDER(S) EQUITY ............ $ 82,395 $77,142 $ 202,667 ======== ======= =========
The accompanying notes are an integral part of these consolidated financial statements. F-3 AKI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
PREDECESSOR SUCCESSOR --------------------------------------------------------------------- ------------------ NINE MONTHS JULY 1, 1997 YEAR ENDED JUNE 30, ENDED TO DECEMBER 16, 1997 ------------------------------------ MARCH 31, DECEMBER 15, TO 1995 1996 1997 1997 1997 MARCH 31, 1998 ---------- ---------- ---------- ------------- -------------- ------------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) Net sales .................... $61,794 $73,486 $77,723 $62,367 $35,186 $ 21,982 Cost of goods sold ........... 38,333 49,862 49,467 39,529 22,809 13,782 ------- ------- ------- ------- ------- -------- Gross profit ............... 23,461 23,624 28,256 22,838 12,377 8,200 Selling, general and administrative expenses...... 8,483 10,655 13,353 10,470 5,712 3,189 Amortization of goodwill ..... 1,113 1,214 1,214 911 559 1,125 ------- ------- ------- ------- ------- -------- Income from operations ................ 13,865 11,755 13,689 11,457 6,106 3,886 Other expenses (income): Interest expense to stockholder(s) .............. 6,181 6,164 5,196 3,960 2,143 5,031 Interest expense (income), other ....................... (11) 598 1,007 734 503 132 Management fees to stockholder(s) .............. 470 470 470 353 215 63 Other, net ................... (22) 244 (101) (266) 11 (15) ------- ------- ------- ------- ------- -------- Income (loss) before income taxes .............. 7,247 4,279 7,117 6,676 3,234 (1,325) Income tax expense (benefit) ................... 3,114 2,101 3,135 2,852 1,441 (41) ------- ------- ------- ------- ------- -------- Net income (loss) .......... $ 4,133 $ 2,178 $ 3,982 $ 3,824 $ 1,793 $ (1,284) ======= ======= ======= ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 AKI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER(S) EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK STOCK CUMULATIVE CARRYOVER ----------------- PAID-IN PURCHASE RETAINED TRANSLATION BASIS SHARES AMOUNT CAPITAL WARRANTS EARNINGS ADJUSTMENT ADJUSTMENT TOTAL -------- -------- --------- ---------- ------------ ------------- ------------- ----------- PREDECESSOR -------------------- Balances, June 30, 1994 ........... 48,000 $ 1 $ 4,889 $1,923 $ (3,886) $ -- $ -- $ 2,927 Preferred stock dividend ......... -- -- -- -- (608) -- -- (608) Cumulative translation adjustment ...................... -- -- -- -- -- 120 -- 120 Net income ....................... -- -- -- -- 4,133 -- -- 4,133 ------ ---- ------- ------ -------- ------ --------- -------- Balances, June 30, 1995 ........... 48,000 1 4,889 1,923 (361) 120 -- 6,572 Preferred stock dividend ......... -- -- -- -- (618) -- -- (618) Cumulative translation adjustment ...................... -- -- -- -- -- (200) -- (200) Net income ....................... -- -- -- -- 2,178 -- -- 2,178 ------ ---- ------- ------ -------- ------ --------- -------- Balances, June 30, 1996 ........... 48,000 1 4,889 1,923 1,199 (80) -- 7,932 Preferred stock dividend ......... -- -- -- -- (616) -- -- (616) Cumulative translation adjustment ...................... -- -- -- -- -- (73) -- (73) Net income ....................... -- -- -- -- 3,982 -- -- 3,982 ------ ---- ------- ------ -------- ------ --------- -------- Balances, June 30, 1997 ........... 48,000 1 4,889 1,923 4,565 (153) -- 11,225 Preferred stock dividend (unaudited) ..................... -- -- -- -- (283) -- -- (283) Cumulative translation adjustment (unaudited) .......... -- -- -- -- -- (19) -- (19) Net income (unaudited) ........... -- -- -- -- 1,793 -- -- 1,793 ------ ---- ------- ------ -------- ------ --------- -------- Balances, December 15, 1997 (unaudited) ...................... 48,000 $ 1 $ 4,889 $1,923 $ 6,075 $ (172) $ -- $ 12,716 ====== ==== ======= ====== ======== ====== ========= ======== - ----------------------------------------------------------------------------------------------------------------------------- SUCCESSOR --------- Balances, December 16, 1997 (unaudited) ...................... 1,000 $ -- $78,363 $ -- $ -- $ -- $ (15,730) $ 62,633 Cumulative translation adjustment (unaudited) .......... -- -- -- -- -- (76) -- (76) Net loss (unaudited) ............. -- -- -- -- (1,284) -- -- (1,284) ------ ---- ------- ------ -------- ------ --------- -------- Balances, March 31, 1998 (unaudited) ...................... 1,000 $ -- $78,363 $ -- $ (1,284) $ (76) $ (15,730) $ 61,273 ====== ==== ======= ====== ======== ====== ========= ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 AKI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
PREDECESSOR SUCCESSOR --------------------------------------------------------------- ------------------ NINE MONTHS JULY 1, 1997 YEAR ENDED JUNE 30, ENDED TO DECEMBER 16, 1997 ----------------------------------- MARCH 31, DECEMBER 15, TO 1995 1996 1997 1997 1997 MARCH 31, 1998 ----------- ----------- ----------- ------------- ------------- ------------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ....................... $ 4,133 $ 2,178 $ 3,982 $ 3,824 $ 1,793 $ (1,284) Adjustment to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of goodwill and other intangibles ........ 3,627 4,422 5,084 3,828 2,456 2,007 Amortization of debt discount .......... 378 642 560 420 233 44 Amortization of loan closing costs 260 231 258 193 101 1,122 Deferred income taxes .................. 1,575 (483) (297) (967) (460) (148) Other .................................. 382 239 (138) (124) (18) (76) Changes in operating assets and liabilities: Accounts receivable .................... (4,962) (1,268) 2,546 (2,452) 1,153 (6,329) Inventory .............................. (1,103) (304) (550) 67 69 220 Prepaid expenses, deferred charges and other assets ...................... (293) (168) (101) (103) (62) (432) Income taxes ........................... 784 75 (1,163) (540) 699 91 Accounts payable and accrued expenses .............................. 1,920 (227) (1,239) (909) (1,036) (4,938) Other liabilities ...................... (2,246) -- -- -- -- -- -------- -------- -------- -------- -------- ---------- Net cash provided by (used in) operating activities ................... 4,455 5,337 8,942 3,237 4,928 (9,723) -------- -------- -------- -------- -------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment .................. (1,325) (2,051) (2,462) (1,839) (807) (255) Proceeds from sale of equipment ......... -- 55 38 19 -- -- Refundable deposit on equipment ......... (1,984) 1,984 -- -- -- -- Payments for acquisitions, net of cash acquired .......................... (528) -- -- -- -- (134,152) -------- -------- -------- -------- -------- ---------- Net cash used in investing activities.... (3,837) (12) (2,424) (1,820) (807) (134,407) -------- -------- -------- -------- -------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments under capital leases for equipment .............................. (209) (646) (2,359) (2,227) (249) (165) Proceeds on line of credit with stockholder ............................ 3,500 7,500 -- -- -- -- Repayments on line of credit with stockholder ............................ (3,500) (7,500) -- -- -- -- Net proceeds (repayments) on line of credit .............................. -- -- 4,338 7,700 2,362 (5,100) Proceeds from issuance of senior increasing rate notes .................. -- -- -- -- -- 119,735 Proceeds from issuance of common stock .................................. -- -- -- -- -- 76,000 Redemption of preferred stock ........... -- -- -- -- -- (8,678) Proceeds from issuance of loans payable to stockholder ................. 4,000 -- -- -- -- -- Repayment of loans payable to stockholder ............................ (3,486) (6,004) (7,004) (5,253) (1,851) (36,649) Repayment of other notes payable ........ (150) (1,627) (1,200) (1,175) (50) (25) Dividends paid on preferred stock ....... (305) (618) (616) (460) (155) -- -------- -------- -------- -------- -------- ---------- Net cash provided by (used in) financing activities ................... (150) (8,895) (6,841) (1,415) 57 145,118 -------- -------- -------- -------- -------- ---------- Net increase (decrease) in cash and cash equivalents ........................ 468 (3,570) (323) 2 4,178 988 Cash and cash equivalents, beginning of period ............................... 3,728 4,196 626 626 303 -- -------- -------- -------- -------- -------- ---------- Cash and cash equivalents, end of period .................................. $ 4,196 $ 626 $ 303 $ 628 $ 4,481 $ 988 ======== ======== ======== ======== ======== ========== SUPPLEMENTAL INFORMATION: Cash paid during the period for: Interest to stockholder(s) ............. $ 5,561 $ 5,573 $ 4,559 $ 3,483 $ 1,146 $ 4,005 Interest, other ........................ 94 604 917 672 459 64 Income taxes ........................... 2,697 2,834 4,594 4,384 1,222 33 SIGNIFICANT NON-CASH ACTIVITIES: Assets acquired under capital lease ..... $ 1,798 $ 3,555 $ -- $ -- $ -- $ --
The accompanying notes are an integral part of these consolidated financial statements. F-6 AKI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION) 1. ORGANIZATION, BUSINESS AND ACQUISITION Arcade Holding Corporation (the "Predecessor") was organized for the purpose of acquiring all the issued and outstanding capital stock of Arcade, Inc. ("Arcade") on November 4, 1993. Arcade manufactures and distributes cosmetics sampling products from its Chattanooga, Tennessee facilities, and distributes its products in Europe through its French subsidiary, Arcade Europe S.A.R.L. On June 9, 1995, Arcade acquired all of the issued and outstanding stock of Scent Seal Inc. ("Scent Seal") (see Note 8). The acquisition of Scent Seal did not have a material impact on the financial position or results of operations of the Predecessor. These acquisitions were accounted for as purchase transactions whereby the purchase cost was allocated to the fair value of the net assets acquired. As more fully described in Note 15, DLJ Merchant Banking Partners II, L.P. and certain related investors (collectively, "DLJMBII") and certain members of the Predecessor organized AHC I Acquisition Corp. ("Acquisition Corp.") and AHC I Merger Corp. ("Merger Corp.") for purposes of acquiring the Predecessor. Merger Corp. was a wholly-owned subsidiary of Acquisition Corp. and was initially capitalized by Acquisition Corp. with an equity contribution of $78,363 ($76,000 of cash and $2,363 of non-cash consideration in the form of a preferred stock option in Acquisition Corp.) Immediately following this equity contribution, Merger Corp. issued $123,500 of senior increasing rate notes to an entity that has a partial ownership interest in Acquisition Corp. On December 15, 1997, Merger Corp. acquired all of the equity interests of the Predecessor (the "Acquisition") for a total cost of $197,730, which consisted of $138,634 cash paid for equity interests and related expenses, $2,363 in non-cash consideration and the assumption of $56,733 in debt, preferred stock and related interest and dividends, including capital lease obligations. Merger Corp. then merged with and into the Predecessor and the combined entity assumed the name AKI, Inc. ("AKI," the "Successor" or the "Company"). The Acquisition was accounted for using the purchase method of accounting. Subsequent to the Acquisition, Acquisition Corp. contributed all of its ownership interest in AKI to AKI Holding Corp. ("Holding"). Unless otherwise indicated, all references to years refer to the Predecessor's fiscal year, June 30. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Interim Financial Information The consolidated balance sheet at March 31, 1998 and the consolidated statements of operations, of changes in stockholder(s) equity and of cash flows for the nine month period ended March 31, 1997, the period from July 1, 1997 through December 15, 1997 and the period from December 16, 1997 through March 31, 1998 are unaudited, and certain information and footnote disclosure related thereto, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted. In the opinion of management, the unaudited interim consolidated financials were prepared following the same policies and procedures used in the preparation of the audited financial statements and all adjustments, consisting only of normal recurring adjustments necessary to fairly present the financial position, results of operations and cash flows with respect to the interim consolidated financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. The accompanying unaudited interim consolidated financial statements as of March 31, 1998 and for the period from December 16, 1997 through March 31, 1998, present the financial position and results of operations of the Company on the basis of accounting described in Note 15 and, accordingly, are not comparable with the audited Predecessor consolidated financial statements as of June 30, 1996 and 1997 and for each of the three years in the period ended June 30, 1997, nor with the unaudited Predecessor interim consolidated financial statements for the nine months ended March 31, 1997 and the period from July 1, 1997 to December 15, 1997. F-7 AKI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Principles of Consolidation The accompanying consolidated financial statements include the accounts of Predecessor and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated. Reclassification Certain prior year amounts have been reclassified to conform with the current year presentation. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, Predecessor considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Concentration of Credit Risk Predecessor maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Predecessor has not experienced any losses in such accounts; in addition, Predecessor believes it is not exposed to any significant credit risk on cash and cash equivalents. Predecessor grants credit terms in the normal course of business to its customers and as part of its ongoing procedures, Predecessor monitors the credit worthiness of its customers. Predecessor does not believe that it is subject to any unusual credit risk beyond the normal credit risk attendant in its business. Approximately $9,354, $17,690 and $13,104 of net sales were from sales to customers outside of the United States for the years ended June 30, 1995, 1996 and 1997, respectively. A single customer accounted for approximately 20.4% and 12.9% of Predecessor's net sales in 1995 and 1996, respectively. In 1997, two customers accounted for 12.1% and 11.4% of Predecessor's net sales, respectively. Concentration of Purchasing Products accounting for a majority of Predecessor's net sales utilize specific grades of paper that are produced exclusively for Predecessor by one international supplier. Predecessor does not have an agreement with this supplier. Revenue Recognition and Accounts Receivable Product sales are recognized upon shipment, net of estimated discounts. Accounts receivable are accounted for net of allowances for doubtful accounts. Inventory Paper inventory is stated at the lower of cost or market using the last-in, first-out (LIFO) method; all other inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. Property, Plant and Equipment Property, plant and equipment are stated at cost. Expenditures that extend the economic lives or improve the efficiency of equipment are capitalized. The costs of maintenance and repairs are expensed as incurred. Upon retirement or disposal, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is recorded. F-8 AKI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Depreciation is computed using the straight-line method based on the estimated useful lives of the assets as indicated in Note 5 for financial reporting purposes and accelerated methods for tax purposes. Goodwill The aggregate purchase price of business acquisitions was allocated to the assets and liabilities of the acquired companies based on their respective fair values as of the acquisition date. Goodwill represents the excess purchase price paid over the fair value of net identifiable assets acquired and is amortized over forty years using the straight-line method. Accumulated amortization was $1,872, $3,086 and $4,300 at June 30, 1995, 1996 and 1997, respectively. Predecessor periodically reviews the value of its goodwill to determine if an impairment has occurred. Predecessor measures the potential impairment of recorded goodwill by the undiscounted value of expected future operating cash flows in relation to its net capital investment. Based on its review, Predecessor does not believe that an impairment of its goodwill has occurred. Fair Value of Financial Instruments SFAS No. 107, "Disclosures About Fair Values of Financial Instruments," requires the disclosure of the fair value of financial instruments, for assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value. The carrying value of Predecessor's financial instruments approximates fair value. Foreign Currency Transactions Gains and losses on foreign currency transactions with third parties have been included in the determination of net income in accordance with SFAS No. 52, "Foreign Currency Translation." Foreign currency losses and (gains) amounted to $7, $(99) and $387 for the years ended June 30, 1995, 1996 and 1997, respectively. Research and Development Expenses Research and development expenditures are charged to selling, general and administrative expenses in the period incurred. Research and development expenses totaled $500, $1,012 and $1,263 for the years ended June 30, 1995, 1996 and 1997, respectively. Debt Issuance Costs Debt issuance costs are being amortized using the effective interest method over the terms of the related debt. Such costs are included in the accompanying consolidated balance sheets, net of accumulated amortization. Income Taxes Income taxes are provided in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Accordingly, deferred tax assets and liabilities are recognized at the applicable income tax rates based upon future tax consequences of temporary differences between the tax basis and financial reporting basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. F-9 AKI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. ACCOUNTS RECEIVABLE The following table details the components of accounts receivable:
JUNE 30, ----------------------- 1996 1997 ---------- ---------- Trade accounts receivable .................................... $12,707 $10,362 Allowance for doubtful accounts .............................. (467) (319) ------- ------- 12,240 10,043 Employee and other related party accounts receivable ......... 218 121 Other accounts receivable .................................... 288 36 ------- ------- $12,746 $10,200 ======= =======
4. INVENTORY The following table details the components of inventory:
JUNE 30, -------------------- 1996 1997 -------- --------- Raw materials Paper ....................... $ 653 $ 915 Other raw materials ......... 499 956 ------ ------ Net raw materials ........... 1,152 1,871 Work in process ............... 1,084 915 ------ ------ Net inventory ................. $2,236 $2,786 ====== ======
Inventory would have been greater by $117 and $45 at June 30, 1996 and 1997, respectively, had it been stated using the FIFO method. 5. PROPERTY, PLANT AND EQUIPMENT The following table details the components of property, plant and equipment as well as their estimated useful lives:
JUNE 30, -------------------------- ESTIMATED USEFUL LIVES 1996 1997 ---------------- ----------- ------------ Land .............................. -- $ 243 $ 243 Building and improvements ......... 15 -- 30 years 2,552 2,741 Machinery and equipment ........... 5 -- 7 years 21,573 23,250 Furniture and fixtures ............ 3 -- 5 years 1,760 2,359 Construction in progress .......... 543 424 -------- --------- 26,671 29,017 (7,046) (10,861) -------- --------- $ 19,625 $ 18,156 ======== =========
F-10 AKI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION) 5. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Depreciation expense amounted to $2,496, $3,188 and $3,850 for the years ended June 30, 1995, 1996 and 1997, respectively. Property held under capital leases was included in the respective property, plant and equipment account on the balance sheet as follows:
JUNE 30, --------------------- 1996 1997 --------- --------- Machinery and equipment ............... $5,353 $3,555 Less accumulated depreciation ......... (382) (762) ------ ------ $4,971 $2,793 ====== ======
Depreciation of capital leases totaled $156, $421 and $633 for the years ended June 30, 1995, 1996 and 1997, respectively. Future minimum lease payments under the remaining lease are as follows:
PAYMENT INTEREST --------- --------- 1998 .......... $ 774 $217 1999 .......... 774 165 2000 .......... 774 107 2001 .......... 839 17 ------ ---- $3,161 $506 ====== ====
6. LINE OF CREDIT Predecessor entered into a $15,000 revolving loan commitment ("Credit Agreement") with an institutional lender in 1996. This facility would have expired in November 1998. Borrowings were limited to a borrowing base consisting of accounts receivable, inventory and property, plant and equipment. Interest on amounts borrowed accrued at either prime plus 1% or LIBOR plus 2.75% (9.25% and 9.50% at June 30, 1996 and 1997, respectively). Predecessor paid an annual commitment fee on its unused lines of credit amounting to 0.5% of the unused amount and a facility fee of $38 per annum. The Credit Agreement contained certain financial covenants and other restrictions including restrictions on additional indebtedness and investments. Predecessor was not in compliance with all such covenants at June 30, 1997. Therefore, all amounts outstanding under the Credit Agreement at June 30, 1997 were classified as short-term liabilities. However, all amounts outstanding under the Credit Agreement were subsequently repaid upon the acquisition of Predecessor as discussed in Note 15 and an amended credit agreement entered into. 7. LOANS PAYABLE TO STOCKHOLDER Loans payable to stockholder consists of the following:
JUNE 30, ------------------------- 1996 1997 ---------- ------------ Senior Loan ............................. $ 14,910 $ 7,906 Senior Subordinated Loans ............... 30,594 30,594 Less unamortized debt discounts ......... (968) (608) -------- --------- 44,536 37,892 Less current portion .................... (7,004) (37,892) -------- --------- $ 37,532 $ -- ======== =========
F-11 AKI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION) 7. LOANS PAYABLE TO STOCKHOLDER (CONTINUED) Predecessor entered into a Senior Loan Agreement and two Subordinated Loan Agreements (collectively, the "Loan Agreements") with a party that owned Predecessor's preferred stock and a significant portion of its common stock. The Loan Agreements were collateralized by substantially all the assets of Predecessor. The Loan Agreements limited the Predecessor's ability to incur additional indebtedness, pay dividends and purchase fixed assets. Additionally, the Loan Agreements required that certain financial covenants be maintained. Predecessor was not in compliance with all such covenants at June 30, 1997. Therefore, all amounts outstanding under the Loan Agreements at June 30, 1997 were classified as short-term liabilities. However, this debt was subsequently retired upon the acquisition of Predecessor as discussed in Note 15. Amounts borrowed under the Senior Loan Agreement were repayable in varying quarterly amounts through December 1998. All amounts borrowed under the Senior Loan Agreement bore interest at prime plus 1.50% (9.75% and 10% at June 30, 1996 and 1997, respectively) which was payable monthly. Predecessor borrowed $30,000 under the Subordinated Loan Agreements, of which $23,000 was designated as Loan I and $7,000 was designated as Loan II. Loan I bore interest, payable quarterly, at 12% until November 4, 1998, and then would have converted to prime plus 4%. Loan II bore interest, payable quarterly, at 7%. The outstanding amount of the subordinated loans was net of unamortized debt discounts, which were being amortized over the term of the related loan. The loans were repayable in varying quarterly installments from March 1999 until December 2001. In connection with Loan II, Predecessor issued a warrant to purchase 19,233 shares of common stock at $0.05 per share. The warrant was exercisable until November 4, 2003. Predecessor valued the warrants at $100 each based on the fair market value of a share of the underlying common stock resulting from a sale with a third party. In connection with the warrant issued, Predecessor recorded debt discount of $1,923. In connection with the sale of Predecessor on December 15, 1997 (Note 15), all outstanding warrants were purchased from the holder by the buyer of Predecessor and retired. Maturities of loans payable to stockholder at June 30, 1997, were as follows: 1998 .................................... $ 7,404 1999 .................................... 5,502 2000 .................................... 10,000 2001 .................................... 10,000 2002 .................................... 5,594 ------- 38,500 Less unamortized debt discounts ......... (608) ------- $37,892 =======
8. OTHER NOTES PAYABLE In connection with the acquisition of Scent Seal, Predecessor issued $3,627 in noninterest bearing promissory notes ("Notes") to an employee of Predecessor who was previously a Scent Seal stockholder. The remaining notes are due in quarterly installments of $25 through June 1998 with a balloon payment of $1,450 due in July 1998. Predecessor recorded a debt discount of $649 in connection with the issuance of the Notes to reflect an effective interest rate of 10%. The discount is being amortized over the term of the Notes. F-12 AKI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION) 8. OTHER NOTES PAYABLE (CONTINUED) Maturities of other notes payable at June 30, 1997, were as follows: 1998 ................................... $ 100 1999 ................................... 1,450 ------ 1,550 Less unamortized debt discount ......... (149) ------ $1,401 ======
9. REDEEMABLE PREFERRED STOCK In connection with the 1993 acquisition of Arcade, Predecessor authorized and issued 8,000 shares of 7% cumulative, $1 par value preferred stock at $1,000 per share. The preferred stock prohibited the Predecessor from acquiring its common stock as long as the preferred stock was outstanding and restricted the payment of common stock dividends. Accrued and unpaid dividends of $678 accrued through December 31, 1994, were added to the outstanding balance. The preferred stock would have been redeemable on December 31, 2001, at liquidation value of $1,000 per share plus accrued and unpaid dividends. In connection with the sale of Predecessor on December 15, 1997 (Note 15), all outstanding preferred stock was redeemed at $1,000 per share plus accrued and unpaid dividends. 10. COMMITMENTS AND CONTINGENCIES Operating Leases Predecessor leases equipment and office space under operating leases expiring at various dates. Rent expense was approximately $72, $355 and $443 for the years ended June 30, 1995, 1996 and 1997, respectively. Future minimum lease payments under these leases are as follows: 1998 ................ $249 1999 ................ 235 2000 ................ 153 2001 ................ 129 ---- $766 ====
Royalty Agreements Predecessor maintains licensing agreements for certain technologies used in the manufacture of certain Predecessor products. Under the terms of one licensing agreement, Predecessor is required to submit royalty payments based on a percentage of net sales of those products manufactured with the specific technology, or a minimum of $800 per year. This agreement expires in 2003 or when a total of $12,500 in cumulative royalty payments has been paid. Under the terms of another licensing agreement, Predecessor is required to submit royalty payments based on the number of products sold that were manufactured with the specific licensed technology, or a minimum of $475 per year. This agreement expires in 2012, coinciding with the expiration of the underlying patent. F-13 AKI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) Litigation Predecessor is a party to litigation arising in the ordinary course of business which, in the opinion of management, will not have a material adverse effect on Predecessor's financial condition, results of operations or cash flows. Year 2000/European Monetary Unit Predecessor has not implemented a strategy to be fully compliant with the year 2000 and European monetary unit issues related to its computer systems. Management does not believe that the costs related to implementing such a strategy will have a material impact on the operations or financial statements of Predecessor. 11. RETIREMENT PLANS Predecessor has a 401(k) defined contribution plan (the "Plan") covering substantially all full-time salaried employees. Applicable employees who have six months of service and have attained age 21 are eligible to participate in the Plan. Employees may elect to contribute a percentage of their earnings to the Plan in accordance with limits prescribed by law. Predecessor's contributions to the Plan are determined annually by the Board of Directors and generally are a matching percentage of employee contributions. Predecessor's contributions to this Plan were $132, $136 and $159 for the years ended June 30, 1995, 1996 and 1997, respectively. Certain Predecessor hourly employees are covered under a multiemployer defined benefit plan administered under a collective bargaining agreement. Predecessor's cost (determined by union contract) under this Plan was $93, $127 and $143 for the years ended June 30, 1995, 1996 and 1997, respectively. 12. INCOME TAXES Significant components of the provision (benefit) for income taxes are as follows:
JUNE 30, --------------------------------- 1995 1996 1997 --------- --------- --------- Current expense: Federal ............ $1,340 $2,225 $2,880 State .............. 199 359 552 ------ ------ ------ 1,539 2,584 3,432 ------ ------ ------ Deferred benefit: Federal ............ 1,389 (418) (255) State .............. 186 (65) (42) ------ ------ ------ 1,575 (483) (297) ------ ------ ------ $3,114 $2,101 $3,135 ====== ====== ======
F-14 AKI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION) 12. INCOME TAXES (CONTINUED) The significant components of Predecessor's deferred tax asset and deferred tax liability at June 30, 1996 and 1997, were as follows:
JUNE 30, -------------------------------------------- 1996 1997 ---------------------- --------------------- CURRENT NONCURRENT CURRENT NONCURRENT --------- ------------ --------- ----------- Deferred income tax asset: Accrued expenses ............... $317 $ -- $300 $ -- Allowance for doubtful accounts 182 -- 124 -- ---- ------ ---- ------ 499 -- 424 -- ---- ------ ---- ------ Deferred income tax liability: Property, plant and equipment .. -- 3,321 -- 2,949 ---- ------ ---- ------ $499 $3,321 $424 $2,949 ==== ====== ==== ======
The income tax provision recognized by Predecessor for the years ended June 30, 1995, 1996 and 1997, differs from the amount determined by applying the applicable U.S. statutory federal income tax rate to Predecessor's pretax income as a result of the following:
JUNE 30, --------------------------------- 1995 1996 1997 --------- --------- --------- Computed tax provision at the statutory rate .............. $2,464 $1,455 $2,420 State income tax provision, net of Federal effect ......... 255 194 335 Nondeductible expenses .................................... 391 427 455 Other, net ................................................ 4 25 (75) ------ ------ ------ $3,114 $2,101 $3,135 ====== ====== ======
13. STOCK OPTION AGREEMENT Predecessor sponsored a key employee stock option plan under which a maximum of 12,571 shares of Predecessor's common stock could be reserved for nonqualified options; all stock options were granted with an exercise price equal to the fair market value of $100 per share. All options vested ratably over five years and would have expired ten years from the grant date. Predecessor accounted for its employee stock options under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). Under APB 25, because the exercise price of Predecessor's employee stock options equaled the market value of the underlying stock on the date of grant, no compensation expense was recognized. F-15 AKI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION) 13. STOCK OPTION AGREEMENT (CONTINUED) A summary of Predecessor's stock option activity and related information follows:
JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1997 ------------------------- ----------------------- ---------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ----------- ----------- --------- ----------- --------- ---------- Outstanding, beginning of year ......... 8,380 $100 12,571 $100 12,571 $100 Granted ............................... 8,381 100 -- -- -- -- Exercised ............................. -- -- -- -- -- -- Forfeited ............................. (4,190) 100 -- -- -- -- ------ ---- ------ ---- ------ ---- Outstanding, end of year ............... 12,571 $100 12,571 $100 12,571 $100 ====== ====== ====== Exercisable at end of year ............. 838 $100 3,352 $100 5,866 $100 ====== ====== ====== Weighted average remaining contractual life ...................... 9.3 years 8.3 years 7.3 years
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), requires disclosure of pro forma information regarding net income for option grants subsequent to December 15, 1995. Because all of the Predecessor's options were granted prior to that date, no pro forma adjustments to net income or disclosure of information would apply under SFAS 123. As a result of the sale of Predecessor on December 15, 1997 (Note 15), all outstanding options became immediately vested and exercisable under the individual stock option agreements. In connection with the sale, the buyer of Predecessor purchased and retired 11,201 of the outstanding options. The remaining 1,370 options were exchanged at their fair value for an option to purchase Acquisition Corp.'s preferred stock. 14. RELATED PARTY TRANSACTIONS The Predecessor made payments to a company controlled by a stockholder of the Predecessor, of $451, $692 and $612 for the years ended June 30, 1995, 1996 and 1997, respectively, for management fees, bonuses and expense reimbursements. The Predecessor also made payments to another stockholder totaling $120 for each of the years ended June 30, 1995, 1996 and 1997 for management fees. 15. SUBSEQUENT EVENT DLJMBII and certain members of the Predecessor organized Acquisition Corp. and Merger Corp. for purposes of acquiring the Predecessor. Merger Corp. was a wholly-owned subsidiary of Acquisition Corp. and was initially capitalized by Acquisition Corp. with an equity contribution of $78,363 ($76,000 of cash and $2,363 of non-cash consideration in the form of a preferred stock option in Acquisition Corp.). Immediately following this equity contribution, Merger Corp. issued $123,500 of senior increasing rate notes to an entity that has a partial ownership interest in Acquisition Corp. The senior increasing rate notes mature on December 15, 1998 and can be repaid without penalty at any time prior to maturity. The senior increasing rate notes bear interest equal to the greater of (i) a rate of 10.0% per annum and (ii) a daily floating rate of prime plus 2.25% plus an additional percentage amount equal to (a) 1.0% from and including the interest payment date on June 15, 1998 or (b) 1.5% from and including the interest payment date on September 15, 1998. Merger Corp. received cash proceeds from the issuance of the senior increasing rate notes of $119,735, net of $3,765 of associated debt issuance costs. F-16 AKI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION) 15. SUBSEQUENT EVENT (CONTINUED) On December 15, 1997, Merger Corp. acquired all of the equity interests of the Predecessor (the "Acquisition") for a total cost of $197,730, which consisted of $138,634 cash paid for equity interests and related expenses, $2,363 in non-cash consideration and the assumption of $56,733 in debt, preferred stock and related interest and dividends, including capital lease obligations. Merger Corp. then merged with and into the Predecessor and the combined entity assumed the name AKI. Subsequent to the Acquisition, Acquisition Corp. contributed all of its ownership interest in AKI to Holding. The Acquisition was accounted for using the purchase method of accounting. In accordance with the consensus reached by the Emerging Issues Task Force of the Financial Accounting Standards Board in Issue 88-16, "Basis in Leveraged Buyout Transactions," the purchase price allocation required an adjustment for the continuing interest attributable to management's ownership interest in Predecessor carried over in connection with the Acquisition. As a result, a reduction in stockholder's equity of $15,730 was recorded which represents the difference between the fair value of the Company's assets and the related book value attributable to the interest of the continuing shareholders' investment in Predecessor. The remaining purchase price has been allocated to assets and liabilities based upon estimates of their respective fair value as determined by management and a third-party appraisal with respect to property, plant and equipment. In connection with the Acquisition, the Company repaid the outstanding balance and related interest of Predecessor's loans payable to a shareholder of $37,374, the outstanding balance and related interest on the Predecessor's line of credit of $6,728 and redeemed all outstanding preferred stock and related dividends for $8,806. The following shows the acquisition costs and the preliminary allocation of the purchase price: Acquisition costs Cash paid for stock ................................................. $ 134,403 Direct acquisition costs ............................................ 4,231 --------- 138,634 Non-cash consideration for stock .................................... 2,363 --------- Total ............................................................... 140,997 Less--Carryover basis adjustment .................................... (15,730) --------- Purchase price to be allocated ...................................... $ 125,267 ========= Summary allocation of purchase price Cash ................................................................ $ 4,481 Other current assets ................................................ 18,936 Fixed assets ........................................................ 20,132 Deferred income taxes ............................................... 1,799 Other assets ........................................................ 329 Goodwill ............................................................ 153,929 --------- Total allocation to assets .......................................... $ 199,606 ========= Current liabilities ................................................. $ 13,190 Long-term debt (including current portion) and related interest ..... 47,927 Deferred income taxes ............................................... 4,416 Preferred stock and related dividends ............................... 8,806 --------- Total liabilities assumed ........................................... $ 74,339 =========
Final allocations of certain liabilities may be different from amounts reflected; however, it is not anticipated that any significant changes will be made to the preliminary allocations. F-17 =============================================================================== NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS EXCHANGE OFFER OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. -------------------------- TABLE OF CONTENTS
PAGE ----------- Available Information ........................ iii Prospectus Summary ........................... 1 Risk Factors ................................. 14 Use of Proceeds .............................. 19 The Exchange Offer ........................... 20 Capitalization ............................... 27 Selected Historical Consolidated Financial Data ...................................... 28 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................ 30 Business ..................................... 35 The Transactions ............................. 45 Management ................................... 46 Security Ownership of Certain Beneficial Owners and Management ..................... 49 Certain Relationships and Related Transactions .............................. 50 Description of Certain Indebtedness .......... 52 Description of New Notes ..................... 53 Certain U.S. Federal Income Tax Consequences .............................. 78 Plan of Distribution ......................... 79 Notice to Holders ............................ 80 Legal Matters ................................ 81 Experts ...................................... 81 Index to Unaudited Pro Forma Condensed Consolidated Financial Data ...................................... P-1 Index to Consolidated Financial Statements ................................ F-1
=============================================================================== OFFER TO EXCHANGE 10 1/2% NEW SENIOR NOTES DUE 2008 FOR UP TO $115,000,000 IN PRINCIPAL AMOUNT OUTSTANDING 10 1/2% SENIOR NOTES DUE 2008 AKI, INC. -------------------------------------------- PROSPECTUS -------------------------------------------- , 1998 =============================================================================== INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THE SECURITIES HAS BEEN FILED WITH THE SECURITIES A-1 AND EXCHANGE COMMISSION. THE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO ANY REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE. [ALTERNATE COVER FOR MARKET-MAKING PROSPECTUS] PROSPECTUS AKI, INC. 10 1/2% NEW SENIOR NOTES DUE 2008 ---------------- The 10 1/2% New Senior Notes due 2008 (the "New Notes") were issued in exchange for the 10 1/2% Senior Notes due 2008 (the "Old Notes") by AKI, Inc., a Delaware corporation (the "Company"). The New Notes are obligations of the Company. The New Notes will mature on July 1, 2008. The New Notes bear interest from June 25, 1997, the date of issuance of the Old Notes tendered in exchange for the New Notes. Interest on the New Notes will be payable semi-annually on January 1 and July 1 of each year, commencing on January 1, 1999, at a rate of 10 1/2% per annum. The New Notes are redeemable at the option of the Company, in whole or in part, at anytime on or after July 1, 2003, in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages (as defined herein), if any, thereon to the date of redemption. In addition, at any time prior to July 1, 2001, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of New Notes originally issued at a redemption price equal to 110.5% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings (as defined herein); provided that at least 65% of the aggregate principal amount of New Notes originally issued remains outstanding immediately after the occurrence of any such redemption. See "Description of New Notes--Optional Redemption." In addition, upon the occurrence of a Change of Control (as defined herein), each holder of Notes will have the right to require the Company to repurchase all or any part of such holder's Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. See "Description of New Notes--Repurchase at the Option of Holders--Change of Control." There can be no assurance that, in the event of a Change of Control, the Company would have sufficient funds to purchase all Notes tendered. See "Risk Factors--Limitations on Ability to Make Change of Control Payment." The New Notes are general unsecured obligations of the Company, and rank pari passu in right of payment to all existing and future senior unsecured indebtedness of the Company and rank senior in right of payment to all existing and future subordinated indebtedness of the Company. The New Notes, however, are effectively subordinated to all secured obligations of the Company, including borrowings under the Credit Agreement (as defined herein), to the extent of the assets securing such obligations. As of March 31,1998, on a pro forma basis, after giving effect to the Refinancing (as defined herein) and the consummation of the 3M Acquisition (as defined herein), the Company would have had no outstanding secured obligations (other than outstanding letters of credit in the amount of $0.6 million) under the Credit Agreement. In addition, as of such date and on such pro forma basis, borrowings of up to approximately $19.4 million were available under the Credit Agreement, subject to certain conditions. (Continued on next page) ---------------- SEE "RISK FACTORS" BEGINNING ON PAGE 14 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This Prospectus is to be used by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") in connection with the offers and sales in market-making transactions at negotiated prices related to prevailing market prices at the time of sale. The Company does not intend to list the New Notes on a national securities exchange or to apply for quotation of the New Notes through the National Association of Securities Dealers Automated Quotation System. DLJ has advised the Company that it intends to make a market in the New Notes. However DLJ is not obligated to do so and any market-making activities with respect to the New Notes may be discontinued at any time without notice. The Company will receive no portion of the proceeds of the sale of the New Notes and will bear expenses incident to the registration thereof. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION The date of this Prospectus is , 1998 A-1 [ALTERNATE SECTION FOR MARKET-MAKING PROSPECTUS] NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR DLJ. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE NEW NOTES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. The New Notes are general unsecured obligations of the Company, and rank pari passu in right of payment to all existing and future senior unsecured indebtedness of the Company and rank senior in right of payment to all existing and future subordinated indebtedness of the Company. The New Notes, however, are effectively subordinated to all secured obligations of the Company, including borrowings under the Credit Agreement (as defined herein), to the extent of the assets securing such obligations. As of March 31,1998, on a pro forma basis, after giving effect to the Refinancing (as defined herein) and the consummation of the 3M Acquisition (as defined herein), the Company would have had no outstanding secured obligations (other than outstanding letters of credit in the amount of $0.6 million) under the Credit Agreement. In addition, as of such date and on such pro forma basis, borrowings of up to approximately $19.4 million were available under the Credit Agreement, subject to certain conditions. A-2 [ALTERNATE SECTION FOR MARKET-MAKING PROSPECTUS] ---------------- AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-4 (the "Exchange Offer Registration Statement") under the Securities Act with respect to the New Notes being offered by this Prospectus. This Prospectus does not contain all of the information set forth in the Exchange Offer Registration Statement and the exhibits and schedules thereto, certain portions of which have been omitted pursuant to the rules and regulations of the Commission. Statements made in this Prospectus as to the contents of any contract, agreement or other document are not necessarily complete. With respect to each such contract, agreement or other document filed or incorporated by reference as an exhibit to the Exchange Offer Registration Statement, reference is made to such exhibit for a more complete description of the matter involved, and each such statement is qualified in its entirety by such reference. Upon the effectiveness of the Exchange Offer Registration Statement, the Company became subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith will file reports and other information with the Commission. The Exchange Offer Registration Statement and the exhibits and schedules thereto as well as any reports and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be available for inspection and copying at the regional offices of the Commission located at 7 World Trade Center, New York, New York 10048 and at 500 West Madison Street (Suite 1400), Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission maintains a web site (http://www.sec.gov) that contains reports, proxy statements and other information regarding registrants that file electronically with the Commission. Under the terms of the Indenture pursuant to which the New Notes were issued, the Company has agreed that, whether or not it is required to do so by the rules and regulations of the Commission, for so long as any of the Notes remain outstanding, it will furnish to the Trustee and Holders of the Notes and file with the Commission (unless the Commission will not accept such a filing) (i) all quarterly and annual financial information that would be required to be contained in such a filing with the Commission on Forms 10-Q and 10-K if the Company was required to file such forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent public accountants and (ii) all reports that would be required to be filed with the Commission on Form 8-K if the Company was required to file such reports. The Company has agreed to make such information available to the Trustee, securities analysts and prospective investors upon request. In addition, for so long as any of the Notes remain outstanding, the Company has agreed to make available to any prospective purchaser of the Notes or Holder of the Notes in connection with any sale thereof, the information required by Rule 144A(d)(4) under the Securities Act. A-3 [ALTERNATE SECTION FOR MARKET-MAKING PROSPECTUS] TRADING MARKET FOR THE NEW NOTES There is no existing trading market for the New Notes, and there can be no assurance regarding the future development of a market for the New Notes or the ability of the Holders of the New Notes to sell their New Notes or the price at which such Holders may be able to sell their New Notes. If such market were to develop, the New Notes could trade at prices that may be higher or lower than their initial offering price depending on many factors, including prevailing interest rates, the Company's operating results and the market for similar securities. Although it is not obligated to do so, DLJ intends to make a market in the New Notes. Any such market-making activity may be discontinued at any time, for any reason, without notice at the sole discretion of DLJ. No assurance can be given as to the liquidity of or the trading market for the New Notes. DLJ may be deemed to be an affiliate of the Company and, as such, may be required to deliver a prospectus in connection with its market-making activities in the New Notes. Pursuant to the Registration Rights Agreement, the Company agreed to use its respective best efforts to file and maintain a registration statement that would allow DLJ to engage in market-making transactions in the New Notes. The Company has agreed to bear substantially all the costs and expenses related to such registration statement. A-4 [ATLERNATE SECTION FOR MARKET-MAKING PROSPECTUS] USE OF PROCEEDS This Prospectus is delivered in connection with the sale of the New Notes by DLJ in market-making transactions. The Company will not receive any of the proceeds from such transactions. A-5 [ALTERNATE SECTION FOR MARKET-MAKING PROSPECTUS] PLAN OF DISTRIBUTION This Prospectus is to be used by DLJ (the "Initial Purchaser") in connection with offers and sales of the New Notes in market-making transactions effected from time to time. The Initial Purchaser may act as a principal or agent in such transactions, including as agent for the counterparty when acting as principal or as agent for both counterparties, and may receive compensation in the form of discounts and commissions, including from both counterparties when it acts as agent for both. Such sales will be made at prevailing market prices at the time of sale, at prices related thereto or at negotiated prices. DLJ has informed the Company that it does not intend to confirm sales of the New Notes to any accounts over which it exercises discretionary authority without the prior specific written approval of such transactions by the customer. DLJMBII, an affiliate of DLJ, and certain of its affiliates beneficially own approximately 81.3% of the outstanding Acquisition Corp. Common Stock. Messrs. Dean, Michael and Wittels, who are directors of the Company and officers and directors of Holding and Acquisition Corp., are officers of DLJ Merchant Banking. The Initial Purchaser is also an affiliate of DLJ Merchant Banking and DLJMBII and has acted as financial advisor to the Company in connection with the structuring of the Acquisition. For these financial advisory services, the Initial Purchaser received a customary fee and was reimbursed for its out-of-pocket expenses. In addition, pursuant to an agreement between the Initial Purchaser and Acquisition Corp., the Initial Purchaser will receive a customary annual fee for acting as the exclusive financial and investment banking advisor to the Company ending December 31, 2002. DLJ acted as a purchaser in connection with the initial sale of the Old Notes and received an underwriting discount of $3.45 million in connection therewith. See "Certain Relationships and Related Party Transactions." The Company has been advised by the Initial Purchaser that, subject to applicable laws and regulations, the Initial Purchaser currently intends to make a market in the New Notes following completion of the Exchange Offer. However, the Initial Purchaser is not obligated to do so and any such market-making may be interrupted or discontinued at any time without notice. In addition, such market-making activity will be subject to the limits imposed by the Securities Act and the Exchange Act. There can be no assurance that an active trading market will develop or be sustained. See "Risk Factors --Trading Market for the New Notes." The Initial Purchaser and the Company have entered into the Registration Rights Agreement with respect to the use by the Initial Purchaser of this Prospectus. Pursuant to such agreement, the Company agreed to bear all registration expenses incurred under such agreement, and the Company agreed to indemnify the Initial Purchaser in connection with its acting as Initial Purchaser and as financial advisor. A-6 [ALTERNATE SECTION FOR MARKET-MAKING PROSPECTUS] CERTAIN U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS The following is a general discussion of certain U.S. federal income and estate tax consequences of the acquisition, ownership and disposition of Notes by an initial beneficial owner of Notes that, for U.S. federal income tax purposes, is not a "U.S. person" (a "Non-U.S. Holder"). This discussion is based upon the U.S. federal tax law now in effect, which is subject to change, possibly retroactively. For purposes of this discussion, a "U.S. person" means a citizen or resident of the U.S., a corporation created or organized in the U.S. or under the laws of the U.S., or of any political subdivision thereof, a estate whose income ins includable in gross income for U.S. federal income tax purposes regardless of it source or a trust, if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust. For purposes of the withholding tax on interest, a non-resident alien or other non-resident fiduciary of an estate or trust will be considered to be a Non-U.S. Holder. The tax treatment of the holders of the Notes may vary depending upon their particular situations. U.S. persons acquiring the Notes are subject to different rules than those discussed below. This discussion does not address the U.S. federal income tax consequences to investors in pass-through entities hat hold a Note. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE U.S. FEDERAL TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF NOTES, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY FOREIGN, STATE, LOCAL OR OTHER TAXING JURISDICTION. For purposes of the discussion below, interest and gain on the sale, exchange or other disposition of Note will be considered to be "U.S. trade or business income" if such income or gain is (i) effectively connected with the conduct of a U.S. trade or business or (ii) in the case of a treaty resident, attributable to a permanent establishment (or, in the case of an individual, a fixed base) in the U.S. INTEREST Interest paid by the Company (including any Liquidated Damages or other amounts that are treated as additional interest) to a Non-U.S. Holder will not be subject to U.S. federal income or withholding tax if such interest is not U.S. trade or business income and is "portfolio interest." Interest will be portfolio interest if (i) the Non-U.S. Holder does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company and is not a controlled foreign corporation with respect to which the Company is a "related person" within the meaning of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), and (ii) the beneficial owner (a) certifies, under penalties of perjury, that such holder is not a U.S. person and provides such holder's name and address and 9b) is not a bank receiving interest on an extension of credit made pursuant to a loan agreement made in the ordinary course of its trade or business. The gross amount of payments of interest that do not qualify for the portfolio interest exception and that re not U.S. trade or business income will be subject to U.S. withholding tax at a rate of 30% unless a treaty applies to reduce or eliminate withholding. U.S. trade or business income will be taxes at regular graduated U.S. rates rather than the 30% gross rate. In the case of a Non-U.S. Holder that is a corporation, such U.S. trade or business income may also be subject to the branch profits tax (which is generally imposed on a foreign corporation on the actual or deemed repatriation form the United States of earnings and profits attributable to U.S. trade or business income) at a rate of 30%. The branch profits tax may not apply (or may apply at a reduced rate) if the recipient is a qualified resident of certain countries with which the United States has an income tax treaty. To claim exemption form withholding or to claim the benefits of a treaty, a Non-U.S. Holder must provide property executed Form 1001 or 4224 (or such successor from as the Internal Revenue Service 9the "IRS") designates), as applicable prior to the payment of interest. These forma must be periodically updated. Under new final regulations effective, subject to certain transition rules, for payments after December 31, 1999, the Forms 1001 and 4224 will be replaced by a Form W-8. Also under these regulations, a Non-U.S. Holder who is claiming the benefits of a treaty may be required in certain instances to obtain a U.S. taxpayer identification number and to A-7 provide certain documentary evidence issued by the appropriate foreign governmental authority to prove residence in the foreign country. Certain special procedures are provided in the final regulations for payments through qualified intermediaries. Prospective purchasers are urged to consult their tax advisors regarding the final regulations. GAIN ON DISPOSITION A Non-U.S. Holder will generally not be subject to U.S. federal income tax on gain recognized on a sale, redemption or other disposition of a Note unless (i) the gain is effectively connected with the conduct of a trade or business within the U.S. by the Non-U.S. Holder; (ii) in the case of a Non-U.S. Holder who is a nonresident alien individual and holds the Notes as a capital asset, such holder is present in the U.S. for 183 or more day sin the taxable year and certain other requirements are met; or (iii) the Non-U.S. Holder is subject to the special rules applicable to certain former citizens and residents of the U.S. FEDERAL ESTATE TAXES Notes held (or treated a held) by an individual who is not a citizen or resident of the United States (for federal estate tax purposes) at the time of his or her death will not be subject to the U.S. federal estate tax, provided that (i) the individual does not actually or constructively own 10% or more of the total voting power of all voting stock of the Company and (ii) income on the Notes was not U.S. trade or business income. INFORMATION REPORTING AND BACKUP WITHHOLDING The Company must report annually to the IRS and to each Non-U.S. Holder any interest paid to the Non-U.S. Holder. Copies of these information returns may also be made available under the provisions of a specific treaty or other agreement to the tax authorities of the country in which the Non-U.S. Holder resides. In the case of a payments of interest to Non-U.S. Holders, Treasury regulations provide that the 31% backup withholding tax and certain information reporting will not apply to such payments with respect to which either the requisite certification, as described above, has been received or an exemption has otherwise been established, provided that neither the Company nor its payment agent has actual knowledge that the holder is a U.S. person or that the conditions of any other exemption are not in fact satisfied. The payment of the proceeds from the disposition of Notes to or through the U.S. office of any broker, U.S. or foreign, will be subject to information reporting and possible backup withholding unless the owner certifies as its non-U.S. status under penalty of perjury or otherwise establishes an exemption, provided that the broker does not have actual knowledge that the Holder is a U.S. person or that the conditions of any other exemption are not, in fact, satisfied. The payment of the proceeds form the disposition of Notes to or through a non-U.S. office of a non-U.S. broker will not be subject to information reporting or backup withholding unless the non-U.S. broker has certain types of relationships with the U.S. In the case of the payment of proceeds form the disposition of Notes to or through a non-U.S. office of a broker that is either a U.S. person or a U.S. related person, the regulations r4equre information reporting (but not backup withholding) on the payment unless the broker has documentary evidence in its files that the owner is an Non-U.S. Holder and the broker has no knowledge to the contrary. The Treasury Department recently promulgated final regulations regarding the withholding and information reporting rules discussed above. In general, the final regulations do not significantly alter the substantive withholding and information reporting requirements but rather unify current certification procedures and forms and clarify reliance standards. The final regulations are generally effective for payments made after December 31, 1999, subject to certain transition rules. NON-U.S. HOLDER SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE IMPACT, IF ANY, OF THE NEW FINAL REGULATIONS. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or credited against the Non-U.S. Holder's U.S. federal income tax liability, provided that the required information is furnished to the IRS. A-8 [ALTERNATE COVER FOR MARKET-MAKING PROSPECTUS] =============================================================================== NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. -------------------------- TABLE OF CONTENTS
PAGE ----- Available Information ........................ Prospectus Summary ........................... Risk Factors ................................. Use of Proceeds .............................. Capitalization ............................... Selected Historical Consolidated Financial Data ...................................... Management's Discussion and Analysis of Financial Condition and Results of Operations ................................ Business ..................................... The Transactions ............................. Management ................................... Security Ownership of Certain Beneficial Owners and Management ..................... Certain Relationships and Related Transactions .............................. Description of Certain Indebtedness .......... Description of New Notes ..................... Certain U.S. Federal Income Tax Consequences .............................. Plan of Distribution ......................... Notice to Holders ............................ Legal Matters ................................ Experts ...................................... Index to Unaudited Pro Forma Condensed Consolidated Financial Data ...................................... P-1 Index to Consolidated Financial Statements ................................ F-1
=============================================================================== 10 1/2% NEW SENIOR NOTES DUE 2008 AKI, INC. -------------------------------------------- PROSPECTUS -------------------------------------------- , 1998 =============================================================================== A-9 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Pursuant to Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL"), Article Eighth of the Company's Certificate of Incorporation, (the "Certificate of Incorporation") (incorporated by reference as Exhibit 3.1 to this Registration Statement), eliminates the liability of the Company's directors to the Company or its stockholders, except for liabilities related to breach of duty of loyalty, actions not in good faith and certain other liabilities. Section 145 of the DGCL provides, in substance, that Delaware corporations shall have the power, under specified circumstances, to indemnify their directors, officers, employees and agents in connection with actions, suits or proceedings brought against them by a third party or in the right of the corporation, by reason of the fact that they were or are such directors, officers, employees or agents, against expenses incurred in any such action, suit or proceeding. The DGCL also provides that Delaware corporations may purchase insurance on behalf of any such director, officer, employee or agent. Article Eighth of the Certificate of Incorporation provides that the Company shall indemnify any director to the fullest extent permitted by the DGCL. The Company also maintains officers' and directors' liability insurance which insures against liabilities that officers and directors of the Company may incur in such capacities. Reference is made to Section 8 of the Registration Rights Agreement filed as Exhibit 4.3 to this Exchange Offer Registration Statement which provides for indemnification for the officers and directors of the Company and certain control persons of the Company against certain liabilities, including liabilities caused by any untrue statement of material fact or omission in any registration statement, draft prospectus, prospectus or any amendments thereto. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits 1.1. Purchase Agreement dated June 22, 1998 between DLJ and the Company. 3.1. Certificate of Incorporation of the Company.* 3.2. Bylaws of the Company. 4.1. Indenture dated as of June 25, 1998 between the Company and IBJ Schroder Bank & Trust Company, as Trustee. 4.2. Form of 10 1/2% Senior Notes due July 1, 2008.* 4.3. Registration Rights Agreement, dated as of June 25, 1998 between the Company and DLJ. 5.1. Legal opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. concerning the legality of the Notes. 8.1. Legal opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. concerning certain tax matters. 10.1. Acquisition Corp. Stock Option Plan. 10.2. Option Letter Agreement relating to the Time Vesting Options dated as of June 17, 1998 between Acquisition Corp. and Roger L. Barnett. 10.3. Option Letter Agreement relating to the Standard Options dated as of June 17, 1998 between Acquisition Corp. and Roger L. Barnett. II-1 10.4. Employment Agreement dated as of June 17, 1998 between the Company and Roger L. Barnett. 10.5. Employment Agreement dated as of May 12, 1998 between the Company and Barry W. Miller. 10.6. Stockholders Agreement dated as of December 15, 1997 between Acquisition Corp., DLJMBII and certain other investors including Roger L. Barnett. 10.7. Credit Agreement dated as of April 30, 1996, as amended on December 12, 1997, between the Company and Heller Financial, Inc. 10.8. Securities Purchase Agreement dated as of December 15, 1997 between the Company and the Bridge Lender.* 10.9. Asset Purchase Agreement dated as of June 22, 1998 between Arcade Marketing, Inc. and Minnesota, Mining and Manufacturing Company. 10.10. Acquisition Agreement dated as of December 15, 1997 between the Company and DLJMBII and certain related investors.* 10.11. Put Option Agreement dated as of December , 1997 between Roger L. Barnett, Acquisition Corp. and DLJMBII.* 10.12. Indenture dated as of June 25, 1998 between Holding and State Street Bank and Trust Company. 12.1 Computation of Earnings to Fixed Charges. 16.1 Letter from Coopers & Lybrand L.L.P. dated as of , 1998 regarding Change in Certifying Accountant.* 23.1. Consent of Price Waterhouse L.L.P. 23.2. Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in Exhibit 5.1).* 24.1. Powers of Attorney (included on signature page hereto). 25.1. Form T-1 Statement of Eligibility of Trustee and Qualification under the Trust Indenture Act of 1939 of IBJ Schroder Bank & Trust Company, as Trustee under the Indenture.* 99.1. Letter of Transmittal.* 99.2 Notice of Guaranteed Delivery.*
(b) Financial Statement Schedules Schedule II -- Allowance for Doubtful Accounts - ---------- * To be filed by amendment. II-2 ITEM 22. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the DGCL, the Certificate of Incorporation and Bylaws, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in such Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in such Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the Prospectus pursuant to items 4.10(b), 11 or 13 of this Form, within one business day receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. II-3 SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 7th day of August 1998. AKI, INC. By: /s/ Kenneth A. Budde ------------------------------------- Kenneth A. Budde Chief Financial Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Roger L. Barnett and David M. Wittels, and each of them his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as might or could be done in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or his substitute may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------------------------- ------------------------------------ --------------- /s/ Roger L. Barnett President, Chief Executive Officer August 7, 1998 - ------------------------- (principal executive officer) Roger L. Barnett and Director /s/ Thompson Dean Chairman of the Board and Director August 7, 1998 - ------------------------- Thompson Dean /s/ Barry W. Miller Chief Operating Officer August 7, 1998 - ------------------------- Barry W. Miller /s/Kenneth A. Budde Chief Financial Officer (principal August 7, 1998 - ------------------------- financial officer and principal Kenneth A. Budde accounting officer) /s/Hugh R. Kirkpatrick Director August 7, 1998 - ------------------------- Hugh R. Kirkpatrick Director August 7, 1998 - ------------------------- Mark Michaels /s/ David M. Wittels Director August 7, 1998 - ------------------------- David M. Wittels
II-4 SCHEDULE II AKI, INC. AND SUBSIDIARIES ALLOWANCE FOR DOUBTFUL ACCOUNTS (DOLLARS IN THOUSANDS)
BALANCE AT BALANCE AT YEAR BEGINNING END OF ENDED OF PERIOD ADDITIONS(1) DEDUCTIONS(2) PERIOD - -------- ------------ -------------- --------------- ----------- 1995 375 671 (667) 379 1996 379 337 (249) 467 1997 467 120 (268) 319
- ---------- (1) Additions represent amounts charged to expense during the respective periods. (2) Deductions represent net writeoffs and recoveries recorded by the Company during the respective periods. EX-1.1 2 PURCHASE AGREEMENT EXECUTION COPY AKI, INC. $115,000,000 10 1/2% SENIOR NOTES DUE 2008 PURCHASE AGREEMENT JUNE 22, 1998 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION $115,000,000 10 1/2% Senior Notes due 2008 AKI, INC. PURCHASE AGREEMENT June 22, 1998 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION 277 Park Avenue New York, New York 10172 Ladies and Gentlemen: AKI, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to Donaldson, Lufkin & Jenrette Securities Corporation (the "Initial Purchaser") an aggregate of $115,000,000 in principal amount of its 10 1/2% Senior Notes due 2008 (the "Series A Notes"), subject to the terms and conditions set forth herein. The Series A Notes are to be issued pursuant to the provisions of an indenture (the "Indenture"), to be dated as of the Closing Date (as defined below), between the Company and IBJ Schroder Bank & Trust Company, as trustee (the "Trustee"). The Series A Notes and the Series B Notes (as defined below) issuable in exchange therefor are collectively referred to herein as the "Notes". Capitalized terms used but not defined herein shall have the meanings given to such terms in the Indenture. The Company intends to use the gross proceeds from the sale to the Initial Purchaser of the Series A Notes to (i) repay the outstanding principal of and accrued interest on $123.5 million in Senior Increasing Rate Notes and (ii) fund working capital requirements and general corporate purposes, including funding the purchase price of the acquisition of the fragrance sampling business of the Consumer Products Division of Minnesota Mining and Manufacturing Company. 1. OFFERING MEMORANDUM. The Series A Notes will be offered and sold to the Initial Purchaser pursuant to one or more exemptions from the registration requirements under the Securities Act of 1933, as amended (the "Act"). The Company has prepared a preliminary offering memorandum, dated June 5, 1998 (the "Preliminary Offering 1 Memorandum"), and a final offering memorandum, dated June 22, 1998 (the "Offering Memorandum"), relating to the Series A Notes. Upon original issuance thereof, and until such time as the same is no longer required pursuant to the Indenture, the Series A Notes (and all securities issued in exchange therefor, in substitution thereof or upon conversion thereof) shall bear the following legend: "THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A OR REGULATION S THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (d) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) OF THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR") THAT, PRIOR TO SUCH TRANSFER, FURNISHES THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS (THE FORM OF WHICH CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF SECURITIES LESS THAN $250,000, AN OPINION OF COUNSEL THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT OR (e) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE." 2. AGREEMENTS TO SELL AND PURCHASE. On the basis of the representations, warranties and covenants contained in this Agreement, and subject to the terms and conditions contained herein, the Company agrees to issue and sell to the Initial Purchaser, and the Initial Purchaser agrees to purchase from the Company, an aggregate principal amount of $115.0 million of Series A Notes at a purchase price equal to 97.0% of the principal amount thereof (the "Purchase Price"). 3. TERMS OF OFFERING. The Initial Purchaser has advised the Company that the Initial Purchaser will make offers (the "Exempt Resales") of the Series A Notes purchased hereunder on the terms set forth in the Offering Memorandum, as amended or supplemented, solely to (i) persons whom the Initial Purchaser reasonably believes to be "qualified institutional buyers" as defined in Rule 144A under the Act ("QIBs") and (ii) to persons permitted to purchase the Series A Notes in offshore transactions in reliance upon Regulation S under the Act (each, a "Regulation S Purchaser") (such persons specified in clauses (i) and (ii) being referred to herein as the "Eligible Purchasers"). The Initial Purchaser will offer the Series A Notes to Eligible Purchasers initially at a price equal to 100% of the principal amount thereof. Such price may be changed at any time without notice. Holders (including subsequent transferees) of the Series A Notes will have the registration rights set forth in the registration rights agreement (the "Registration Rights Agreement"), to be executed on and dated the Closing Date, in substantially the form of Exhibit A hereto, for so long as such Series A Notes constitute "Transfer Restricted Securities" (as defined in the Registration Rights Agreement). Pursuant to the Registration Rights Agreement, the Company will agree to file with the Securities and Exchange Commission (the "Commission") under the circumstances set forth therein, (i) a registration statement under the Act (the "Exchange Offer Registration Statement") relating to the Company's new 10 1/2% Senior Notes due 2008 (the "Series B Notes"), identical in all material respects to the Series A Notes (except that the Series B Notes shall have been registered pursuant to such Exchange Offer Registration Statement), to be offered in exchange for the Series A Notes (such offer to exchange being referred to as the "Exchange Offer") and (ii) a shelf registration statement pursuant to Rule 415 under the Act (the "Shelf Registration Statement" and, together with the Exchange Offer Registration Statement, the "Registration Statements") relating to the resale by certain holders of the Series A Notes, and to use their reasonable best efforts to cause such Registration Statements to be declared and remain effective and usable for the periods specified in the Registration Rights Agreement and to consummate the Exchange Offer. This Agreement, the Indenture, the Series A Notes and the Registration Rights Agreement are hereinafter sometimes referred to collectively as the "Operative Documents." 4. DELIVERY AND PAYMENT. (a) Delivery of, and payment of the Purchase Price for, the Series A Notes shall be made at the offices of Latham & Watkins, 885 Third Avenue, Suite 1000, New York, New York 10022, or such other location as may be mutually acceptable. Such delivery and payment shall be made at 9:00 a.m. New York City time, on June 25, 1998 or at such other time on the same date or such other date as shall be agreed upon by the Initial Purchaser and the Company in writing. The time and date of such delivery and the payment for the Series A Notes are herein called the "Closing Date." (b) One or more of the Series A Notes in definitive global form, registered in the name of Cede & Co., as nominee of The Depository Trust Company ("DTC"), having an aggregate principal amount corresponding to the aggregate principal amount of the Series A Notes (collectively, the "Global Note"), shall be delivered by the Company to the Initial Purchaser (or as the Initial Purchaser directs) in each case with any transfer taxes thereon duly paid by the Company against payment by the Initial Purchaser of the Purchase Price thereof by wire transfer in same day funds to the order of the Company. The Global Note shall be made available to the Initial Purchaser for inspection not later than 9:30 a.m., New York City time, on the business day immediately preceding the Closing Date. 5. AGREEMENTS OF THE COMPANY. As of the date hereof, the Company hereby agrees with the Initial Purchaser as follows: (a) To advise the Initial Purchaser promptly (and, if requested by the Initial Purchaser, confirm such advice in writing) (i) of the issuance by any state securities commission of any stop order suspending the qualification or exemption from qualification of any Series A Notes for offering or sale in any jurisdiction designated by the Initial Purchaser pursuant to Section 5(e) hereof, or the initiation of any proceeding by any state securities commission or any other federal or state regulatory authority for such purpose and (ii) of the happening of any event during the period referred to in Section 5(c) below that makes any statement of a material fact made in the Offering Memorandum untrue or that requires any additions to or changes in the Offering Memorandum in order to make the statements therein not misleading. The Company shall use its reasonable best efforts to prevent the issuance of any stop order or order suspending the qualification or exemption of any Series A Notes under any state securities or Blue Sky laws and, if at any time any state securities commission or other federal or state regulatory authority shall issue an order suspending the qualification or exemption of any Series A Notes under any state securities or Blue Sky laws, the Company shall use its reasonable best efforts to obtain the withdrawal or lifting of such order at the earliest possible time; provided, however, that the Company shall not be required in connection therewith to qualify as a foreign entity in any jurisdiction in which it is not now so qualified or to take any action that would subject it to general consent to service of process or taxation, other than as to matters and transactions relating to the Preliminary Offering Memorandum, the Offering Memorandum or Exempt Resales, in any jurisdiction in which it is not now so subject. (b) To furnish the Initial Purchaser and those persons identified by the Initial Purchaser to the Company as many copies of the Preliminary Offering Memorandum and the Offering Memorandum, and any amendments or supplements thereto, as the Initial Purchaser may reasonably request for the time period specified in Section 5(c). Subject to the Initial Purchaser's compliance with its representations and warranties and agreements set forth in Section 7 hereof, the Company consents to the use of the Preliminary Offering Memorandum and the Offering Memorandum, and any amendments and supplements thereto required pursuant hereto, by the Initial Purchaser in connection with Exempt Resales. (c) During such period, as in the opinion of counsel for the Initial Purchaser, an Offering Memorandum is required by law to be delivered in connection with Exempt Resales by the Initial Purchaser and in connection with market-making activities of the Initial Purchaser for so long as any Series A Notes are outstanding, (i) not to make any amendment or supplement to the Offering Memorandum of which the Initial Purchaser shall not previously have been advised or to which the Initial Purchaser shall reasonably object in writing after being so advised and (ii) to prepare promptly upon the Initial Purchaser's reasonable request, any amendment or supplement to the Offering Memorandum that may be necessary or advisable in connection with such Exempt Resales or such market-making activities; provided, however, that the Company shall have the right to determine the form and substance of such amendment or supplement to the Offering Memorandum, in consultation with the Initial Purchaser. (d) If, during the period referred to in Section 5(c) above, any event shall occur or condition shall exist as a result of which, in the opinion of counsel to the Initial Purchaser, it becomes necessary to amend or supplement the Offering Memorandum in order to make the statements therein, in the light of the circumstances when such Offering Memorandum is delivered to an Eligible Purchaser, not misleading, or if, in the opinion of counsel to the Initial Purchaser, it is necessary to amend or supplement the Offering Memorandum to comply with any applicable law, forthwith to prepare an appropriate amendment or supplement to such Offering Memorandum so that the statements therein, as so amended or supplemented, will not, in the light of the circumstances existing when it is so delivered, be misleading, or so that such Offering Memorandum will comply with applicable law, and to furnish to the Initial Purchaser and such other persons as the Initial Purchaser may designate such number of copies thereof as the Initial Purchaser may reasonably request. (e) Prior to the sale of all Series A Notes pursuant to Exempt Resales as contemplated hereby, to cooperate with the Initial Purchaser and counsel to the Initial Purchaser in connection with the registration or qualification of the Series A Notes for offer and sale to the Initial Purchaser and pursuant to Exempt Resales under the securities or Blue Sky laws of such jurisdictions as the Initial Purchaser may reasonably request and to continue such registration or qualification in effect so long as required for Exempt Resales and to file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification; provided, however, that the Company shall not be required in connection therewith to register or qualify as a foreign corporation in any jurisdiction in which it is not now so qualified or to take any action that would subject it to general consent to service of process or taxation other than as to matters and transactions relating to the Preliminary Offering Memorandum, the Offering Memorandum or Exempt Resales, in any jurisdiction in which it is not now so subject. (f) So long as the Notes are outstanding and the Indenture so requires, (i) to mail and make generally available as soon as practicable after the end of each fiscal year to the record holders of the Notes a financial report of the Company and its subsidiaries on a consolidated basis, all such financial reports to include a consolidated balance sheet, a consolidated statement of operations, a consolidated statement of cash flows and a consolidated statement of shareholders' equity as of the end of and for such fiscal year, together with comparable information as of the end of and for the preceding year, certified by the Company's independent public accountants and (ii) to mail and make generally available as soon as practicable after the end of each quarterly period (except for the last quarterly period of each fiscal year) to such holders, a consolidated balance sheet, a consolidated statement of operations and a consolidated statement of cash flows (and similar financial reports of all unconsolidated subsidiaries, if any) as of the end of and for such period, and for the period from the beginning of such year to the close of such quarterly period, together with comparable information for the corresponding periods of the preceding year. (g) So long as the Notes are outstanding, to furnish to the Initial Purchaser as soon as available copies of all reports or other communications furnished by the Company to its security holders generally or furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed and such other publicly available information concerning the Company and/or its subsidiaries as the Initial Purchaser may reasonably request. (h) So long as any of the Series A Notes remain outstanding and during any period in which the Company is not subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to make available to any holder of Series A Notes in connection with any sale thereof and any prospective purchaser of such Series A Notes from such holder, the information ("Rule 144A Information") required by Rule 144A(d)(4) under the Act. (i) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of the obligations of the Company under this Agreement, including: (i) the fees, disbursements and expenses of counsel to the Company and accountants of the Company in connection with the sale and delivery of the Series A Notes to the Initial Purchaser and pursuant to Exempt Resales, and all other fees and expenses in connection with the preparation, printing, filing and distribution of the Preliminary Offering Memorandum, the Offering Memorandum and all amendments and supplements to any of the foregoing (including financial statements), including the mailing and delivering of copies thereof to the Initial Purchaser and persons designated by it in the quantities specified herein, (ii) all costs and expenses related to the transfer and delivery of the Series A Notes to the Initial Purchaser and pursuant to Exempt Resales, including any transfer or other taxes payable thereon, (iii) all costs of printing or producing this Agreement, the other Operative Documents and any other agreements or documents in connection with the offering, purchase, sale or delivery of the Series A Notes (other than the fees of counsel for the Initial Purchaser, except as provided by Section 5(i)(iv) below), (iv) all expenses in connection with the registration or qualification of the Series A Notes for offer and sale under the securities or Blue Sky laws of the several states and all costs of printing or producing any preliminary and supplemental Blue Sky memoranda in connection therewith (including the filing fees and the reasonable fees and disbursements of counsel for the Initial Purchaser in connection with such registration or qualification and memoranda relating thereto), (v) the cost of printing certificates representing the Notes, (vi) all expenses and listing fees in connection with the application for quotation of the Series A Notes in the National Association of Securities Dealers, Inc. ("NASD") Automated Quotation System - PORTAL ("PORTAL"), (vii) the fees and expenses of the Trustee in connection with the Indenture and the Notes, (viii) the costs and charges of any transfer agent, registrar and/or depositary (including DTC), (ix) any fees charged by rating agencies for the rating of the Notes, (x) all costs and expenses of the Exchange Offer and any Registration Statement, as set forth in the Registration Rights Agreement and (xi) and all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section (5)(i). (j) To use its reasonable best efforts to effect the inclusion of the Series A Notes in PORTAL and to maintain the listing of the Series A Notes on PORTAL for so long as the Series A Notes are outstanding. (k) To use its reasonable best efforts to obtain the approval of DTC for "book-entry" transfer of the Notes, and to comply with all of its agreements set forth in the representation letters of the Company to DTC relating to the approval of the Notes by DTC for "book-entry" transfer. (l) During the period beginning on the date hereof and continuing to and including the Closing Date, not to offer, sell, contract to sell or otherwise transfer or dispose of any debt securities of the Company or any warrants, rights or options to purchase or otherwise acquire debt securities of the Company substantially similar to the Notes (other than (i) the Notes and (ii) commercial paper issued in the ordinary course of business), without the prior written consent of the Initial Purchaser, which will not be unreasonably held. (m) Not to sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Act) that would be integrated with the sale of the Series A Notes to the Initial Purchaser or pursuant to Exempt Resales in a manner that would require the registration of any such sale of the Series A Notes under the Act. (n) Not to voluntarily claim, and to actively resist any attempts to claim, the benefit of any usury laws against the holders of any Notes. (o) To cause the Exchange Offer to be made in the appropriate form to permit Series B Notes registered pursuant to the Act to be offered in exchange for the Series A Notes and to comply with all applicable federal and state securities laws in connection with the Exchange Offer. (p) To comply with all of its agreements set forth in the Registration Rights Agreement. (q) To use its reasonable best efforts to do and perform all things required or necessary to be done and performed under this Agreement by it prior to the Closing Date and to satisfy or obtain the waiver of all conditions precedent to the delivery of the Series A Notes. (r) Not to use any form of general solicitation or general advertising (within the meaning of Regulation D under the Act) in connection with the offer and sale of the Series A Notes pursuant hereto, including, but not limited to, articles, notices or other communications published in any newspaper, magazine or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. 6. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. As of the date hereof, the Company represents and warrants to, and agrees with, the Initial Purchaser that: (a) The Preliminary Offering Memorandum and the Offering Memorandum do not, and any supplement or amendment to them will not, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties contained in this paragraph (a) shall not apply to statements in or omissions from the Preliminary Offering Memorandum or the Offering Memorandum (or any supplement or amendment thereto) based upon information relating to the Initial Purchaser furnished to the Company in writing by the Initial Purchaser expressly for use therein. No stop order preventing the use of the Preliminary Offering Memorandum or the Offering Memorandum, or any amendment or supplement thereto, or any order asserting that any of the transactions contemplated by this Agreement are subject to the registration requirements of the Act, has been issued. (b) Each of the Company and its subsidiaries has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as described in the Preliminary Offering Memorandum and the Offering Memorandum and to own, lease and operate its properties, and each is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole (a "Material Adverse Effect"). (c) All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights. (d) The entities listed on Schedule A hereto are the only subsidiaries, direct or indirect, of the Company. All of the outstanding shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable, and are owned by the Company, directly or indirectly through one or more subsidiaries, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature (each, a "Lien"). (e) This Agreement has been duly authorized, executed and delivered by the Company. (f) The Indenture has been duly authorized by the Company and, on the Closing Date, will have been validly executed and delivered by the Company. When the Indenture has been duly executed and delivered by the Company (and assuming the due authorization, execution and delivery thereof by the Trustee), the Indenture will be a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. On the Closing Date, the Indenture will conform in all material respects to the requirements of the Trust Indenture Act of 1939, as amended (the "TIA" or "Trust Indenture Act"), and the rules and regulations of the Commission applicable to an indenture which is qualified thereunder. (g) The Series A Notes have been duly authorized by the Company for issuance and sale to the Initial Purchaser pursuant to this Agreement and, on the Closing Date, will have been validly executed and delivered by the Company. When the Series A Notes have been issued, executed and authenticated in accordance with the provisions of the Indenture and delivered to and paid for by the Initial Purchaser in accordance with the terms of this Agreement, the Series A Notes will be entitled to the benefits of the Indenture and will be the valid and binding obligations of the Company, enforceable in accordance with their terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. On the Closing Date, the Series A Notes will conform in all material respects as to legal matters to the description thereof contained in the Offering Memorandum. (h) On the Closing Date, the Series B Notes will have been duly authorized by the Company. When the Series B Notes are issued, executed and authenticated in accordance with the terms of the Exchange Offer and the Indenture, the Series B Notes will be entitled to the benefits of the Indenture and will be the valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. (i) The Registration Rights Agreement has been duly authorized by the Company and, on the Closing Date, will have been duly executed and delivered by the Company. When the Registration Rights Agreement has been duly executed and delivered by the Company and the Initial Purchaser, the Registration Rights Agreement will be the valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as (i) the enforcement thereof may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. On the Closing Date, the Registration Rights Agreement will conform in all material respects as to legal matters to the description thereof contained in the Offering Memorandum. (j) Neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws or in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound, except as would not, singly or in the aggregate, result in a Material Adverse Effect. (k) The execution, delivery and performance of this Agreement and the other Operative Documents by the Company, compliance by the Company with all provisions hereof and thereof and the consummation of the transactions contemplated hereby and thereby will not (i) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except (i) in regards to the Registration Rights Agreement and the transactions contemplated thereby, and (ii) such as may be required under the securities or Blue Sky laws of the various states), (ii) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any of its subsidiaries or any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound, (iii) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over the Company, any of its subsidiaries or their respective property, (iv) result in the imposition or creation of (or the obligation to create or impose) a Lien under, any agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound, or (v) result in the termination, suspension or revocation of any Authorization (as defined below) of the Company or any of its subsidiaries or result in any other impairment of the rights of the holder of any such Authorization; except as would not, singly or in the aggregate, result in a Material Adverse Effect. (l) There are no legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is a party or to which any of their respective property is reasonably expected to be subject, which might, singly or in the aggregate, result in a Material Adverse Effect. (m) Neither the Company nor any of its subsidiaries has violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), any provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or any provisions of the Foreign Corrupt Practices Act or the rules and regulations promulgated thereunder, except for such violations which would not, singly or in the aggregate, result in a Material Adverse Effect. (n) Except as set forth in the Offering Memorandum, there are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any Authorization, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a Material Adverse Effect. (o) Each of the Company and its subsidiaries has such permits, licenses, consents, exemptions, franchises, authorizations and other approvals (each, an "Authorization") of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, including without limitation, under any applicable Environmental Laws, as are necessary to own, lease, license and operate its respective properties and to conduct its business, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a Material Adverse Effect. Each such Authorization is valid and in full force and effect and each of the Company and its respective subsidiaries is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Authorization; and such Authorizations contain no restrictions that are burdensome to the Company or any of its subsidiaries; except where such failure to be valid and in full force and effect or to be in compliance, the occurrence of any such event or the presence of any such restriction would not, singly or in the aggregate, result in a Material Adverse Effect. (p) The Company and its subsidiaries own or possess, or can acquire on reasonable terms, all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names ("intellectual property") currently employed by them in connection with the business now operated by them; except where the failure to own or possess or otherwise be able to acquire such intellectual property would not, singly or in the aggregate, have a Material Adverse Effect; and, to the best knowledge of the Company after due inquiry, neither the Company nor any of its subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect to any of such intellectual property which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (q) The Company and its subsidiaries maintain reasonably adequate insurance. (r) Since the respective dates as of which information is given in the Offering Memorandum, other than as set forth in the Offering Memorandum (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there has not occurred any material adverse change or any development involving a prospective material adverse change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company and its subsidiaries, taken as a whole, (ii) there has not been any material adverse change or any development involving a prospective material adverse change in the capital stock or in the long-term debt of the Company or any of its subsidiaries and (iii) neither the Company nor any of its subsidiaries have incurred any material liability or obligation, direct or contingent. (s) There is no (i) significant unfair labor practice complaint, grievance or arbitration proceeding pending or threatened against the Company or any of its subsidiaries before the National Labor Relations Board or any state or local labor relations board, and no significant grievance or more significant arbitration proceeding arising out of or under any collective bargaining agreement is pending against the Company or any of its subsidiaries or, to the best knowledge of the Company, threatened against them, (ii) strike, labor dispute, slowdown or stoppage pending or threatened against the Company or any of its subsidiaries or (iii) union representation question existing with respect to the employees of the Company or any of its subsidiaries; except for such actions which, singly or in the aggregate, would not result in a Material Adverse Effect. (t) All tax returns required to be filed by the Company and its subsidiaries in any jurisdiction have been filed, other than those filings being contested in good faith, and all taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due pursuant to such returns or pursuant to any assessment received by the Company or any of its subsidiaries have been paid, other than those being contested in good faith and for which adequate reserves have been provided, except for such tax returns the failure to file, and such taxes the failure to pay, as would not, singly or in the aggregate, result in a Material Adverse Effect. (u) The Company and each of its subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurance that: (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (v) All indebtedness of the Company that will be repaid with the proceeds of the issuance and sale of the Series A Notes was incurred, and the indebtedness represented by the Series A Notes is being incurred, for proper purposes and in good faith. At the time of the incurrence of such indebtedness that will be repaid with the proceeds of the issuance and sale of the Series A Notes, and on the Closing Date (after giving effect to the application of the proceeds from the issuance of the Series A Notes), (a) the fair value and present fair saleable value of the Company's assets exceeds and would exceed its stated liabilities and identified contingent liabilities, (b) the Company should be able to pay its debts as they become absolute and matured and (c) the capital of the Company is not and would not be unreasonably small for the business in which it is engaged. (w) The accountants, Price Waterhouse L.L.P., that have certified the financial statements included in the Preliminary Offering Memorandum and the Offering Memorandum are independent public accountants with respect to the Company, as required by the Act and the Exchange Act. (x) The historical financial statements, together with related notes forming part of the Offering Memorandum (and any amendment or supplement thereto), present fairly in all material respects the consolidated financial position, results of operations and changes in financial position of the Company and its subsidiaries on the basis stated in the Offering Memorandum at the respective dates or for the respective periods to which they apply. Such statements and related notes have been prepared in all material respects accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed in the Offering Memorandum. The other financial and statistical information and data set forth in the Offering Memorandum (and any amendment or supplement thereto) are, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. (y) The pro forma financial statements included in the Preliminary Offering Memorandum and the Offering Memorandum have been prepared on a basis consistent with the historical financial statements of the Company and its subsidiaries and give effect to assumptions used in the preparation thereof on a reasonable basis and in good faith and present fairly the historical and proposed transactions contemplated by the Preliminary Offering Memorandum and the Offering Memorandum The pro forma financial and statistical information and data included in the Offering Memorandum are, in all material respects, accurately presented and prepared on a basis consistent with the pro forma financial statements. (z) In the Company's opinion, the assumptions used in the preparation of the pro forma financial statements included in the Offering Memorandum are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (aa) The Company is not and, after giving effect to the offering and sale of the Series A Notes and the application of the net proceeds thereof as described in the Offering Memorandum will not be, an "investment company," as such term is defined in the Investment Company Act of 1940, as amended. (bb) Other than the Registration Rights Agreement, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company or to require the Company to include such securities with the Notes registered pursuant to any Registration Statement. (cc) Neither the Company nor any of its subsidiaries nor any agent thereof acting on the behalf of them has taken, and none of them will take, any action that might cause this Agreement or the issuance or sale of the Series A Notes to violate Regulation T (12 C.F.R. Part 220), Regulation U (12 C.F.R. Part 221) or Regulation X (12 C.F.R. Part 224) of the Board of Governors of the Federal Reserve System. (dd) Except as described in the Offering Memorandum, there are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or liens related to or entitling any person to purchase or otherwise to acquire any shares of the capital stock of, or other ownership interest in, the Company or any of its subsidiaries. (ee) Each of the Preliminary Offering Memorandum and the Offering Memorandum, as of its date, contains all the information specified in, and meeting the requirements of, Rule 144A(d)(4) under the Act. (ff) When the Series A Notes are issued and delivered pursuant to this Agreement, the Series A Notes will not be of the same class (within the meaning of Rule 144A under the Act) as any security of the Company that is listed on a national securities exchange registered under Section 6 of the Exchange Act or that is quoted in a United States automated inter-dealer quotation system. (gg) No form of general solicitation or general advertising (within the meaning of Regulation D under the Act) was used by the Company or any of its representatives (other than the Initial Purchaser, as to whom the Company makes no representation) in connection with the offer and sale of the Series A Notes contemplated hereby, including, but not limited to, articles, notices or other communications published in any newspaper, magazine, or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. No securities of the same class as the Series A Notes have been issued and sold by the Company within the six-month period immediately prior to the date hereof. (hh) Prior to the effectiveness of any Registration Statement, the Indenture is not required to be qualified under the TIA. (ii) None of the Company nor any of its affiliates or any person acting on its or their behalf (other than the Initial Purchaser, as to whom the Company makes no representation) has engaged or will engage in any "directed selling efforts" within the meaning of Regulation S under the Act ("Regulation S") with respect to the Series A Notes. (jj) The Company has not, and will not, offer or sell the Series A Notes as part of a plan or scheme to evade the registration provisions of the Act. (kk) The Company and its affiliates and all persons acting on their behalf (other than the Initial Purchaser, as to whom the Company makes no representation) have complied with and will comply with the offering restrictions requirements of Regulation S in connection with the offering of the Series A Notes outside the United States and, in connection therewith, the Offering Memorandum will contain the disclosure required by Rule 902(g)(2). (ll) The Series A Notes sold in reliance on Regulation S will be represented upon issuance by a temporary global security that may not be exchanged for definitive securities until the expiration of the "distribution compliance period" referred to in Rule 903(b)(2) of the Act and only upon certification of beneficial ownership of such Series A Notes by non-U.S. persons or U.S. persons who purchased such Series A Notes in transactions that were exempt from the registration requirements of the Act. (mm) No registration under the Act of the Series A Notes is required for the sale of the Series A Notes to the Initial Purchaser as contemplated hereby or for the Exempt Resales, assuming the accuracy of the Initial Purchaser's representations and warranties and agreements set forth in Section 7 hereof. (nn) No "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Act (i) has imposed (or has informed the Company that it is considering imposing) any condition (financial or otherwise) on the Company's retaining any rating assigned as of the date hereof to the Company or any securities of the Company or (ii) has indicated to the Company that it is considering (a) the downgrading, suspension or withdrawal of, or any review for a possible change that does not indicate the direction of the possible change in, any rating so assigned or (b) any change in the outlook for any rating of the Company or any securities of the Company. (oo) Each certificate signed by any officer of the Company and delivered to the Initial Purchaser or counsel for the Initial Purchaser shall be deemed to be a representation and warranty by the Company to the Initial Purchaser as to the matters covered thereby. The Company acknowledges that the Initial Purchaser and, for purposes of the opinions to be delivered to the Initial Purchaser pursuant to Section 9 hereof, counsel to the Company and counsel to the Initial Purchaser, will rely upon the accuracy and truth of the foregoing representations and hereby consents to such reliance. 7. INITIAL PURCHASER'S REPRESENTATIONS AND WARRANTIES. The Initial Purchaser represents and warrants to the Company that: (a) The Initial Purchaser is either a QIB or an institution that is an "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act (an "Accredited Institution"), in either case, with such knowledge and experience in financial and business matters as is necessary in order to evaluate the merits and risks of an investment in the Series A Notes. (b) The Initial Purchaser (A) is not acquiring the Series A Notes with a view to any distribution thereof or with any present intention of offering or selling any of the Series A Notes in a transaction that would violate the Act or the securities laws of any state of the United States or any other applicable jurisdiction and (B) will be reoffering and reselling the Series A Notes only to (x) QIBs in reliance on the exemption from the registration requirements of the Act provided by Rule 144A and (y) in offshore transactions in reliance upon Regulation S under the Act. (c) The Initial Purchaser agrees that no form of general solicitation or general advertising (within the meaning of Regulation D under the Act) has been or will be used by such Initial Purchaser or any of its representatives in connection with the offer and sale of the Series A Notes pursuant hereto, including, but not limited to, articles, notices or other communications published in any newspaper, magazine or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. (d) The Initial Purchaser agrees that, in connection with Exempt Resales, such Initial Purchaser will solicit offers to buy the Series A Notes only from, and will offer to sell the Series A Notes only to, Eligible Purchasers. Each Initial Purchaser further agrees that it will offer to sell the Series A Notes only to, and will solicit offers to buy the Series A Notes only from (A) Eligible Purchasers that the Initial Purchaser reasonably believes are QIBs and (B) Regulation S Purchasers, in each case, that agree that (x) the Series A Notes purchased by them may be resold, pledged or otherwise transferred within the time period referred to under Rule 144(k) (taking into account the provisions of Rule 144(d) under the Act, if applicable) under the Act, as in effect on the date of the transfer of such Series A Notes, only (I) to the Company or any of its subsidiaries, (II) to a person whom the seller reasonably believes is a QIB purchasing for its own account or for the account of a QIB in a transaction meeting the requirements of Rule 144A under the Act, (III) in an offshore transaction (as defined in Rule 902 under the Act) meeting the requirements of Rule 904 of the Act, (IV) in a transaction meeting the requirements of Rule 144 under the Act, (V) to an Accredited Institution that, prior to such transfer, furnishes the Trustee a signed letter containing certain representations and agreements relating to the registration of transfer of such Series A Note (the form of which is substantially the same as Exhibit D to the Indenture) and, if such transfer is in respect of an aggregate principal amount of Series A Notes less than $250,000, an opinion of counsel acceptable to the Company that such transfer is in compliance with the Act, (VI) in accordance with another exemption from the registration requirements of the Act (and based upon an opinion of counsel acceptable to the Company) or (VII) pursuant to an effective registration statement and, in each case, in accordance with the applicable securities laws of any state of the United States or any other applicable jurisdiction and (y) they will deliver to each person to whom such Series A Notes or an interest therein is transferred a notice substantially to the effect of the foregoing. (e) The Initial Purchaser and its affiliates or any person acting on its or their behalf have not engaged or will not engage in any "directed selling efforts" within the meaning of Regulation S with respect to the Series A Notes. (f) The Series A Notes offered and sold by the Initial Purchaser pursuant hereto in reliance on Regulation S have been and will be offered and sold only in offshore transactions. (g) The sale of the Series A Notes offered and sold by the Initial Purchaser pursuant hereto in reliance on Regulation S is not part of a plan or scheme to evade the registration provisions of the Act. (h) The Initial Purchaser agrees that it has not offered or sold and will not offer or sell the Series A Notes in the United States or to, or for the benefit or account of, a U.S. Person (other than a distributor), in each case, as defined in Rule 902 under the Act (i) as part of its distribution at any time and (ii) otherwise until 40 days after the later of the commencement of the offering of the Series A Notes pursuant hereto and the Closing Date, other than in accordance with Regulation S of the Act or another exemption from the registration requirements of the Act. Such Initial Purchaser agrees that, during such 40-day "distribution compliance period", it will not cause any advertisement with respect to the Series A Notes (including any "tombstone" advertisement) to be published in any newspaper or periodical or posted in any public place and will not issue any circular relating to the Series A Notes, except such advertisements as permitted by and including the statements required by Regulation S. (i) The Initial Purchaser agrees that, at or prior to confirmation of a sale of Series A Notes by it to any distributor, dealer or person receiving a selling concession, fee or other remuneration during the 40-day "distribution compliance period" referred to in Rule 902(g)(2) under the Act, it will send to such distributor, dealer or person receiving a selling concession, fee or other remuneration a confirmation or notice to substantially the following effect: "The Series A Notes covered hereby have not been registered under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and may not be offered and sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of your distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the Offering and the Closing Date, except in either case in accordance with Regulation S under the Securities Act (or Rule 144A or to Accredited Institutions in transactions that are exempt from the registration requirements of the Securities Act), and in connection with any subsequent sale by you of the Series A Notes covered hereby in reliance on Regulation S during the period referred to above to any distributor, dealer or person receiving a selling concession, fee or other remuneration, you must deliver a notice to substantially the foregoing effect. Terms used above have the meanings assigned to them in Regulation S." (j) The Initial Purchaser agrees that the Series A Notes offered and sold in reliance on Regulation S will be represented upon issuance by a global security that may not be exchanged for definitive securities until the expiration of the 40-day "distribution compliance period" referred to in Rule 902(g)(2) of the Act and only upon certification of beneficial ownership of such Series A Notes by non-U.S. persons or U.S. persons who purchased such Series A Notes in transactions that were exempt from the registration requirements of the Act. The Initial Purchaser acknowledges that the Company and, for purposes of the opinions to be delivered to the Initial Purchaser pursuant to Section 9 hereof, counsel to the Company and counsel to the Initial Purchaser will rely upon the accuracy and truth of the foregoing representations and the Initial Purchaser hereby consents to such reliance. 8. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless the Initial Purchaser, its directors, its officers and each person, if any, who controls the Initial Purchaser within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities and judgments (including, without limitation, any legal or other expenses reasonably incurred in connection with investigating or defending any matter, including any action, that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in the Offering Memorandum (or any amendment or supplement thereto), the Preliminary Offering Memorandum or any Rule 144A Information provided by the Company to any holder or prospective purchaser of Series A Notes pursuant to Section 5(h) or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to the Initial Purchaser furnished in writing to the Company by the Initial Purchaser; provided, however, that the foregoing indemnity agreement with respect to any Preliminary Offering Memorandum shall not inure to the benefit of the Initial Purchaser if the Initial Purchaser should fail to deliver an Offering Memorandum as then amended or supplemented (so long as the Offering Memorandum and any amendment or supplement thereto was provided by the Company to the Initial Purchaser in the requisite quantity and on a timely basis to permit proper delivery on or prior to the Closing Date) to the person asserting any losses, claims, damages, liabilities or judgments caused by any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Offering Memorandum, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such material misstatement or omission or alleged material misstatement or omission was cured in the Offering Memorandum, as so amended or supplemented. (b) The Initial Purchaser agrees to indemnify and hold harmless the Company and its respective directors and officers and each person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company, to the same extent as the foregoing indemnity from the Company to the Initial Purchaser but only with reference to information relating to the Initial Purchaser furnished in writing to the Company by the Initial Purchaser expressly for use in the Preliminary Offering Memorandum or the Offering Memorandum. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the "indemnified party"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 8(a) and 8(b), the Initial Purchaser shall not be required to assume the defense of such action pursuant to this Section 8(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of the Initial Purchaser). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and a conflict or potential conflict exists based on advice of counsel to the indemnified party between the indemnified party and the indemnifying party (in which case the indemnifying party shall not have the right to direct or assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all indemnified parties and all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by Donaldson, Lufkin & Jenrette Securities Corporation, in the case of the parties indemnified pursuant to Section 8(a), and by the Company, in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without its written consent if the settlement is entered into more than twenty business days after the indemnifying party shall have received a request from the indemnified party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the indemnifying party) and, prior to the date of such settlement, the indemnifying party shall have failed to comply with such reimbursement request. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. (d) To the extent the indemnification provided for in this Section 8 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, on the one hand, and the Initial Purchaser on the other hand from the offering of the Series A Notes or (ii) if the allocation provided by clause 8(d)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 8(d)(i) above but also the relative fault of the Company, on the one hand, and the Initial Purchaser, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand and the Initial Purchaser, on the other hand, shall be deemed to be in the same proportion as the total net proceeds from the offering of the Series A Notes (after underwriting discounts and commissions, but before deducting expenses) received by the Company, and the total discounts and commissions received by the Initial Purchaser bear to the total price to investors of the Series A Notes, in each case as set forth in the table on the cover page of the Offering Memorandum. The relative fault of the Company, on the one hand, and the Initial Purchaser, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, on the one hand, or the Initial Purchaser, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Initial Purchaser agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such indemnified party in connection with investigating or defending any matter, including any action, that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 8, the Initial Purchaser shall not be required to contribute any amount in excess of the amount by which the total discounts and commissions received by the Initial Purchaser exceeds the amount of any damages which the Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) The remedies provided for in this Section 8 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. 9. CONDITIONS OF INITIAL PURCHASER'S OBLIGATIONS. The obligation of the Initial Purchaser to purchase the Series A Notes under this Agreement is subject to the satisfaction of each of the following conditions: (a) All the representations and warranties of the Company contained in this Agreement and the other Operative Documents shall be true and correct in all material respects, except where otherwise qualified, on the Closing Date with the same force and effect as if made on and as of the Closing Date. (b) On or after the date hereof, (i) there shall not have occurred any downgrading, suspension or withdrawal of, nor shall any notice have been given of any potential or intended downgrading, suspension or withdrawal of, or of any review (or of any potential or intended review) for a possible change that does not indicate the direction of the possible change in, any rating of the Company or any securities of the Company (including, without limitation, the placing of any of the foregoing ratings on credit watch with negative or developing implications or under review with an uncertain direction) by any "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Act, (ii) there shall not have occurred any change, nor shall notice have been given of any potential or intended change, in the outlook for any rating of the Company by any such rating organization and (iii) no such rating organization shall have given notice that it has assigned (or is considering assigning) a lower rating to the Notes than that on which the Notes were marketed. (c) Since the respective dates as of which information is given in the Offering Memorandum other than as contemplated by the Offering Memorandum, (i) there shall not have occurred any change or any development involving a prospective change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company and its subsidiaries, taken as a whole, (ii) there shall not have been any change or any development involving a prospective change in the capital stock or in the long-term debt of the Company or any of its subsidiaries and (iii) neither the Company nor any of its subsidiaries shall have incurred any liability or obligation, direct or contingent, the effect of which, in any such case described in clause 9(c)(i), 9(c)(ii) or 9(c)(iii), in your reasonable judgment, is material and adverse and, in your reasonable judgment, makes it impracticable to market the Series A Notes on the terms and in the manner contemplated in the Offering Memorandum. (d) You shall have received on the Closing Date a certificate dated the Closing Date, signed by each of the President and the Chief Financial Officer of the Company, confirming the matters set forth in Sections 9(a), 9(b) and 9(c) and stating that, to such Officer's reasonable knowledge and belief, the Company has complied with all agreements and satisfied all of the conditions herein contained and required to be complied with or satisfied on or prior to the Closing Date. (e) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Initial Purchaser), dated the Closing Date, of Weil, Gotshal & Manges LLP, counsel for the Company, to the effect that: (i) the Company is a corporation duly incorporated, validly existing and in good standing under the laws of its states of incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted; (ii) the Company has all requisite corporate power and authority to execute and deliver the Series A Notes delivered on the Closing Date, the Indenture, the Registration Rights Agreement and this Agreement (collectively, the "Note Documents") and to perform its obligations thereunder. The execution, delivery and performance of the Note Documents by the Company and the consummation by the Company of the transactions contemplated thereby have been duly authorized by all necessary corporate action on the part of the Company. The Note Documents have been duly and validly executed and delivered by the Company; (iii) the issuance of the Series A Notes delivered on the Closing Date has been duly authorized by all necessary corporate action on the part of the Company. The Series A Notes delivered on the Closing Date, when duly executed by the Company and authenticated by the Trustee in accordance with the terms of the Indenture and duly delivered against receipt of payment therefor in accordance with the terms of this Agreement, will be entitled to the benefits of the Indenture and will constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium, and similar laws affecting creditors' rights and remedies generally and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity); (iv) assuming the due authorization, execution and delivery thereof by the Trustee (in the case of the Indenture) and the Initial Purchaser (in the case of the Registration Rights Agreement), each of the Indenture and the Registration Rights Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium, and similar laws affecting creditors' rights and remedies generally and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity) and subject to the qualification that rights to indemnification and contribution under the Registration Rights Agreement may be limited by federal or state securities laws or public policy relating thereto; (v) the issuance of the Series B Notes to be delivered in connection with the consummation of the Exchange Offer has been duly authorized by all necessary corporate action on the part of the Company; (vi) the execution and delivery of the Note Documents, the consummation of the transactions contemplated thereby and compliance by the Company with the provisions thereof will not conflict with, constitute a default under or violate (i) any of the terms, conditions or provisions of the certificate of incorporation or bylaws of the Company, (ii) any of the terms, conditions or provisions of any material document, agreement or other instrument to which the Company is a party or by which it is bound of which we are aware, (iii) any New York, Delaware corporate or federal law or regulation (other than federal and state securities or blue sky laws, as to which such counsel need not express any opinion in this paragraph), or (iv) any judgment, writ, injunction, decree, order or ruling of any court or governmental authority binding on the Company of which we are aware; (vii) no consent, approval, waiver, license or authorization or other action by or filing with any New York, Delaware corporate or federal governmental authority is required in connection with the execution and delivery by the Issuers, to the extent a party thereto, of the Note Documents or the consummation by the Company of the transactions contemplated thereby, except for (i) the applicable requirements of federal and state securities or blue sky laws, as to which such counsel need not express any opinion in this paragraph) and (ii) those already obtained and which are in full force and effect; (viii) to such counsel's knowledge, there is no litigation, proceeding or governmental investigation pending or overtly threatened against the Company that relates to the any of the transactions contemplated by this Agreement; (ix) to such counsel's knowledge, there is no material document, agreement or other instrument to which the Company is a party (other than the Registration Rights Agreement) granting any person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Series A Notes registered pursuant to any Registration Statement; (x) the Company is not, and after giving effect to the offering and sale of the Series A Notes in accordance with the terms of this Agreement and the application of the net proceeds thereof as described in the Offering Memorandum under the caption "Use of Proceeds," will not be, an "investment company" within the meaning of the Investment Company Act of 1940, as amended; (xi) the Indenture and the Series A Notes delivered on the Closing Date conform in all material respects as to legal matters to the description thereof contained in the Offering Memorandum under the caption "Description of Notes"; (xii) assuming that the representations and warranties of the Initial Purchaser contained in this Agreement are true, correct and complete and assuming compliance by the Initial Purchaser with its covenants contained in this Agreement, it is not necessary in connection with the offer, sale and delivery of the Series A Notes delivered on the Closing Date to the Initial Purchaser pursuant to this Agreement or the resales of such Series A Notes by the Initial Purchaser in the manner contemplated by this Agreement to register such Series A Notes under the Securities Act or to qualify the Indenture under the TIA; (xiii) all of the outstanding shares of the Company's capital stock are duly authorized, validly issued, fully paid and non-assessable, and have not been issued in violation of any preemptive rights pursuant to law or in the Company's certificate of incorporation; and (xiv) based on the assumptions and subject to the qualifications set forth therein, the discussion set forth under the heading "Certain U.S. Federal Tax Considerations for Non-U.S. Holders" in the Offering Memorandum, as it relates to legal conclusions and matters of law, accurately describes the material United States federal income tax consequences of the acquisition, ownership and disposition of Notes by an initial beneficial owner of Notes that, for U.S. federal income tax purposes, is not a "U.S. person." In addition, such counsel shall state that it has participated in conferences with directors, officers and other representatives of the Company, representatives of the independent public accountants for the Company, representatives of the Initial Purchaser and representatives of counsel for the Initial Purchaser, at which conferences the contents of the final Offering Memorandum and related matters were discussed, and, although such counsel has not independently verified and is not passing upon and assumes no responsibility for the accuracy, completeness or fairness of the statements contained in the final Offering Memorandum (except to the extent specified in clause (xi) above), no facts have come to such counsel's attention which lead such counsel to believe that the final Offering Memorandum, as of the date of the final Offering Memorandum and the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statement contained therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel expresses no view with respect to the financial statements and related notes, the financial statement schedules, the assumptions and the other financial and accounting data included in the final Offering Memorandum). The opinion of Weil, Gotshal & Manges LLP described in Section 9(e) above shall be rendered to you at the request of the Company and shall so state therein. In giving such opinion with respect to the matters covered by Section 9(e)(xxiii), Weil, Gotshal & Manges LLP may state that their opinion and belief are based upon their participation in the preparation of the Offering Memorandum and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. (f) The Initial Purchaser shall have received on the Closing Date an opinion, dated the Closing Date, of Latham & Watkins, counsel for the Initial Purchaser, in form and substance reasonably satisfactory to the Initial Purchaser. (g) The Initial Purchaser shall have received, at the time this Agreement is executed and at the Closing Date, letters dated the date hereof and the Closing Date, as the case may be, in form and substance satisfactory to the Initial Purchaser from Price Waterhouse L.L.P., independent public accountants for the Company and, in each case containing the information and statements of the type ordinarily included in accountants' "comfort letters" to the Initial Purchaser with respect to the financial statements and certain financial information contained in the Offering Memorandum. (h) The Series A Notes shall have been approved by the NASD for trading, and duly listed in, PORTAL. (i) The Initial Purchaser shall have received a counterpart, conformed as executed, of the Indenture which shall have been entered into by the Company and the Trustee. (j) The Company shall have executed the Registration Rights Agreement and the Initial Purchaser shall have received an original copy thereof, duly executed by the Company. (k) The Company shall have executed this Agreement and the Initial Purchaser shall have received an original copy thereof, duly executed by the Company. (l) Latham & Watkins shall have been furnished with such documents, in addition to those set forth above, as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in this Section 9 and in order to evidence the accuracy, completeness or satisfaction in all material respects of any of the representations, warranties or conditions herein contained. (m) Prior to the Closing Date, the Company shall have furnished to the Initial Purchaser such further information, certificates and documents as the Initial Purchaser may reasonably request. (n) The Company shall not have failed at or prior to the Closing Date to perform or comply with any of the agreements herein contained and required to be performed or complied with by the Company at or prior to the Closing Date. 10. EFFECTIVENESS OF AGREEMENT AND TERMINATION. This Agreement shall become effective upon the execution and delivery of this Agreement by the parties hereto. This Agreement may be terminated at any time prior to the Closing Date by the Initial Purchaser by written notice to the Company if any of the following has occurred: (i) any outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic conditions or in the financial markets of the United States or elsewhere that, in the Initial Purchaser's reasonable judgment, is material and adverse and, in the Initial Purchaser's reasonable judgment, makes it impracticable to market the Series A Notes on the terms and in the manner contemplated in the Offering Memorandum, (ii) the suspension or material limitation of trading in securities or other instruments on the New York Stock Exchange, the American Stock Exchange, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade or the Nasdaq National Market or limitation on prices for securities or other instruments on any such exchange or the Nasdaq National Market, (iii) the suspension of trading of any securities of the Company on any exchange or in the over-the-counter market, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority that in the Initial Purchaser's opinion materially and adversely affects, or will materially and adversely affect, the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Initial Purchaser's opinion has a material adverse effect on the financial markets in the United States. 11. MISCELLANEOUS. Notices given pursuant to any provision of this Agreement shall be addressed as follows: (i) if to the Company, to 1815 East Main Street, Chattanooga, Tennessee 37404, Attention: Chief Financial Officer and to 120 East 56th Street, New York, NY 10022, Attention: President, and (ii) if to the Initial Purchaser, Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, or in any case to such other address as the person to be notified may have requested in writing. The respective indemnities, contribution agreements, representations, warranties and other statements of the Company and the Initial Purchaser set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Series A Notes, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of the Initial Purchaser, the officers or directors of the Initial Purchaser, any person controlling the Initial Purchaser, the Company, the officers or directors of the Company, or any person controlling the Company, (ii) acceptance of the Series A Notes and payment for them hereunder and (iii) termination of this Agreement. If for any reason the Series A Notes are not delivered by or on behalf of the Company as provided herein (other than as a result of any termination of this Agreement pursuant to Section 10), the Company agrees to reimburse the Initial Purchaser for all reasonable out-of-pocket expenses (including reasonable fees and disbursements of counsel) incurred by it. Notwithstanding any termination of this Agreement, the Company shall be liable for all reasonable expenses which it has agreed to pay pursuant to Section 5(i) hereof. The Company also agrees to reimburse the Initial Purchaser and its officers, directors and each person, if any, who controls such Initial Purchaser within the meaning of Section 15 of the Act or Section 20 of the Exchange Act for any and all reasonable fees and expenses (including without limitation the reasonable fees and expenses of counsel) incurred by them in connection with enforcing their rights under this Agreement (including without limitation its rights under Section 8). Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Initial Purchaser, the Initial Purchaser's directors and officers, any controlling persons referred to herein, the directors of the Company and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Series A Notes from the Initial Purchaser merely because of such purchase. This Agreement shall be governed and construed in accordance with the internal laws of the State of New York. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. * * * * Please confirm that the foregoing correctly sets forth the agreement among the Company and the Initial Purchaser as of the date first above written. Very truly yours, AKI, INC. By:_____________________________ Name: Title: The foregoing Purchase Agreement is hereby confirmed and accepted as of the date first above written by Donaldson, Lufkin & Jenrette Securities Corporation, as the Initial Purchaser. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By:_______________________________ Name: Title: SCHEDULE A SUBSIDIARIES Scent Seal, Inc. Arcade Europe SARL EXHIBIT A FORM OF REGISTRATION RIGHTS AGREEMENT EX-3.2 3 BYLAWS AMENDED AND RESTATED BYLAWS OF ARCADE MARKETING, INC., A Delaware Corporation 1 ARTICLE ONE: OFFICES 1.1 Registered Office and Agent 1 1.2 Other Offices 1 ARTICLE TWO: MEETINGS OF STOCKHOLDERS 2.1 Annual Meeting 1 2.2 Special Meeting 1 2.3 Place of Meetings 2 2.4 Notice 2 2.5 Voting List 2 2.6 Quorum 3 2.7 Required Vote; Withdrawal of Quorum 3 2.8 Method of Voting; Proxies 3 2.9 Record Date 4 2.10 Conduct of Meeting 5 2.11 Inspectors 5 ARTICLE THREE: DIRECTORS 3.1 Management 5 3.2 Number; Qualification; Election; Term 6 3.3 Change in Number 6 3.4 Removal 6 3.5 Vacancies 6 3.6 Meetings of Directors 7 3.7 First Meeting 7 3.8 Election of Officers 7 3.9 Regular Meetings 7 3.10 Special Meetings 7 3.11 Notice 7 3.12 Quorum; Majority Vote 8 3.13 Procedure 8 3.14 Presumption of Assent 8 3.15 Compensation 8 ARTICLE FOUR: COMMITTEES 2 4.1 Designation 9 4.2 Number; Qualification; Term 9 4.3 Authority 9 4.4 Committee Changes 9 4.5 Alternate Members of Committees 9 4.6 Regular Meetings 9 4.7 Special Meetings 10 4.8 Quorum; Majority Vote 10 4.9 Minutes 10 4.10 Compensation 10 4.11 Responsibility 10 ARTICLE FIVE: NOTICE 5.1 Method 10 5.2 Waiver 11 ARTICLE SIX: OFFICERS 6.1 Number; Titles; Term of Office 11 6.2 Removal 11 6.3 Vacancies 11 6.4 Authority 12 6.5 Compensation 12 6.6 Chairman of the Board 12 6.7 President 12 6.8 Vice Presidents 12 6.9 Treasurer 12 6.10 Assistant Treasurers 13 6.11 Secretary 13 6.12 Assistant Secretaries 13 ARTICLE SEVEN: CERTIFICATES AND SHAREHOLDERS 7.1 Certificates for Shares 13 7.2 Replacement of Lost or Destroyed Certificates 14 7.3 Transfer of Shares 14 7.4 Registered Stockholders 14 7.5 Regulations 14 7.6 Legends 14 ii ARTICLE EIGHT: MISCELLANEOUS PROVISIONS 8.1 Dividends 15 8.2 Reserves 15 8.3 Books and Records 15 8.4 Fiscal Year 15 8.5 Seal 15 8.6 Resignations 15 8.7 Securities of Other Corporations 16 8.8 Telephone Meetings 16 8.9 Action Without a Meeting 16 8.10 Invalid Provisions 17 8.11 Mortgages, etc. 17 8.12 Headings 17 8.13 References 17 8.14 Amendments 17 iii AMENDED AND RESTATED BYLAWS OF ARCADE MARKETING, INC., A Delaware Corporation PREAMBLE These bylaws are subject to, and governed by, the General Corporation Law of the State of Delaware (the "DGCL") and the certificate of incorporation of Arcade Marketing, Inc., a Delaware corporation (the "Corporation"). In the event of a direct conflict between the provisions of these bylaws and the mandatory provisions of the DGCL or the provisions of the certificate of incorporation of the Corporation, such provisions of the DGCL or the certificate of incorporation of the Corporation, as the case may be, will be controlling. ARTICLE ONE: OFFICES 1.1 Registered Office and Agent. The registered office and registered agent of the Corporation shall be as designated from time to time by the appropriate filing by the Corporation in the office of the Secretary of State of the State of Delaware. 1.2 Other Offices. The Corporation may also have offices at such other places, both within and without the State of Delaware, as the board of directors may from time to time determine or as the business of the Corporation may require. ARTICLE TWO: MEETINGS OF STOCKHOLDERS 2.1 Annual Meeting. An annual meeting of stockholders of the Corporation shall be held each calendar year on such date and at such time as shall be designated from time to time by the board of directors and stated in the notice of the meeting or in a duly executed waiver of notice of such meeting. At such meeting, the stockholders shall elect directors and transact such other business as may properly be brought before the meeting. iv 2.2 Special Meeting. A special meeting of the stockholders may be called at any time by the Chairman of the Board, the President or the board of directors, and shall be called by the President or the Secretary at the request in writing of the stockholders of record of not less than ten percent of all shares entitled to vote at such meeting or as otherwise provided by the certificate of incorporation of the Corporation. A special meeting shall be held on such date and at such time as shall be designated by the person(s) calling the meeting and stated in the notice of the meeting or in a duly executed waiver of notice of such meeting. Only such business shall be transacted at a special meeting as may be stated or indicated in the notice of such meeting or in a duly executed waiver of notice of such meeting. 2.3 Place of Meetings. An annual meeting of stockholders may be held at any place within or without the State of Delaware designated by the board of directors. A special meeting of stockholders may be held at any place within or without the State of Delaware designated in the notice of the meeting or a duly executed waiver of notice of such meeting. Meetings of stockholders shall be held at the principal office of the Corporation unless another place is designated for meetings in the manner provided herein. 2.4 Notice. Written or printed notice stating the place, day, and time of each meeting of the stockholders and, in case of a special meeting, the purpose or purposes for which the meeting is called shall be delivered not less than ten nor more than 60 days before the date of the meeting, either personally or by mail, by or at the direction of the President, the Secretary, or the officer or person(s) calling the meeting, to each stockholder of record entitled to vote at such meeting. If such notice is to be sent by mail, it shall be directed to such stockholder at his address as it appears on the records of the Corporation, unless he shall have filed with the Secretary of the Corporation a written request that notices to him be mailed to some other address, in which case it shall be directed to him at such other address. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy and shall not, at the beginning of such meeting, object to the transaction of any business because the meeting is not lawfully called or convened, or who shall, either before or after the meeting, submit a signed waiver of notice, in person or by proxy. 2.5 Voting List. At least ten days before each meeting of stockholders, the Secretary or other officer of the Corporation who has charge of the Corporation's stock ledger, either directly or through another officer appointed by him or through a transfer agent appointed by the board of directors, shall prepare a complete list of stockholders entitled to vote thereat, arranged in alphabetical order and showing the address of each stockholder and number of shares registered in the name of each stockholder. For a period of ten days prior to such meeting, such list shall be kept on file at a place within the city where the meeting is to be held, which place shall be specified in the notice of meeting or a duly executed waiver of notice of such meeting or, if not so specified, at the place where the meeting is to be held and shall be open to examination by any stockholder 2 during ordinary business hours. Such list shall be produced at such meeting and kept at the meeting at all times during such meeting and may be inspected by any stockholder who is present. 2.6 Quorum. The holders of a majority of the outstanding shares entitled to vote on a matter, present in person or by proxy, shall constitute a quorum at any meeting of stockholders, except as otherwise provided by law, the certificate of incorporation of the Corporation, or these by-laws. If a quorum shall not be present, in person or by proxy, at any meeting of stockholders, the stockholders entitled to vote thereat who are present, in person or by proxy, or, if no stockholder entitled to vote is present, any officer of the Corporation may adjourn the meeting from time to time, without notice other than announcement at the meeting (unless the board of directors, after such adjournment, fixes a new record date for the adjourned meeting), until a quorum shall be present, in person or by proxy. At any adjourned meeting at which a quorum shall be present, in person or by proxy, any business may be transacted which may have been transacted at the original meeting had a quorum been present; provided that, if the adjournment is for more than 30 days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting. 2.7 Required Vote; Withdrawal of Quorum. When a quorum is present at any meeting, the vote of the holders of at least a majority of the outstanding shares entitled to vote who are present, in person or by proxy, shall decide any question brought before such meeting, unless the question is one on which, by express provision of statute, the certificate of incorporation of the Corporation, or these bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question. The stockholders present at a duly constituted meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. 2.8 Method of Voting; Proxies. Except as otherwise provided in the certificate of incorporation of the Corporation or by law, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders. Elections of directors need not be by written ballot. At any meeting of stockholders, every stockholder having the right to vote may vote either in person or by a proxy executed in writing by the stockholder or by his duly authorized attorney-in-fact. Each such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after three years from the date of its execution, unless otherwise provided in the proxy. If no date is stated in a proxy, such proxy shall be presumed to have been executed on the date of the meeting at which it is to be voted. Each proxy shall be revocable unless expressly provided therein to be irrevocable and coupled with an interest sufficient in law to support an irrevocable power or unless otherwise made irrevocable by law. 2.9 Record Date. (a) For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders, or any adjournment thereof, or entitled to receive 3 payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any other lawful action, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, for any such determination of stockholders, such date in any case to be not more than 60 days and not less than ten days prior to such meeting nor more than 60 days prior to any other action. If no record date is fixed: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. (iii) A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the board of directors. If no record date has been fixed by the board of directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by law or these bylaws, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office in the State of Delaware, principal place of business, or such officer or agent shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the board of directors and prior action by the board of directors is required by law or these bylaws, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the board of directors adopts the resolution taking such prior action. 2.10 Conduct of Meeting. The Chairman of the Board, if such office has been filled, and, if not or if the Chairman of the Board is absent or otherwise unable to act, the President shall preside 4 at all meetings of stockholders. The Secretary shall keep the records of each meeting of stockholders. In the absence or inability to act of any such officer, such officer's duties shall be performed by the officer given the authority to act for such absent or non-acting officer under these bylaws or by some person appointed by the meeting. 2.11 Inspectors. The board of directors may, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If any of the inspectors so appointed shall fail to appear or act, the chairman of the meeting shall, or if inspectors shall not have been appointed, the chairman of the meeting may, appoint one or more inspectors. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares of capital stock of the Corporation outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the validity and effect of proxies and shall receive votes, ballots, or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots, or consents, determine the results, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting, the inspectors shall make a report in writing of any challenge, request, or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as an inspector of an election of directors. Inspectors need not be stockholders. ARTICLE THREE: DIRECTORS 3.1 Management. The business and property of the Corporation shall be managed by the board of directors. Subject to the restrictions imposed by law, the certificate of incorporation of the Corporation, or these bylaws, the board of directors may exercise all the powers of the Corporation. 3.2 Number; Qualification; Election; Term. The number of directors which shall constitute the entire board of directors shall be not less than one. The first board of directors shall consist of the number of directors named in the certificate of incorporation of the Corporation or, if no directors are so named, shall consist of the number of directors elected by the incorporator(s) at an organizational meeting or by unanimous written consent in lieu thereof. Thereafter, within the limits above specified, the number of directors which shall constitute the entire board of directors shall be determined by resolution of the board of directors or by resolution of the stockholders at the annual meeting thereof or at a special meeting thereof called for that purpose. Except as otherwise required by law, the certificate of incorporation of the Corporation, or these bylaws, the directors shall be elected at an annual meeting of stockholders at which a quorum is present. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy and 5 entitled to vote on the election of directors. Each director so chosen shall hold office until the first annual meeting of stockholders held after his election and until his successor is elected and qualified or, if earlier, until his death, resignation, or removal from office. None of the directors need be a stockholder of the Corporation or a resident of the State of Delaware. Each director must have attained the age of majority. 3.3 Change in Number. No decrease in the number of directors constituting the entire board of directors shall have the effect of shortening the term of any incumbent director. 3.4 Removal. Except as otherwise provided in the certificate of incorporation of the Corporation or these by-laws, at any meeting of stockholders called expressly for that purpose, any director or the entire board of directors may be removed, with or without cause, by a vote of the holders of a majority of the shares then entitled to vote on the election of directors; provided, however, that so long as stockholders have the right to cumulate votes in the election of directors pursuant to the certificate of incorporation of the Corporation, if less than the entire board of directors is to be removed, no one of the directors may be removed if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire board of directors. 3.5 Vacancies. Vacancies and newly-created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by the sole remaining director, and each director so chosen shall hold office until the first annual meeting of stockholders held after his election and until his successor is elected and qualified or, if earlier, until his death, resignation, or removal from office. If there are no directors in office, an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly-created directorship, the directors then in office shall constitute less than a majority of the whole board of directors (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least 10% of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly-created directorships or to replace the directors chosen by the directors then in office. Except as otherwise provided in these bylaws, when one or more directors shall resign from the board of directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have the power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in these bylaws with respect to the filling of other vacancies. 3.6 Meetings of Directors. The directors may hold their meetings and may have an office and keep the books of the Corporation, except as otherwise provided by statute, in such place or places within or without the State of Delaware as the board of directors may from time to time 6 determine or as shall be specified in the notice of such meeting or duly executed waiver of notice of such meeting. 3.7 First Meeting. Each newly elected board of directors may hold its first meeting for the purpose of organization and the transaction of business, if a quorum is present, immediately after and at the same place as the annual meeting of stockholders, and no notice of such meeting shall be necessary. 3.8 Election of Officers. At the first meeting of the board of directors after each annual meeting of stockholders at which a quorum shall be present, the board of directors shall elect the officers of the Corporation. 3.9 Regular Meetings. Regular meetings of the board of directors shall be held at such times and places as shall be designated from time to time by resolution of the board of directors. Notice of such regular meetings shall not be required. 3.10 Special Meetings. Special meetings of the board of directors shall be held whenever called by the Chairman of the Board, the President, or any director. 3.11 Notice. The Secretary shall give notice of each special meeting to each director at least 24 hours before the meeting. Notice of any such meeting need not be given to any director who shall, either before or after the meeting, submit a signed waiver of notice or who shall attend such meeting without protesting, prior to or at its commencement, the lack of notice to him. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. 3.12 Quorum; Majority Vote. At all meetings of the board of directors, a majority of the directors fixed in the manner provided in these bylaws shall constitute a quorum for the transaction of business. If at any meeting of the board of directors there be less than a quorum present, a majority of those present or any director solely present may adjourn the meeting from time to time without further notice. Unless the act of a greater number is required by law, the certificate of incorporation of the Corporation, or these bylaws, the act of a majority of the directors present at a meeting at which a quorum is in attendance shall be the act of the board of directors. At any time that the certificate of incorporation of the Corporation provides that directors elected by the holders of a class or series of stock shall have more or less than one vote per director on any matter, every reference in these bylaws to a majority or other proportion of directors shall refer to a majority or other proportion of the votes of such directors. 3.13 Procedure. At meetings of the board of directors, business shall be transacted in such order as from time to time the board of directors may determine. The Chairman of the Board, if such office has been filled, and, if not or if the Chairman of the Board is absent or otherwise 7 unable to act, the President shall preside at all meetings of the board of directors. In the absence or inability to act of either such officer, a chairman shall be chosen by the board of directors from among the directors present. The Secretary of the Corporation shall act as the secretary of each meeting of the board of directors unless the board of directors appoints another person to act as secretary of the meeting. The board of directors shall keep regular minutes of its proceedings which shall be placed in the minute book of the Corporation. 3.14 Presumption of Assent. A director of the Corporation who is present at the meeting of the board of directors at which action on any corporate matter is taken shall be presumed to have assented to the action unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward any dissent by certified or registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. 3.15 Compensation. The board of directors shall have the authority to fix the compensation, including fees and reimbursement of expenses, paid to directors for attendance at regular or special meetings of the board of directors or any committee thereof; provided, that nothing contained herein shall be construed to preclude any director from serving the Corporation in any other capacity or receiving compensation therefor. ARTICLE FOUR: COMMITTEES 4.1 Designation. The board of directors may, by resolution adopted by a majority of the entire board of directors, designate one or more committees. 4.2 Number; Qualification; Term. Each committee shall consist of one or more directors appointed by resolution adopted by a majority of the entire board of directors. The number of committee members may be increased or decreased from time to time by resolution adopted by a majority of the entire board of directors. Each committee member shall serve as such until the earliest of (i) the expiration of his term as director, (ii) his resignation as a committee member or as a director, or (iii) his removal as a committee member or as a director. 4.3 Authority. Each committee, to the extent expressly provided in the resolution establishing such committee, shall have and may exercise all of the authority of the board of directors in the management of the business and property of the Corporation except to the extent expressly restricted by law, the certificate of incorporation of the Corporation, or these bylaws. 4.4 Committee Changes. The board of directors shall have the power at any time to fill vacancies in, to change the membership of, and to discharge any committee. 8 4.5 Alternate Members of Committees. The board of directors may designate one or more directors as alternate members of any committee. Any such alternate member may replace any absent or disqualified member at any meeting of the committee. If no alternate committee members have been so appointed to a committee or each such alternate committee member is absent or disqualified, the member or members of such committee present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. 4.6 Regular Meetings. Regular meetings of any committee may be held without notice at such time and place as may be designated from time to time by the committee and communicated to all members thereof. 4.7 Special Meetings. Special meetings of any committee may be held whenever called by any committee member. The committee member calling any special meeting shall cause notice of such special meeting, including therein the time and place of such special meeting, to be given to each committee member at least two days before such special meeting. Neither the business to be transacted at, nor the purpose of, any special meeting of any committee need be specified in the notice or waiver of notice of any special meeting. 4.8 Quorum; Majority Vote. At meetings of any committee, a majority of the number of members designated by the board of directors shall constitute a quorum for the transaction of business. If a quorum is not present at a meeting of any committee, a majority of the members present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present. The act of a majority of the members present at any meeting at which a quorum is in attendance shall be the act of a committee, unless the act of a greater number is required by law, the certificate of incorporation of the Corporation, or these bylaws. 4.9 Minutes. Each committee shall cause minutes of its proceedings to be prepared and shall report the same to the board of directors upon the request of the board of directors. The minutes of the proceedings of each committee shall be delivered to the Secretary of the Corporation for placement in the minute books of the Corporation. 4.10 Compensation. Committee members may, by resolution of the board of directors, be allowed a fixed sum and expenses of attendance, if any, for attending any committee meetings or a stated salary. 4.11 Responsibility. The designation of any committee and the delegation of authority to it shall not operate to relieve the board of directors or any director of any responsibility imposed upon it or such director by law. 9 ARTICLE FIVE: NOTICE 5.1 Method. Whenever by statute, the certificate of incorporation of the Corporation, or these bylaws, notice is required to be given to any committee member, director, or stockholder and no provision is made as to how such notice shall be given, personal notice shall not be required and any such notice may be given (a) in writing, by mail, postage prepaid, addressed to such committee member, director, or stockholder at his address as it appears on the books or (in the case of a stockholder) the stock transfer records of the Corporation, or (b) by any other method permitted by law (including but not limited to overnight courier service, telegram, telex, or telefax). Any notice required or permitted to be given by mail shall be deemed to be delivered and given at the time when the same is deposited in the United States mail as aforesaid. Any notice required or permitted to be given by overnight courier service shall be deemed to be delivered and given at the time delivered to such service with all charges prepaid and addressed as aforesaid. Any notice required or permitted to be given by telegram, telex, or telefax shall be deemed to be delivered and given at the time transmitted with all charges prepaid and addressed as aforesaid. 5.2 Waiver. Whenever any notice is required to be given to any stockholder, director, or committee member of the Corporation by statute, the certificate of incorporation of the Corporation, or these bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Attendance of a stockholder, director, or committee member at a meeting shall constitute a waiver of notice of such meeting, except where such person attends for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE SIX: OFFICERS 6.1 Number; Titles; Term of Office. The officers of the Corporation shall be a President, a Secretary, and such other officers as the board of directors may from time to time elect or appoint, including a Chairman of the Board, one or more Vice Presidents (with each Vice President to have such descriptive title, if any, as the board of directors shall determine), and a Treasurer. Each officer shall hold office until his successor shall have been duly elected and shall have qualified, until his death, or until he shall resign or shall have been removed in the manner hereinafter provided. Any two or more offices may be held by the same person. None of the officers need be a stockholder or a director of the Corporation or a resident of the State of Delaware. 6.2 Removal. Any officer or agent elected or appointed by the board of directors may be removed by the board of directors whenever in its judgment the best interest of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of 10 the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. 6.3 Vacancies. Any vacancy occurring in any office of the Corporation (by death, resignation, removal, or otherwise) may be filled by the board of directors. 6.4 Authority. Officers shall have such authority and perform such duties in the management of the Corporation as are provided in these bylaws or as may be determined by resolution of the board of directors not inconsistent with these bylaws. 6.5 Compensation. The compensation, if any, of officers and agents shall be fixed from time to time by the board of directors; provided, however, that the board of directors may delegate the power to determine the compensation of any officer and agent (other than the officer to whom such power is delegated) to the Chairman of the Board or the President. 6.6 Chairman of the Board. The Chairman of the Board, if elected by the board of directors, shall have such powers and duties as may be prescribed by the board of directors. Such officer shall preside at all meetings of the stockholders and of the board of directors. Such officer may sign all certificates for shares of stock of the Corporation. 6.7 President. The President shall be the chief executive officer of the Corporation and, subject to the board of directors, he shall have general executive charge, management, and control of the properties and operations of the Corporation in the ordinary course of its business, with all such powers with respect to such properties and operations as may be reasonably incident to such responsibilities. If the board of directors has not elected a Chairman of the Board or in the absence or inability to act of the Chairman of the Board, the President shall exercise all of the powers and discharge all of the duties of the Chairman of the Board. As between the Corporation and third parties, any action taken by the President in the performance of the duties of the Chairman of the Board shall be conclusive evidence that there is no Chairman of the Board or that the Chairman of the Board is absent or unable to act. 6.8 Vice Presidents. Each Vice President shall have such powers and duties as may be assigned to him by the board of directors, the Chairman of the Board, or the President, and (in order of their seniority as determined by the board of directors or, in the absence of such determination, as determined by the length of time they have held the office of Vice President) shall exercise the powers of the President during that officer's absence or inability to act. As between the Corporation and third parties, any action taken by a Vice President in the performance of the duties of the President shall be conclusive evidence of the absence or inability to act of the President at the time such action was taken. 11 6.9 Treasurer. The Treasurer shall have custody of the Corporation's funds and securities, shall keep full and accurate account of receipts and disbursements, shall deposit all monies and valuable effects in the name and to the credit of the Corporation in such depository or depositories as may be designated by the board of directors, and shall perform such other duties as may be prescribed by the board of directors, the Chairman of the Board, or the President. 6.10 Assistant Treasurers. Each Assistant Treasurer shall have such powers and duties as may be assigned to him by the board of directors, the Chairman of the Board, or the President. The Assistant Treasurers (in the order of their seniority as determined by the board of directors or, in the absence of such a determination, as determined by the length of time they have held the office of Assistant Treasurer) shall exercise the powers of the Treasurer during that officer's absence or inability to act. 6.11 Secretary. Except as otherwise provided in these bylaws, the Secretary shall keep the minutes of all meetings of the board of directors and of the stockholders in books provided for that purpose, and he shall attend to the giving and service of all notices. He may sign with the Chairman of the Board or the President, in the name of the Corporation, all contracts of the Corporation and affix the seal of the Corporation thereto. He may sign with the Chairman of the Board or the President all certificates for shares of stock of the Corporation, and he shall have charge of the certificate books, transfer books, and stock papers as the board of directors may direct, all of which shall at all reasonable times be open to inspection by any director upon application at the office of the Corporation during business hours. He shall in general perform all duties incident to the office of the Secretary, subject to the control of the board of directors, the Chairman of the Board, and the President. 6.12 Assistant Secretaries. Each Assistant Secretary shall have such powers and duties as may be assigned to him by the board of directors, the Chairman of the Board, or the President. The Assistant Secretaries (in the order of their seniority as determined by the board of directors or, in the absence of such a determination, as determined by the length of time they have held the office of Assistant Secretary) shall exercise the powers of the Secretary during that officer's absence or inability to act. ARTICLE SEVEN: CERTIFICATES AND SHAREHOLDERS 7.1 Certificates for Shares. Certificates for shares of stock of the Corporation shall be in such form as shall be approved by the board of directors. The certificates shall be signed by the Chairman of the Board or the President or a Vice President and also by the Secretary or an Assistant Secretary or by the Treasurer or an Assistant Treasurer. Any and all signatures on the certificate may be a facsimile and may be sealed with the seal of the Corporation or a facsimile thereof. If any officer, transfer agent, or registrar who has signed, or whose facsimile signature has been placed 12 upon, a certificate has ceased to be such officer, transfer agent, or registrar before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. The certificates shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued and shall exhibit the holder's name and the number of shares. 7.2 Replacement of Lost or Destroyed Certificates. The board of directors may direct a new certificate or certificates to be issued in place of a certificate or certificates theretofore issued by the Corporation and alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate or certificates representing shares to be lost or destroyed. When authorizing such issue of a new certificate or certificates the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond with a surety or sureties satisfactory to the Corporation in such sum as it may direct as indemnity against any claim, or expense resulting from a claim, that may be made against the Corporation with respect to the certificate or certificates alleged to have been lost or destroyed. 7.3 Transfer of Shares. Shares of stock of the Corporation shall be transferable only on the books of the Corporation by the holders thereof in person or by their duly authorized attorneys or legal representatives. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, the Corporation or its transfer agent shall issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. 7.4 Registered Stockholders. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. 7.5 Regulations. The board of directors shall have the power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer, and registration or the replacement of certificates for shares of stock of the Corporation. 7.6 Legends. The board of directors shall have the power and authority to provide that certificates representing shares of stock bear such legends as the board of directors deems appropriate to assure that the Corporation does not become liable for violations of federal or state securities laws or other applicable law. 13 ARTICLE EIGHT: MISCELLANEOUS PROVISIONS 8.1 Dividends. Subject to provisions of law and the certificate of incorporation of the Corporation, dividends may be declared by the board of directors at any regular or special meeting and may be paid in cash, in property, or in shares of stock of the Corporation. Such declaration and payment shall be at the discretion of the board of directors. 8.2 Reserves. There may be created by the board of directors out of funds of the Corporation legally available therefor such reserve or reserves as the directors from time to time, in their discretion, consider proper to provide for contingencies, to equalize dividends, or to repair or maintain any property of the Corporation, or for such other purpose as the board of directors shall consider beneficial to the Corporation, and the board of directors may modify or abolish any such reserve in the manner in which it was created. 8.3 Books and Records. The Corporation shall keep correct and complete books and records of account, shall keep minutes of the proceedings of its stockholders and board of directors and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its stockholders, giving the names and addresses of all stockholders and the number and class of the shares held by each. 8.4 Fiscal Year. The fiscal year of the Corporation shall be fixed by the board of directors; provided, that if such fiscal year is not fixed by the board of directors and the selection of the fiscal year is not expressly deferred by the board of directors, the fiscal year shall be the calendar year. 8.5 Seal. The seal of the Corporation shall be such as from time to time may be approved by the board of directors. 8.6 Resignations. Any director, committee member, or officer may resign by so stating at any meeting of the board of directors or by giving written notice to the board of directors, the Chairman of the Board, the President, or the Secretary. Such resignation shall take effect at the time specified therein or, if no time is specified therein, immediately upon its receipt. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 8.7 Securities of Other Corporations. The Chairman of the Board, the President, or any Vice President of the Corporation shall have the power and authority to transfer, endorse for transfer, vote, consent, or take any other action with respect to any securities of another issuer which may be held or owned by the Corporation and to make, execute, and deliver any waiver, proxy, or consent with respect to any such securities. 14 8.8 Telephone Meetings. Stockholders (acting for themselves or through a proxy), members of the board of directors, and members of a committee of the board of directors may participate in and hold a meeting of such stockholders, board of directors, or committee by means of a conference telephone or similar communications equipment by means of which persons participating in the meeting can hear each other, and participation in a meeting pursuant to this section shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 8.9 Action Without a Meeting. (a) Unless otherwise provided in the certificate of incorporation of the Corporation, any action required by the DGCL to be taken at any annual or special meeting of the stockholders, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders (acting for themselves or through a proxy) of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which the holders of all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Every written consent of stockholders shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty days of the earliest dated consent delivered in the manner required by this Section 8.9(a) to the Corporation, written consents signed by a sufficient number of holders to take action are delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office, principal place of business, or such officer or agent shall be by hand or by certified or registered mail, return receipt requested. (b) Unless otherwise restricted by the certificate of incorporation of the Corporation or by these bylaws, any action required or permitted to be taken at a meeting of the board of directors, or of any committee of the board of directors, may be taken without a meeting if a consent or consents in writing, setting forth the action so taken, shall be signed by all the directors or all the committee members, as the case may be, entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a vote of such directors or committee members, as the case may be, and may be stated as such in any certificate or document filed with the Secretary of State of the State of Delaware or in any certificate delivered to any person. Such consent or consents shall be filed with the minutes of proceedings of the board or committee, as the case may be. 15 8.10 Invalid Provisions. If any part of these bylaws shall be held invalid or inoperative for any reason, the remaining parts, so far as it is possible and reasonable, shall remain valid and operative. 8.11 Mortgages, etc. With respect to any deed, deed of trust, mortgage, or other instrument executed by the Corporation through its duly authorized officer or officers, the attestation to such execution by the Secretary of the Corporation shall not be necessary to constitute such deed, deed of trust, mortgage, or other instrument a valid and binding obligation against the Corporation unless the resolutions, if any, of the board of directors authorizing such execution expressly state that such attestation is necessary. 8.12 Headings. The headings used in these bylaws have been inserted for administrative convenience only and do not constitute matter to be construed in interpretation. 8.13 References. Whenever herein the singular number is used, the same shall include the plural where appropriate, and words of any gender should include each other gender where appropriate. 8.14 Amendments. These bylaws may be altered, amended, or repealed or new bylaws may be adopted by the stockholders or by the board of directors at any regular meeting of the stockholders or the board of directors or at any special meeting of the stockholders or the board of directors if notice of such alteration, amendment, repeal, or adoption of new bylaws be contained in the notice of such special meeting. 16 The undersigned, the Assistant Secretary of the Corporation, hereby certifies that the foregoing amended and restated bylaws were adopted by written consent of holders of more than 75% of the outstanding shares of common stock of the Corporation as of December 15, 1997. ------------------------------ David M. Wittels Assistant Secretary 17 EX-4.1 4 INDENTURE EXECUTION COPY =============================================================================== AKI, INC. $115,000,000 ------------------------------------- 10 1/2% SENIOR NOTES DUE 2008 ------------------------------------- ----------------------------- INDENTURE DATED AS OF JUNE 25, 1998 ----------------------------- IBJ SCHRODER BANK & TRUST COMPANY Trustee =============================================================================== CROSS-REFERENCE TABLE* Trust Indenture Act Section Indenture Section 310(a)(1)..................................................................7.10 (a)(2) ....................................................................7.10 (a)(3).....................................................................N.A. (a)(4).....................................................................N.A. (a)(5).....................................................................7.10 (b) .......................................................................7.10 (c) .......................................................................N.A. 311(a).....................................................................7.11 (b) .......................................................................7.11 (c) .......................................................................N.A. 312 (a)....................................................................2.05 (b) .......................................................................11.03 (c) .......................................................................11.03 313(a).....................................................................7.06 (b)(1).....................................................................10.03 (b)(2).....................................................................7.07 (c) .......................................................................7.06; 11.02 (d) .......................................................................7.06 314(a).....................................................................4.03; 11.02 (b) .......................................................................10.02 (c)(1).....................................................................11.04 (c)(2).....................................................................11.04 (c)(3).....................................................................N.A. (e) .......................................................................11.05 (f) .......................................................................N.A. 315 (a)....................................................................7.01 (b) .......................................................................7.05, 11.02 (c) .......................................................................7.01 (d) .......................................................................7.01 (e) .......................................................................6.11 316 (a)(last sentence).....................................................2.09 (a)(1)(A)..................................................................6.05 (a)(1)(B)..................................................................6.04 (a)(2).....................................................................N.A. (b) .......................................................................6.07 (c) .......................................................................2.12 317(a)(1)..................................................................6.08 (a)(2).....................................................................6.09 (b) .......................................................................2.04 318(a).....................................................................11.01 (b) .......................................................................N.A. (c) .......................................................................11.01 N.A. means not applicable. *This Cross-Reference Table is not part of the Indenture. TABLE OF CONTENTS PAGE ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE........................1 SECTION 1.01. DEFINITIONS.................................................1 SECTION 1.02. OTHER DEFINITIONS..........................................14 SECTION 1.03. TRUST INDENTURE ACT TERMS..................................15 SECTION 1.04. RULES OF CONSTRUCTION......................................15 ARTICLE 2. THE NOTES........................................................15 SECTION 2.01. FORM AND DATING............................................15 SECTION 2.02. EXECUTION AND AUTHENTICATION...............................16 SECTION 2.03. REGISTRAR AND PAYING AGENT.................................17 SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST........................17 SECTION 2.05. HOLDER LISTS...............................................17 SECTION 2.06. TRANSFER AND EXCHANGE......................................18 SECTION 2.07. REPLACEMENT NOTES..........................................30 SECTION 2.08. OUTSTANDING NOTES..........................................30 SECTION 2.09. TREASURY NOTES.............................................30 SECTION 2.10. TEMPORARY NOTES............................................30 SECTION 2.11. CANCELLATION...............................................31 SECTION 2.12. DEFAULTED INTEREST.........................................31 ARTICLE 3. REDEMPTION AND PREPAYMENT........................................31 SECTION 3.01. NOTICES TO TRUSTEE.........................................31 SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED..........................31 SECTION 3.03. NOTICE OF REDEMPTION.......................................32 i SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION.............................33 SECTION 3.05. DEPOSIT OF REDEMPTION PRICE................................33 SECTION 3.06. NOTES REDEEMED IN PART.....................................33 SECTION 3.07. OPTIONAL REDEMPTION........................................33 SECTION 3.08. NO MANDATORY REDEMPTION OR SINKING FUND PAYMENTS...........34 SECTION 3.09. OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS........34 ARTICLE 4. COVENANTS........................................................35 SECTION 4.01. PAYMENT OF NOTES...........................................35 SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY............................36 SECTION 4.03. REPORTS....................................................36 SECTION 4.04. COMPLIANCE CERTIFICATE.....................................37 SECTION 4.05. TAXES......................................................37 SECTION 4.06. STAY, EXTENSION AND USURY LAWS.............................37 SECTION 4.07. RESTRICTED PAYMENTS........................................38 SECTION 4.08. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES...................................40 SECTION 4.09. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK..........................................41 SECTION 4.10. ASSET SALES................................................43 SECTION 4.11. TRANSACTIONS WITH AFFILIATES...............................44 SECTION 4.12. LIENS......................................................45 SECTION 4.13. BUSINESS ACTIVITIES........................................45 SECTION 4.14. CORPORATE EXISTENCE........................................45 SECTION 4.15. OFFER TO REPURCHASE UPON CHANGE OF CONTROL.................45 SECTION 4.16. LIMITATION ON SALE AND LEASEBACK TRANSACTIONS..............46 SECTION 4.17. LIMITATION ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS......46 SECTION 4.18. ADDITIONAL GUARANTEES......................................47 ii ARTICLE 5. SUCCESSORS.......................................................47 SECTION 5.01. MERGER, CONSOLIDATION, OR SALE OF ASSETS...................47 SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED..........................48 ARTICLE 6. DEFAULTS AND REMEDIES............................................48 SECTION 6.01. EVENTS OF DEFAULT..........................................48 SECTION 6.02. ACCELERATION...............................................49 SECTION 6.03. OTHER REMEDIES.............................................50 SECTION 6.04. WAIVER OF PAST DEFAULTS....................................50 SECTION 6.05. CONTROL BY MAJORITY........................................51 SECTION 6.06. LIMITATION ON SUITS........................................51 SECTION 6.07. RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT..............51 SECTION 6.08. COLLECTION SUIT BY TRUSTEE.................................51 SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM...........................52 SECTION 6.10. PRIORITIES.................................................52 SECTION 6.11. UNDERTAKING FOR COSTS......................................53 ARTICLE 7. TRUSTEE..........................................................53 SECTION 7.01. DUTIES OF TRUSTEE..........................................53 SECTION 7.02. RIGHTS OF TRUSTEE..........................................54 SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE...............................54 SECTION 7.04. TRUSTEE'S DISCLAIMER.......................................55 SECTION 7.05. NOTICE OF DEFAULTS.........................................55 SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES.................55 SECTION 7.07. COMPENSATION AND INDEMNITY.................................55 SECTION 7.08. REPLACEMENT OF TRUSTEE.....................................56 SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC...........................57 SECTION 7.10. ELIGIBILITY; DISQUALIFICATION..............................57 iii SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY..........57 ARTICLE 8. LEGAL DEFEASANCE AND COVENANT DEFEASANCE.........................58 SECTION 8.01. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE...58 SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE.............................58 SECTION 8.03. COVENANT DEFEASANCE........................................58 SECTION 8.04. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE.................59 SECTION 8.05. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS.................60 SECTION 8.06. REPAYMENT TO COMPANY.......................................60 SECTION 8.07. REINSTATEMENT..............................................61 ARTICLE 9. AMENDMENT, SUPPLEMENT AND WAIVER.................................61 SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF NOTES........................61 SECTION 9.02. WITH CONSENT OF HOLDERS OF NOTES...........................62 SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT........................63 SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS..........................63 SECTION 9.05. NOTATION ON OR EXCHANGE OF NOTES...........................63 SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC............................63 ARTICLE 10 NOTE GUARANTEES..................................................64 SECTION 10.01. GUARANTEE.................................................64 SECTION 10.02. LIMITATION ON SUBSIDIARY GUARANTOR LIABILITY..............65 SECTION 10.03. EXECUTION AND DELIVERY OF NOTE GUARANTEE..................65 SECTION 10.04. SUBSIDIARY GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN TERMS........................................65 SECTION 10.05. RELEASES FOLLOWING SALE OF ASSETS.........................66 ARTICLE 11. MISCELLANEOUS...................................................67 SECTION 11.01. TRUST INDENTURE ACT CONTROLS..............................67 SECTION 11.02. NOTICES...................................................67 iv SECTION 11.03. COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES........................................68 SECTION 11.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT........68 SECTION 11.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.............68 SECTION 11.06. RULES BY TRUSTEE AND AGENTS...............................69 SECTION 11.07. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS..............................69 SECTION 11.08. GOVERNING LAW.............................................69 SECTION 11.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.............69 SECTION 11.10. SUCCESSORS................................................69 SECTION 11.11. SEVERABILITY..............................................70 SECTION 11.12. COUNTERPART ORIGINALS.....................................70 SECTION 11.13. TABLE OF CONTENTS, HEADINGS, ETC..........................70 EXHIBITS Exhibit A-1: FORM OF NOTE Exhibit A-2: FORM OF REGULATION S NOTE Exhibit B: FORM OF CERTIFICATE OF TRANSFER Exhibit C: FORM OF CERTIFICATE OF EXCHANGE Exhibit D: FORM OF CERTIFICATE OF ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR Exhibit E: FORM OF NOTATION OF NOTE GUARANTEE Exhibit F: FORM OF SUPPLEMENTAL INDENTURE v INDENTURE dated as of June 25, 1998 between AKI, Inc., a Delaware corporation (the "Company"), and IBJ Schroder Bank & Trust Company, a New York banking corporation, as trustee (the "Trustee"). The Company and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the 10 1/2% Senior Notes due 2008 (the "Series A Notes") and the new 10 1/2% Senior Notes due 2008 to be issued pursuant to the Registration Rights Agreement (the "Series B Notes" and, together with the Series A Notes, the "Notes"): ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. DEFINITIONS. "144A Global Note" means a global note in the form of Exhibit A-1 hereto bearing the Global Note Legend and the Private Placement Legend and deposited with or on behalf of, and registered in the name of, the Depositary or its nominee that will be issued in a denomination equal to the outstanding principal amount of the Notes sold in reliance on Rule 144A. "Acquired Debt" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise. "Agent" means any Registrar, Paying Agent or co-registrar. "Applicable Procedures" means, with respect to any transfer or exchange of or for beneficial interests in any Global Note, the rules and procedures of the Depositary, Euroclear and Cedel that apply to such transfer or exchange. "Asset Sale" means (i) the sale, lease, conveyance or other disposition (a "Disposition") of any assets or rights (including, without limitation, by way of a sale and leaseback), provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole will be governed by 4.15 and 5.01 and not by the provisions of the Section 4.10 hereof, and (ii) the issue or sale by the Company or any of its Restricted Subsidiaries of Equity Interests of any of the Company's Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $3.0 million or (b) for net proceeds in excess of $3.0 million. Notwithstanding the foregoing the following items shall not be deemed to be Asset Sales: (i) a disposition of assets by the Company to a Restricted Subsidiary or by a Restricted Subsidiary to the Company or to another Restricted Subsidiary, (ii) an issuance of Equity Interests by a Restricted Subsidiary to the Company or to another Restricted Subsidiary, (iii) a Restricted Payment that is permitted by Section 4.07 hereof, (iv) a disposition in the ordinary course of business, (v) the sale and leaseback of any assets within 90 days of the acquisition thereof, (vi) foreclosures on assets and (vii) any exchange of property pursuant to Section 1031 on the Internal Revenue Code of 1986, as amended, for use in a Related Business. "Attributable Debt" in respect of a sale and leaseback transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Bankruptcy Law" means Title 11, U.S. Code or any similar federal or state law for the relief of debtors. "Board of Directors" means the board of directors of the Company. "Business Day" means any day other than a Legal Holiday. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means (i) United States dollars, (ii) Government Securities having maturities of not more than six months from the date of acquisition, (iii) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any lender party to the Credit Agreement or with any domestic commercial bank having capital and surplus in excess of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above, (v) commercial paper having the rating of "P-2" (or higher) from Moody's Investors Service, Inc. or "A-3" (or higher) from Standard & Poor's Corporation and in each case maturing within six months after the date of acquisition and (vi) any fund investing exclusively in investments of the type described in clauses (i) through (v) above. "Cedel" means Cedel Bank, SA. 2 "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d) of the Exchange Act) other than the Principals or their Related Parties (as defined below), (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), other than the Principals and their Related Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, directly or indirectly, of more than 50% of the Voting Stock of the Company (measured by voting power rather than number of shares), or (iv) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors. "Company" means AKI, Inc., and any and all successors thereto. "Consolidated Cash Flow" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period plus (i) an amount equal to any extraordinary loss plus any net loss realized in connection with an Asset Sale (to the extent such losses were deducted in computing such Consolidated Net Income), plus (ii) provision for taxes based on income or profits of such Person and its Subsidiaries for such period, to the extent that such provision for taxes was included in computing such Consolidated Net Income, plus (iii) consolidated interest expense of such Person and its Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income, plus (iv) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash expenses were deducted in computing such Consolidated Net Income, plus (v) expenses and charges of the Company related to the Refinancing which are paid, taken or otherwise accounted for within 90 days of the consummation of the Refinancing, plus (vi) any non-capitalized transaction costs incurred in connection with actual or proposed financings, acquisitions or divestitures (including, but not limited to, financing and refinancing fees and costs incurred in connection with the Refinancing). Notwithstanding the foregoing, the provision for taxes on the income or profits of, and the depreciation and amortization and other non-cash charges of, a Subsidiary of the referent Person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent (and in the same proportion) that Net Income of such Subsidiary was included in calculating Consolidated Net Income of such Person. "Consolidated Interest Expense" means, with respect to any Person for any period, the sum of, without duplication, (a) the interest expense of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP (including amortization of original issue discount, non-cash interest payments, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments, if any, pursuant to Hedging Obligations; provided that in no event shall any amortization of deferred financing costs be included in Consolidated Interest Expense); and (b) the consolidated capitalized interest 3 of such Person and its Restricted Subsidiaries for such period, whether paid or accrued. Notwithstanding the foregoing, the Consolidated Interest Expense with respect to any Restricted Subsidiary that is not a Wholly Owned Restricted Subsidiary shall be included only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (i) the Net Income (but not loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Restricted Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iv) the cumulative effect of a change in accounting principles shall be excluded and (v) the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the Company or one of its Restricted Subsidiaries for purposes of Section 4.09 hereof and shall be included for purposes of Section 4.07 hereof only to the extent of the amount of dividends or distributions paid in cash to the Company or one of its Restricted Subsidiaries. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on the date of this Indenture or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Corporate Trust Office of the Trustee" shall be at the address of the Trustee specified in Section 11.02 hereof or such other address as to which the Trustee may give notice to the Company. "Credit Agreement" means that certain Credit Agreement, dated as of April 30, 1996, as amended on December 12, 1997, between the Company and Heller Financial, Inc., providing for revolving credit borrowings, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, modified, renewed, refunded, replaced or refinanced from time to time. "Default" means any event that is, or with the passage of time or the giving of notice or both would be an Event of Default. "Definitive Note" means a certificated Note registered in the name of the Holder thereof and issued in accordance with Section 2.06 hereof, in the form of Exhibit A-1 hereto except that such Note shall not bear the Global Note Legend and shall not have the "Schedule of Exchanges of Interests in the Global Note" attached thereto. "Depositary" means, with respect to the Notes issuable or issued in whole or in part in global form, the Person specified in Section 2.03 hereof as the Depositary with respect to the Notes, and any and all successors thereto appointed as depositary hereunder and having become such pursuant to the applicable provision of this Indenture. 4 "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the Holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the Notes mature; provided, however, that any Capital Stock that would not qualify as Disqualified Stock but for change of control provisions shall not constitute Disqualified Stock if the provisions are not more favorable to the holders of such Capital Stock than the provisions described under Section 4.15 applicable to the Holders of the Notes. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Euroclear" means Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear system. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Exchange Notes" means the Notes issued in the Exchange Offer pursuant to Section 2.06(f) hereof. "Exchange Offer" has the meaning set forth in the Registration Rights Agreement. "Exchange Offer Registration Statement" has the meaning set forth in the Registration Rights Agreement. "Existing Indebtedness" means Indebtedness of the Company and its Subsidiaries (other than Indebtedness under the Credit Agreement) in existence on the date of this Indenture, until such amounts are repaid. "Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of (i) the Consolidated Interest Expense of such Person for such period, (ii) any interest expense on Indebtedness of another Person that is Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iii) the product of (a) all dividend payments, whether or not in cash, on any series of preferred stock of such Person or any of its Restricted Subsidiaries, other than dividend payments on Equity Interests payable solely in Equity Interests of the Company, times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "Fixed Charge Coverage Ratio" means with respect to any Person for any period, the ratio of the Consolidated Cash Flow of such Person for such period to the Fixed Charges of such Person for such period. In the event that the Company or any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any Indebtedness (other than revolving credit borrowings) or issues preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such issuance or redemption of 5 preferred stock, as if the same had occurred at the beginning of the applicable four-quarter reference period. In addition, for purposes of making the computation referred to above, (i) acquisitions that have been made by the Company or any of its Restricted Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be calculated to include the Consolidated Cash Flow of the acquired entities on a pro forma basis after giving effect to cost savings resulting from employee terminations, facilities consolidations and closings, standardization of employee benefits and compensation policies, consolidation of property, casualty and other insurance coverage and policies, standardization of sales and distribution methods, reductions in taxes other than income taxes and other cost savings reasonably expected to be realized from such acquisition, shall be deemed to have occurred on the first day of the four-quarter reference period and Consolidated Cash Flow for such reference period shall be calculated without giving effect to clause (iii) of the proviso set forth in the definition of Consolidated Net Income, (ii) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such Fixed Charges will not be obligations of the referent Person or any of its Restricted Subsidiaries following the Calculation Date. "Foreign Subsidiary" means any Subsidiary of the Company that is not organized under the laws of a state or territory of the United States or the District of Columbia. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date of this Indenture. "Global Notes" means, individually and collectively, each of the Restricted Global Notes and the Unrestricted Global Notes, in the form of Exhibit A hereto issued in accordance with Section 2.01, 2.06(b)(iv), 2.06(d)(ii) or 2.06(f) hereof. "Global Note Legend" means the legend set forth in Section 2.06(g)(ii), which is required to be placed on all Global Notes issued under this Indenture. "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States is pledged. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency exchange rates. 6 "Holder" means a Person in whose name a Note is registered. "Indebtedness" means, with respect to any Person, any indebtedness of such Person, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or bankers' acceptances or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such Indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person; provided that Indebtedness shall not include the pledge by the Company of the Capital Stock of an Unrestricted Subsidiary of the Company to secure Non-Recourse Debt of such Unrestricted Subsidiary. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness that does not require current payments of interest, and (ii) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. "Indenture" means this Indenture, as amended or supplemented from time to time. "Indirect Participant" means a Person who holds a beneficial interest in a Global Note through a Participant. "Institutional Accredited Investor" means an institution that is an "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act, who are not also QIBs. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Restricted Subsidiary of the Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Restricted Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of Section 4.07 hereof. "Issue Date" means the date of original issuance of the Notes. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the City of New York or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue on such payment for the intervening period. "Letter of Transmittal" means the letter of transmittal to be prepared by the Company and sent to all Holders of the Notes for use by such Holders in connection with the Exchange Offer. 7 "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Liquidated Damages" means all liquidated damages then owing pursuant to Section 5 of the Registration Rights Agreement. "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), the amounts required to be applied to the payment of Indebtedness (other than Indebtedness incurred pursuant to the Credit Agreement), secured by a Lien on the asset or assets that were the subject of the Asset Sale, and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "Non-Recourse Debt" means Indebtedness (i) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor or otherwise), or (c) constitutes the lender; (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness (other than the Notes being offered hereby) of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the lenders have been notified in writing that they will not have any recourse to the stock (other than stock of an Unrestricted Subsidiary pledged by the Company to secure debt of such Unrestricted Subsidiary) or assets of the Company or any of its Restricted Subsidiaries. "Non-U.S. Person" means a Person who is not a U.S. Person. "Note Custodian" means the Trustee, as custodian with respect to the Notes in global form, or any successor entity thereto. 8 "Note Guarantee" means the Guarantee by each Subsidiary Guarantor of the Company's payment obligations under this Indenture and the Notes, executed pursuant to the provisions of this Indenture. "Notes" has the meaning assigned to it in the preamble to this Indenture. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Offering" means the offering of the Notes by the Company. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary, the Assistant Secretary or any Vice-President of such Person. "Officers' Certificate" means a certificate signed by (i) the Chairman of the Board of Directors, the Chief Executive Officer, the President or a Vice President of the Company and (ii) the Chief Financial Officer or the Secretary of the Company, which certificate shall comply with this Indenture. "Opinion of Counsel" means an opinion from legal counsel who is reasonably acceptable to the Trustee, that meets the requirements of Section 11.05 hereof. The counsel may be an employee of or counsel to the Company, any Subsidiary of the Company or the Trustee. "Participant" means, with respect to the Depositary, Euroclear or Cedel, a Person who has an account with the Depositary, Euroclear or Cedel, respectively (and, with respect to The Depository Trust Company, shall include Euroclear and Cedel). "Participating Broker-Dealer" has the meaning set forth in the Registration Rights Agreement. "Permitted Business" means any business in which the Company and its Restricted Subsidiaries are engaged on the date of this Indenture or any business reasonably related, incidental or ancillary thereto. "Permitted Investments" means (a) any Investment in the Company or in a Restricted Subsidiary of the Company that is engaged in a Permitted Business; (b) any Investment in Cash Equivalents; (c) any Investment by the Company or any Restricted Subsidiary of the Company in a Person, if as a result of such Investment (i) such Person becomes a Restricted Subsidiary of the Company that is engaged in a Permitted Business or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Restricted Subsidiary of the Company that is engaged in a Permitted Business; (d) any Restricted Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with Section 4.10 hereof; (e) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Company; and (f) other Investments made after the date of this Indenture in any Person having an aggregate fair market value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (f) that are at the time outstanding, not to exceed $10.0 million. 9 "Permitted Liens" means (i) Liens securing Indebtedness under the Credit Agreement that was permitted by the terms of this Indenture to be incurred or other Indebtedness allowed to be incurred under clause (i) of Section 4.09 hereof; (ii) Liens in favor of the Company; (iii) Liens on property of a Person existing at the time such Person is merged into or consolidated with the Company or any Restricted Subsidiary of the Company, provided that such Liens were not incurred in contemplation of such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with the Company or any Restricted Subsidiary; (iv) Liens on property existing at the time of acquisition thereof by the Company or any Restricted Subsidiary of the Company, provided that such Liens were not incurred in contemplation of such acquisition; (v) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (vi) Liens existing on the date of this Indenture; (vii) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded, provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (viii) Liens to secure Indebtedness (including Capital Lease Obligations) permitted by clause (iv) of Section 4.09 hereof; (ix) Liens securing Permitted Refinancing Indebtedness where the Liens securing the Permitted Refinancing Indebtedness were permitted under this Indenture; (x) Liens incurred in the ordinary course of business of the Company or any Restricted Subsidiary of the Company with respect to obligations that do not exceed $5.0 million at any one time outstanding and that (a) are not incurred in connection with the borrowing of money or the obtaining of advances or credit (other than trade credit in the ordinary course of business) and (b) do not in the aggregate materially detract from the value of the property or materially impair the use thereof in the operation of business by the Company or such Restricted Subsidiary; and (xi) Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries. "Permitted Refinancing Indebtedness" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries; provided that: (i) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accreted value, if applicable), plus accrued interest on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity date no earlier than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Notes on terms at least as favorable to the Holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Person" means an individual, partnership, corporation, limited liability company, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof. "Principals" means Roger L. Barnett, DLJ Merchant Banking Partners II, L.P., DLJ Merchant Banking Partners II-A, L.P., DLJ Offshore Partners II, L.P., DLJ Offshore Partners II, C.V., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJMB Funding II, Inc., DLJ Millennium Partners, L.P., DLJ Millennium Partners-A, L.P., DLJ EAB Partners, L.P., UK Investment Plan 1997 Partners and DLJ First ESC L.P. 10 "Private Placement Legend" means the legend set forth in Section 2.06(g)(i) to be placed on all Notes issued under this Indenture except where otherwise permitted by the provisions of this Indenture. "Public Equity Offering" means a public offering of Equity Interests (other than Disqualified Stock) of (i) the Company or (ii) Acquisition Corp. or Holding to the extent the net proceeds thereof are contributed to the Company as a capital contribution, that, in each case, results in net proceeds to the Company of at least $25.0 million. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of June 25, 1998, by and among the Company and the other parties named on the signature pages thereof, as such agreement may be amended, modified or supplemented from time to time. "Regulation S" means Regulation S promulgated under the Securities Act. "Regulation S Global Notes" means the Regulation S Temporary Global Notes or the Regulation S Permanent Global Notes as applicable. "Regulation S Permanent Global Notes" means the permanent global notes that are deposited with and registered in the name of the Depositary or its nominee, representing a series of Notes sold in reliance on Regulation S. "Regulation S Temporary Global Notes" means the temporary global notes that are deposited with and registered in the name of the Depositary or its nominee, representing a series of Notes sold in reliance on Regulation S. "Related Party" with respect to any Principal means (A) any controlling stockholder or partner, 80% (or more) owned Subsidiary, or spouse or immediate family member (in the case of an individual) of such Principal or (B) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding (directly or through one or more Subsidiaries) a 51% or more controlling interest of which consist of the Principals and/or such other Persons referred to in the immediately preceding clause (A). "Responsible Officer," when used with respect to the Trustee, means any officer within the Corporate Trust Administration of the Trustee (or any successor group of the Trustee) or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Definitive Note" means a Definitive Note bearing the Private Placement Legend. "Restricted Global Note" means a Global Note bearing the Private Placement Legend. "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Period" means the 40-day restricted period as defined in Regulation S. 11 "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "Rule 144" means Rule 144 promulgated under the Securities Act. "Rule 144A" means Rule 144A promulgated under the Securities Act. "Rule 144A Global Note" means a permanent global note that is deposited with and registered in the name of the Depositary or its nominee, representing a series of Notes sold in reliance on Rule 144A. "Rule 903" means Rule 903 promulgated under the Securities Act. "Rule 904" means Rule 904 promulgated the Securities Act. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Shelf Registration Statement" means the Shelf Registration Statement as defined in the Registration Rights Agreement. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date hereof. "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership or limited liability company (a) the sole general partner or the managing general partner or managing member of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "Subsidiary Guarantor" means any Restricted Subsidiary that executes a supplemental indenture providing for the Guarantee of the payment of the Notes by such Restricted Subsidiary. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as in effect on the date on which this Indenture is qualified under the TIA and as may be amended from time to time and the rules and regulations thereunder. 12 "Trustee" means the party named as such above until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor serving hereunder. "Unrestricted Definitive Note" means one or more Definitive Notes that do not bear and are not required to bear the Private Placement Legend. "Unrestricted Global Note" means a permanent global Note in the form of Exhibit A-1 attached hereto that bears the Global Note Legend and that has the "Schedule of Exchanges of Interests in the Global Note" attached thereto, and that is deposited with or on behalf of and registered in the name of the Depositary, representing a series of Notes that do not bear the Private Placement Legend. "Unrestricted Subsidiary" means any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution; but only to the extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (c) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; and (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by Section 4.07 hereof. If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of this Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under Section 4.09 hereof, the Company shall be in default of such covenant). The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall be permitted only if (i) such Indebtedness is permitted under the covenant described under Section 4.09 hereof and (ii) no Default or Event of Default would be in existence following such designation. "U.S. Person" means a U.S. person as defined in Rule 902(o) under the Securities Act. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. 13 "Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person and one or more Wholly Owned Subsidiaries of such Person. SECTION 1.02. OTHER DEFINITIONS. Defined in Term Section "Affiliate Transaction"..................................................4.11 "Asset Sale Offer".......................................................3.09 "Authentication Order"...................................................2.02 "Change of Control Offer"................................................4.15 "Change of Control Payment"..............................................4.15 "Change of Control Payment Date" ........................................4.15 "Covenant Defeasance"....................................................8.03 "Event of Default".......................................................6.01 "Excess Proceeds"........................................................4.10 "incur"..................................................................4.09 "Legal Defeasance" ......................................................8.02 "Offer Amount"...........................................................3.09 "Offer Period"...........................................................3.09 "Paying Agent"...........................................................2.03 "Permitted Debt".........................................................4.09 "Purchase Date"..........................................................3.09 "Registrar"..............................................................2.03 "Restricted Payments"....................................................4.07 SECTION 1.03. TRUST INDENTURE ACT TERMS. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Notes; "indenture security Holder" means a Holder of a Note; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and "obligor" on the Notes means the Company and any successor obligor upon the Notes. 14 All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. SECTION 1.04. RULES OF CONSTRUCTION. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) references to sections of or rules under the Securities Act shall be deemed to include substitute, replacement of successor sections or rules adopted by the SEC from time to time. ARTICLE 2. THE NOTES SECTION 2.01. FORM AND DATING. (a) General. The Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto. The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Note shall be dated the date of its authentication. The Notes shall be in denominations of $1,000 and integral multiples thereof. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Indenture and the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. However, to the extent any provision of any Note conflicts with the express provisions of this Indenture, the provisions of this Indenture shall govern and be controlling. (b) Global Notes. Notes issued in global form shall be substantially in the form of Exhibits A-1 or A-2 attached hereto (including the Global Note Legend thereon and the "Schedule of Exchanges of Interests in the Global Note" attached thereto). Notes issued in definitive form shall be substantially in the form of Exhibit A-1 attached hereto (but without the Global Note Legend thereon and without the "Schedule of Exchanges of Interests in the Global Note" attached thereto). Each Global Note shall represent such of the outstanding Notes as shall be specified therein and each shall provide that it shall represent the aggregate principal amount of outstanding Notes from time to time endorsed thereon and that the aggregate principal amount of outstanding Notes represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the aggregate principal amount of outstanding Notes represented thereby shall be made by the Trustee or the Note Custodian, at the 15 direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.06 hereof. (c) Temporary Global Notes. Notes offered and sold in reliance on Regulation S shall be issued initially in the form of the Regulation S Temporary Global Note, which shall be deposited on behalf of the purchasers of the Notes represented thereby with the Trustee, at its New York, New York office, as custodian for the Depositary, and registered in the name of the Depositary or the nominee of the Depositary for the accounts of designated agents holding on behalf of Euroclear or Cedel Bank, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The Restricted Period shall be terminated upon the receipt by the Trustee of (i) a written certificate from the Depositary, together with copies of certificates from Euroclear and Cedel Bank certifying that they have received certification of non-United States beneficial ownership of 100% of the aggregate principal amount of the Regulation S Temporary Global Note (except to the extent of any beneficial owners thereof who acquired an interest therein during the Restricted Period pursuant to another exemption from registration under the Securities Act and who will take delivery of a beneficial ownership interest in a 144A Global Note or an IAI Global Note bearing a Private Placement Legend, all as contemplated by Section 2.06(a)(ii) hereof), and (ii) an Officers' Certificate from the Company. Following the termination of the Restricted Period, beneficial interests in the Regulation S Temporary Global Note shall be exchanged for beneficial interests in Regulation S Permanent Global Notes pursuant to the Applicable Procedures. Simultaneously with the authentication of Regulation S Permanent Global Notes, the Trustee shall cancel the Regulation S Temporary Global Note. The aggregate principal amount of the Regulation S Temporary Global Note and the Regulation S Permanent Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee, as the case may be, in connection with transfers of interest as hereinafter provided. (d) Euroclear and Cedel Procedures Applicable. The provisions of the "Operating Procedures of the Euroclear System" and "Terms and Conditions Governing Use of Euroclear" and the "General Terms and Conditions of Cedel Bank" and "Customer Handbook" of Cedel Bank shall be applicable to transfers of beneficial interests in the Regulation S Temporary Global Note and the Regulation S Permanent Global Notes that are held by Participants through Euroclear or Cedel Bank. SECTION 2.02. EXECUTION AND AUTHENTICATION. One Officer shall sign the Notes for the Company by manual or facsimile signature. The Company's seal shall be reproduced on the Notes and may be in facsimile form. If an Officer whose signature is on a Note no longer holds that office at the time a Note is authenticated, the Note shall nevertheless be valid. A Note shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture. The Trustee shall, upon receipt of a written order of the Company signed by one Officer (an "Authentication Order"), authenticate Notes for original issue up to the aggregate principal amount stated in paragraph 4 of the Notes. The aggregate principal amount of Notes outstanding at any time may not exceed such amount except as provided in Section 2.07 hereof. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Notes. An authenticating agent may authenticate Notes whenever the Trustee may do 16 so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with Holders or an Affiliate of the Company. SECTION 2.03. REGISTRAR AND PAYING AGENT. The Company shall maintain an office or agency where Notes may be presented for registration of transfer or for exchange ("Registrar") and an office or agency where Notes may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may appoint one or more co-registrars and one or more additional paying agents. The term "Registrar" includes any co-registrar and the term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company shall notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company or any of its Subsidiaries may act as Paying Agent or Registrar. The Company initially appoints The Depository Trust Company ("DTC") to act as Depositary with respect to the Global Notes. The Company initially appoints the Trustee to act as the Registrar and Paying Agent and to act as Note Custodian with respect to the Global Notes. SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal, premium or Liquidated Damages, if any, or interest on the Notes, and will notify the Trustee in writing of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company or a Subsidiary) shall have no further liability for the money. If the Company or a Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Upon any bankruptcy or reorganization proceedings relating to the Company, the Trustee shall serve as Paying Agent for the Notes. SECTION 2.05. HOLDER LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders and shall otherwise comply with TIA ss. 312(a). If the Trustee is not the Registrar, the Company shall furnish to the Trustee at least seven Business Days before each interest payment date and at such other times as the Trustee may request, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders of Notes and the Company shall otherwise comply with TIA ss. 312(a). 17 SECTION 2.06. TRANSFER AND EXCHANGE. (a) Transfer and Exchange of Global Notes. A Global Note may not be transferred as a whole except by the Depositary to a nominee of the Depositary, by a nominee of the Depositary to the Depositary or to another nominee of the Depositary, the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. All Global Notes will be exchanged by the Company for Definitive Notes if (i) the Company delivers to the Trustee written notice from the Depositary that it is unwilling or unable to continue to act as Depositary or that it is no longer a clearing agency registered under the Exchange Act and, in either case, a successor Depositary is not appointed by the Company within 120 days after the date of such notice from the Depositary or (ii) the Company in its sole discretion determines that the Global Notes (in whole but not in part) should be exchanged for Definitive Notes and delivers a written notice to such effect to the Trustee; provided that in no event shall the Regulation S Temporary Global Note be exchanged by the Company for Definitive Notes prior to (x) the expiration of the Restricted Period and (y) the receipt by the Registrar of any certificates required pursuant to Rule 903(c)(3)(ii)(B) under the Securities Act. Upon the occurrence of either of the preceding events in (i) or (ii) above, Definitive Notes shall be issued in such names as the Depositary shall instruct the Trustee. Global Notes also may be exchanged or replaced, in whole or in part, as provided in Sections 2.07 and 2.10 hereof. Every Note authenticated and delivered in exchange for, or in lieu of, a Global Note or any portion thereof, pursuant to this Section 2.06 or Section 2.07 or 2.10 hereof, shall be authenticated and delivered in the form of, and shall be, a Global Note. A Global Note may not be exchanged for another Note other than as provided in this Section 2.06(a), however, beneficial interests in a Global Note may be transferred and exchanged as provided in Section 2.06(b), (c) or (f) hereof. (b) Transfer and Exchange of Beneficial Interests in the Global Notes. The transfer and exchange of beneficial interests in the Global Notes shall be effected through the Depositary, in accordance with the provisions of this Indenture and the Applicable Procedures. Beneficial interests in the Restricted Global Notes shall be subject to restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. Transfers of beneficial interests in the Global Notes also shall require compliance with either subparagraph (i) or (ii) below, as applicable, as well as one or more of the other following subparagraphs, as applicable: (i) Transfer of Beneficial Interests in the Same Global Note. Beneficial interests in any Restricted Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the same Restricted Global Note in accordance with the transfer restrictions set forth in the Private Placement Legend; provided, however, that prior to the expiration of the Restricted Period, transfers of beneficial interests in the Temporary Regulation S Global Note may not be made to a U.S. Person or for the account or benefit of a U.S. Person (other than an Initial Purchaser). Beneficial interests in any Unrestricted Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in an Unrestricted Global Note. No written orders or instructions shall be required to be delivered to the Registrar to effect the transfers described in this Section 2.06(b)(i). (ii) All Other Transfers and Exchanges of Beneficial Interests in Global Notes. In connection with all transfers and exchanges of beneficial interests that are not subject to Section 2.06(b)(i) above, the transferor of such beneficial interest must deliver to the Registrar either (A) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to credit or cause to be credited a beneficial interest in another Global Note in an amount equal to the beneficial interest to be transferred or 18 exchanged and (2) instructions given in accordance with the Applicable Procedures containing information regarding the Participant account to be credited with such increase or (B) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to cause to be issued a Definitive Note in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given by the Depositary to the Registrar containing information regarding the Person in whose name such Definitive Note shall be registered to effect the transfer or exchange referred to in (1) above; provided that in no event shall Definitive Notes be issued upon the transfer or exchange of beneficial interests in the Regulation S Temporary Global Note prior to (x) the expiration of the Restricted Period and (y) the receipt by the Registrar of any certificates required pursuant to Rule 903 under the Securities Act. Upon consummation of an Exchange Offer by the Company in accordance with Section 2.06(f) hereof, the requirements of this Section 2.06(b)(ii) shall be deemed to have been satisfied upon receipt by the Registrar of the instructions contained in the Letter of Transmittal delivered by the Holder of such beneficial interests in the Restricted Global Notes. Upon satisfaction of all of the requirements for transfer or exchange of beneficial interests in Global Notes contained in this Indenture and the Notes or otherwise applicable under the Securities Act, the Trustee shall adjust the principal amount of the relevant Global Note(s) pursuant to Section 2.06(h) hereof. (iii) Transfer of Beneficial Interests to Another Restricted Global Note. A beneficial interest in any Restricted Global Note may be transferred to a Person who takes delivery thereof in the form of a beneficial interest in another Restricted Global Note if the transfer complies with the requirements of Section 2.06(b)(ii) above and the Registrar receives the following: (A) if the transferee will take delivery in the form of a beneficial interest in the 144A Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; (B) if the transferee will take delivery in the form of a beneficial interest in the Regulation S Temporary Global Note or the Regulation S Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof; and (C) if the transferee will take delivery in the form of a beneficial interest in the IAI Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications and certificates and Opinion of Counsel required by item (3) thereof, if applicable. (iv) Transfer and Exchange of Beneficial Interests in a Restricted Global Note for Beneficial Interests in the Unrestricted Global Note. A beneficial interest in any Restricted Global Note may be exchanged by any holder thereof for a beneficial interest in an Unrestricted Global Note or transferred to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note if the exchange or transfer complies with the requirements of Section 2.06(b)(ii) above and: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the holder of the beneficial interest to be transferred, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker- 19 dealer, (2) a Person participating in the distribution of the Exchange Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) such transfer is effected by a Participating Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a beneficial interest in an Unrestricted Global Note, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(a) thereof; or (2) if the Holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a beneficial interest in an Unrestricted Global Note, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. If any such transfer is effected pursuant to subparagraph (B) or (D) above at a time when an Unrestricted Global Note has not yet been issued, the Company shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate one or more Unrestricted Global Notes in an aggregate principal amount equal to the aggregate principal amount of beneficial interests transferred pursuant to subparagraph (B) or (D) above. Beneficial interests in an Unrestricted Global Note cannot be exchanged for, or transferred to Persons who take delivery thereof in the form of, a beneficial interest in a Restricted Global Note. (c) Transfer or Exchange of Beneficial Interests for Definitive Notes. (i) Beneficial Interests in Restricted Global Notes to Restricted Definitive Notes. If any holder of a beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Restricted Definitive Note, then, upon receipt by the Registrar of the following documentation: (A) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Definitive Note, a 20 certificate from such holder in the form of Exhibit C hereto, including the certifications in item (2)(a) thereof; (B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof; (C) if such beneficial interest is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof and, at the option of the Trustee, an Opinion of Counsel to the effect that such transfer is in accordance with Rule 903 and Rule 904; (D) if such beneficial interest is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof and, at the option of the Trustee, an Opinion of Counsel to the effect that such transfer is in accordance with Rule 144; (E) if such beneficial interest is being transferred to an Institutional Accredited Investor in reliance on an exemption from the registration requirements of the Securities Act other than those listed in subparagraphs (B) through (D) above, a certificate to the effect set forth in Exhibit B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable; (F) if such beneficial interest is being transferred to the Company or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or (G) if such beneficial interest is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof, the Trustee shall cause the aggregate principal amount of the applicable Global Note to be reduced accordingly pursuant to Section 2.06(h) hereof, and the Company shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions a Definitive Note in the appropriate principal amount. Any Definitive Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.06(c) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall deliver such Definitive Notes to the Persons in whose names such Notes are so registered. Any Definitive Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.06(c)(i) shall bear the Private Placement Legend and shall be subject to all restrictions on transfer contained therein. 21 (ii) Notwithstanding Sections 2.06(c)(i)(A) and (c) hereof, a beneficial interest in the Regulation S Temporary Global Note may not be exchanged for a Definitive Note or transferred to a Person who takes delivery thereof in the form of a Definitive Note prior to (x) the expiration of the Restricted Period and (y) the receipt by the Registrar of any certificates required pursuant to Rule 903(c)(3)(ii)(B) under the Securities Act, except in the case of a transfer pursuant to an exemption from the registration requirements of the Securities Act other than Rule 903 or Rule 904, in which case, the Trustee shall receive, at its option, an Opinion of Counsel to the effect that such transfer is in accordance with Rule 903 and Rule 904 (iii) Beneficial Interests in Restricted Global Notes to Unrestricted Definitive Notes. A holder of a beneficial interest in a Restricted Global Note may exchange such beneficial interest for an Unrestricted Definitive Note or may transfer such beneficial interest to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note only if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the holder of such beneficial interest, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Exchange Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) such transfer is effected by a Participating Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Definitive Note that does not bear the Private Placement Legend, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(b) thereof; or (2) if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a Definitive Note that does not bear the Private Placement Legend, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. 22 (iv) Beneficial Interests in Unrestricted Global Notes to Unrestricted Definitive Notes. If any holder of a beneficial interest in an Unrestricted Global Note proposes to exchange such beneficial interest for a Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Definitive Note, then, upon satisfaction of the conditions set forth in Section 2.06(b)(ii) hereof, the Trustee shall cause the aggregate principal amount of the applicable Global Note to be reduced accordingly pursuant to Section 2.06(h) hereof, and the Company shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions a Definitive Note in the appropriate principal amount. Any Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.06(c)(iii) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall deliver such Definitive Notes to the Persons in whose names such Notes are so registered. Any Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.06(c)(iii) shall not bear the Private Placement Legend. (d) Transfer and Exchange of Definitive Notes for Beneficial Interests. (i) Restricted Definitive Notes to Beneficial Interests in Restricted Global Notes. If any Holder of a Restricted Definitive Note proposes to exchange such Note for a beneficial interest in a Restricted Global Note or to transfer such Restricted Definitive Notes to a Person who takes delivery thereof in the form of a beneficial interest in a Restricted Global Note, then, upon receipt by the Registrar of the following documentation: (A) if the Holder of such Restricted Definitive Note proposes to exchange such Note for a beneficial interest in a Restricted Global Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (2)(b) thereof; (B) if such Restricted Definitive Note is being transferred to a QIB in accordance with Rule 144A under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof; (C) if such Restricted Definitive Note is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof and, at the option of the Trustee, an Opinion of Counsel to the effect that such transfer is in accordance with Rule 903 and Rule 904; (D) if such Restricted Definitive Note is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof and, at the option of the Trustee, an Opinion of Counsel to the effect that such transfer is in accordance with Rule 144; (E) if such Restricted Definitive Note is being transferred to an Institutional Accredited Investor in reliance on an exemption from the registration requirements 23 of the Securities Act other than those listed in subparagraphs (B) through (D) above, a certificate to the effect set forth in Exhibit B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable; (F) if such Restricted Definitive Note is being transferred to the Company or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or (G) if such Restricted Definitive Note is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof; the Trustee shall cancel the Restricted Definitive Note, increase or cause to be increased the aggregate principal amount of, in the case of clause (A) above, the appropriate Restricted Global Note, in the case of clause (B) above, the 144A Global Note, in the case of clause (c) above, the Regulation S Global Note, and in all other cases, the IAI Global Note. (ii) Restricted Definitive Notes to Beneficial Interests in Unrestricted Global Notes. A Holder of a Restricted Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note or transfer such Restricted Definitive Note to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note only if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Exchange Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) such transfer is effected by a Participating Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the Holder of such Definitive Notes proposes to exchange such Notes for a beneficial interest in the Unrestricted Global Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(c) thereof; or (2) if the Holder of such Definitive Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of a beneficial interest in the Unrestricted Global Note, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the 24 Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. Upon satisfaction of the conditions of any of the subparagraphs in this Section 2.06(d)(ii), the Trustee shall cancel the Definitive Notes and increase or cause to be increased the aggregate principal amount of the Unrestricted Global Note. (iii) Unrestricted Definitive Notes to Beneficial Interests in Unrestricted Global Notes. A Holder of an Unrestricted Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note or transfer such Definitive Notes to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note at any time. Upon receipt of a written request from a Holder for such an exchange or transfer, the Trustee shall cancel the applicable Unrestricted Definitive Note and increase or cause to be increased the aggregate principal amount of one of the Unrestricted Global Notes. If any such exchange or transfer from a Definitive Note to a beneficial interest is effected pursuant to subparagraphs (ii)(B), (ii)(D) or (iii) above at a time when an Unrestricted Global Note has not yet been issued, the Company shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate one or more Unrestricted Global Notes in an aggregate principal amount equal to the principal amount of Definitive Notes so transferred. (e) Transfer and Exchange of Definitive Notes for Definitive Notes. Upon written request by a Holder of Definitive Notes and such Holder's compliance with the provisions of this Section 2.06(e), the Registrar shall register the transfer or exchange of Definitive Notes. Prior to such registration of transfer or exchange, the requesting Holder shall present or surrender to the Registrar the Definitive Notes duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by his attorney, duly authorized in writing. In addition, the requesting Holder shall provide any additional certifications, documents and information, as applicable, required pursuant to the following provisions of this Section 2.06(e). (i) Restricted Definitive Notes to Restricted Definitive Notes. Any Restricted Definitive Note may be transferred to and registered in the name of Persons who take delivery thereof in the form of a Restricted Definitive Note if the Registrar receives the following: (A) if the transfer will be made pursuant to Rule 144A under the Securities Act, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; (B) if the transfer will be made pursuant to Rule 903 or Rule 904, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof and, at the option of the Trustee, an Opinion of Counsel to the effect that such transfer is in accordance with Rule 903 and Rule 904; and (C) if the transfer will be made pursuant to any other exemption from the registration requirements of the Securities Act, then the transferor must deliver a 25 certificate in the form of Exhibit B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable. (ii) Restricted Definitive Notes to Unrestricted Definitive Notes. Any Restricted Definitive Note may be exchanged by the Holder thereof for an Unrestricted Definitive Note or transferred to a Person or Persons who take delivery thereof in the form of an Unrestricted Definitive Note if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Exchange Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) any such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) any such transfer is effected by a Participating Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the Holder of such Restricted Definitive Notes proposes to exchange such Notes for an Unrestricted Definitive Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(d) thereof; or (2) if the Holder of such Restricted Definitive Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of an Unrestricted Definitive Note, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests, an Opinion of Counsel in form reasonably acceptable to the Company to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. (iii) Unrestricted Definitive Notes to Unrestricted Definitive Notes. A Holder of Unrestricted Definitive Notes may transfer such Notes to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note. Upon receipt of a written request to register such a transfer, the Registrar shall register the Unrestricted Definitive Notes pursuant to the written instructions from the Holder thereof. (f) Exchange Offer. Upon the occurrence of the Exchange Offer in accordance with the Registration Rights Agreement, the Company shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02, the Trustee shall authenticate (i) one or more Unrestricted Global Notes in an aggregate 26 principal amount equal to the principal amount of the beneficial interests in the Restricted Global Notes tendered for acceptance by Persons that certify in the applicable Letters of Transmittal that (x) they are not broker-dealers, (y) they are not participating in a distribution of the Exchange Notes and (z) they are not affiliates (as defined in Rule 144) of the Company, and accepted for exchange in the Exchange Offer and (ii) Definitive Notes in an aggregate principal amount equal to the principal amount of the Restricted Definitive Notes accepted for exchange in the Exchange Offer. Concurrently with the issuance of such Notes, the Trustee shall cause the aggregate principal amount of the applicable Restricted Global Notes to be reduced accordingly, and the Company shall execute and the Trustee shall authenticate and deliver to the Persons designated by the Holders of Definitive Notes so accepted Definitive Notes in the appropriate principal amount. (g) Legends. The following legends shall appear on the face of all Global Notes and Definitive Notes issued under this Indenture unless specifically stated otherwise in the applicable provisions of this Indenture. (i) Private Placement Legend. (A) Except as permitted by subparagraph (B) below, each Global Note and each Definitive Note (and all Notes issued in exchange therefor or substitution thereof) shall bear the legend in substantially the following form: "THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A OR REGULATION S THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (d) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) OF THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR") THAT, PRIOR TO SUCH TRANSFER, FURNISHES THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS (THE FORM OF WHICH CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF SECURITIES LESS THAN $250,000, AN OPINION OF COUNSEL THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT OR (e) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM 27 THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE." (B) Notwithstanding the foregoing, any Global Note or Definitive Note issued pursuant to subparagraphs (b)(iv), (c)(ii), (c)(iii), (d)(ii), (d)(iii), (e)(ii), (e)(iii) or (f) to this Section 2.06 (and all Notes issued in exchange therefor or substitution thereof) shall not bear the Private Placement Legend. (ii) Global Note Legend. Each Global Note shall bear a legend in substantially the following form: "THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY." (iii) Regulation S Temporary Global Note Legend. The Regulation S Temporary Global Note shall bear a legend in substantially the following form: "THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON." (h) Cancellation and/or Adjustment of Global Notes. At such time as all beneficial interests in a particular Global Note have been exchanged for Definitive Notes or a particular Global Note has been redeemed, repurchased or canceled in whole and not in part, each such Global Note shall be returned to or retained and canceled by the Trustee in accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note or for Definitive Notes, the principal amount of Notes represented by such Global Note shall be reduced accordingly and an endorsement shall be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such reduction; and if the beneficial interest is being exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another 28 Global Note, such other Global Note shall be increased accordingly and an endorsement shall be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such increase. (i) General Provisions Relating to Transfers and Exchanges. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Global Notes and Definitive Notes upon the Company's order or at the Registrar's request. (ii) No service charge shall be made to a holder of a beneficial interest in a Global Note or to a Holder of a Definitive Note for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 2.10, 3.06, 3.09, 4.10, 4.15 and 9.05 hereof). (iii) The Registrar shall not be required to register the transfer of or exchange any Note selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. (iv) All Global Notes and Definitive Notes issued upon any registration of transfer or exchange of Global Notes or Definitive Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Global Notes or Definitive Notes surrendered upon such registration of transfer or exchange. (v) The Company shall not be required (A) to issue, to register the transfer of or to exchange any Notes during a period beginning at the opening of business 15 days before the day of any selection of Notes for redemption under Section 3.02 hereof and ending at the close of business on the day of selection, (B) to register the transfer of or to exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part or (C) to register the transfer of or to exchange a Note between a record date and the next succeeding Interest Payment Date. (vi) Prior to due presentment for the registration of a transfer of any Note, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of and interest on such Notes and for all other purposes, and none of the Trustee, any Agent or the Company shall be affected by notice to the contrary. (vii) The Trustee shall authenticate Global Notes and Definitive Notes in accordance with the provisions of Section 2.02 hereof. (viii)All certifications, certificates and Opinions of Counsel required to be submitted to the Registrar pursuant to this Section 2.06 to effect a registration of transfer or exchange may be submitted by facsimile. (j) Compliance With Federal or State Securities Laws. Neither the Trustee nor the Registrar shall have any duty to monitor the Company's compliance with any federal or state securities laws. 29 SECTION 2.07. REPLACEMENT NOTES. If any Note shall become mutilated, defaced or be apparently destroyed, lost or stolen, and the Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Note, the Company shall issue and the Trustee, upon receipt of an Authentication Order, shall authenticate a replacement Note if the Trustee's requirements are met. If required by the Trustee or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent and any authenticating agent from any loss that any of them may suffer if a Note is replaced. The Company may charge for its expenses in replacing a Note. Every replacement Note is an additional obligation of the Company and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Notes duly issued hereunder. SECTION 2.08. OUTSTANDING NOTES. The Notes outstanding at any time are all the Notes authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, those reductions in the interest in a Global Note effected by the Trustee in accordance with the provisions hereof, and those described in this Section as not outstanding. Except as set forth in Section 2.09 hereof, a Note does not cease to be outstanding because the Company or an Affiliate of the Company holds the Note. If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Note is held by a bona fide purchaser. If the principal amount of any Note is considered paid under Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue. If the Paying Agent (other than the Company, a Subsidiary or an Affiliate of any thereof) holds, on a redemption date or maturity date, money sufficient to pay Notes payable on that date, then on and after that date such Notes shall be deemed to be no longer outstanding and shall cease to accrue interest. SECTION 2.09. TREASURY NOTES. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Company, or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company, shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes that the Trustee actually knows are so owned shall be so disregarded. SECTION 2.10. TEMPORARY NOTES. Until certificates representing Notes are ready for delivery, the Company may prepare and the Trustee, upon receipt of an Authentication Order, shall authenticate temporary Notes. Temporary 30 Notes shall be substantially in the form of certificated Notes but may have variations that the Company considers appropriate for temporary Notes, that have been identified to the Trustee in writing by the Company and as shall be reasonably acceptable to the Trustee. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Notes in exchange for temporary Notes. Holders of temporary Notes shall be entitled to all of the benefits of this Indenture. SECTION 2.11. CANCELLATION. The Company at any time may deliver Notes to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel all Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall destroy canceled Notes (subject to the record retention requirement of the Exchange Act). Certification of the destruction of all canceled Notes shall be delivered to the Company. The Company may not issue new Notes to replace Notes that it has paid or that have been delivered to the Trustee for cancellation. SECTION 2.12. DEFAULTED INTEREST. If the Company defaults in a payment of interest on the Notes, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date, in each case at the rate provided in the Notes and in Section 4.01 hereof. The Company shall notify the Trustee in writing of the amount of defaulted interest proposed to be paid on each Note and the date of the proposed payment. The Company shall fix or cause to be fixed each such special record date and payment date, provided that no such special record date shall be less than 10 days prior to the related payment date for such defaulted interest. At least 15 days before the special record date, the Company (or, upon the written request of the Company, the Trustee in the name and at the expense of the Company) shall mail or cause to be mailed to Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid. ARTICLE 3. REDEMPTION AND PREPAYMENT SECTION 3.01. NOTICES TO TRUSTEE. If the Company elects to redeem Notes pursuant to the optional redemption provisions of Section 3.07 hereof, it shall furnish to the Trustee, at least 30 days but not more than 60 days before a redemption date, an Officers' Certificate setting forth (i) the clause of this Indenture pursuant to which the redemption shall occur, (ii) the redemption date, (iii) the principal amount of Notes to be redeemed and (iv) the redemption price. SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED. If less than all of the Notes are to be redeemed or purchased in an offer to purchase at any time, the Trustee shall select the Notes to be redeemed or purchased among the Holders of the Notes in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not so listed, on a pro rata basis, provided that no Notes having a principal amount at maturity of $1,000 or less shall be redeemed in part. In the event of partial 31 redemption by lot, the particular Notes to be redeemed shall be selected, unless otherwise provided herein, not less than 30 nor more than 60 days prior to the redemption date by the Trustee from the outstanding Notes not previously called for redemption. The Trustee shall promptly notify the Company in writing of the Notes selected for redemption and, in the case of any Note selected for partial redemption, the principal amount thereof to be redeemed. Notes and portions of Notes selected shall be in amounts of $1,000 or whole multiples of $1,000; except that if all of the Notes of a Holder are to be redeemed, the entire outstanding amount of Notes held by such Holder, even if not a multiple of $1,000, shall be redeemed. Except as provided in the preceding sentence, provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. SECTION 3.03. NOTICE OF REDEMPTION. Subject to the provisions of Section 3.09 hereof, at least 30 days but not more than 60 days before a redemption date, the Company shall mail or cause to be mailed, by first class mail, a notice of redemption to each Holder whose Notes are to be redeemed at its registered address. The notice shall identify the Notes to be redeemed and shall state: (a) the redemption date; (b) the redemption price; (c) if any Note is being redeemed in part, the portion of the principal amount of such Note to be redeemed and that, after the redemption date upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion shall be issued upon cancellation of the original Note; (d) the name and address of the Paying Agent; (e) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price; (f) that, unless the Company defaults in making such redemption payment, interest on Notes called for redemption ceases to accrue on and after the redemption date; (g) the paragraph of the Notes and/or Section of this Indenture pursuant to which the Notes called for redemption are being redeemed; and (h) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Notes. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at its expense; provided, however, that the Company shall have delivered to the Trustee, at least 45 days prior to the redemption date, an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice as provided in the preceding paragraph. 32 SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed in accordance with Section 3.03 hereof, Notes called for redemption become irrevocably due and payable on the redemption date at the redemption price. A notice of redemption may not be conditional. SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. One Business Day prior to the redemption date, the Company shall deposit with the Trustee or with the Paying Agent money sufficient to pay the redemption price of, including premium, if any, and accrued interest on all Notes to be redeemed on that date. The Trustee or the Paying Agent shall promptly return to the Company any money deposited with the Trustee or the Paying Agent by the Company in excess of the amounts necessary to pay the redemption price of, including premium, if any, and accrued interest on, all Notes to be redeemed. If the Company complies with the provisions of the preceding paragraph, on and after the redemption date, interest shall cease to accrue on the Notes or the portions of Notes called for redemption. If a Note is redeemed on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest shall be paid to the Person in whose name such Note was registered at the close of business on such record date. If any Note called for redemption shall not be so paid upon surrender for redemption because of the failure of the Company to comply with the preceding paragraph, interest shall be paid on the unpaid principal, from the redemption date until such principal is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case at the rate provided in the Notes and in Section 4.01 hereof. SECTION 3.06. NOTES REDEEMED IN PART. Upon surrender of a Note that is redeemed in part, the Company shall issue and, upon the Company's written request, the Trustee shall authenticate for the Holder at the expense of the Company a new Note equal in principal amount to the unredeemed portion of the Note surrendered. SECTION 3.07. OPTIONAL REDEMPTION. (a) Except as set forth in clause (b) of this Section 3.07, the Company shall not have the option to redeem the Notes pursuant to this Section 3.07 prior to July 1, 2003. Thereafter, the Company shall have the option to redeem the Notes, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on July 1 of the years indicated below:
YEAR PERCENTAGE - ---- ---------- 2003...................................................................105.250% 2004...................................................................102.625% 2005 and thereafter....................................................100.000%
(b) Notwithstanding the provisions of clause (a) of this Section 3.07, at any time prior to July 1 , 2001, the Company may on one or more occasions redeem up to 35% of the original aggregate principal amount of Notes at a redemption price of 110.5% of the principal amount thereof, plus accrued 33 and unpaid interest and Liquidated Damages thereon, if any, to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the original aggregate principal amount of Notes remains outstanding immediately after the occurrence of such redemption (excluding Notes held by the Company and its subsidiaries); and provided, further, that such redemption shall occur within 90 days of the date of the closing of such Public Equity Offering. (c) Any redemption pursuant to this Section 3.07 shall be made pursuant to the provisions of Section 3.01 through 3.06 hereof. SECTION 3.08. NO MANDATORY REDEMPTION OR SINKING FUND PAYMENTS. The Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. SECTION 3.09. OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS. In the event that, pursuant to Section 4.10 hereof, the Company shall be required to commence an offer to all Holders to purchase Notes (an "Asset Sale Offer"), it shall follow the procedures specified below. The Asset Sale Offer shall remain open for a period of 20 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Offer Period"). No later than five Business Days after the termination of the Offer Period (the "Purchase Date"), the Company shall purchase the principal amount of Notes required to be purchased pursuant to Section 4.10 hereof (the "Offer Amount") or, if less than the Offer Amount has been tendered, all Notes tendered in response to the Asset Sale Offer. Payment for any Notes so purchased shall be made in the same manner as interest payments are made. If the Purchase Date is on or after an interest record date and on or before the related interest payment date, any accrued and unpaid interest shall be paid to the Person in whose name a Note is registered at the close of business on such record date, and no additional interest shall be payable to Holders who tender Notes pursuant to the Asset Sale Offer. Upon the commencement of an Asset Sale Offer, the Company shall send, by first class mail, a notice to each of the Holders, with a copy to the Trustee. The notice shall contain all instructions and materials necessary to enable such Holders to tender Notes pursuant to the Asset Sale Offer. The Asset Sale Offer shall be made to all Holders. The notice, which shall govern the terms of the Asset Sale Offer, shall state: (a) that the Asset Sale Offer is being made pursuant to this Section 3.09 and Section 4.10 hereof and the length of time the Asset Sale Offer shall remain open; (b) the Offer Amount, the purchase price and the Purchase Date; (c) that any Note not tendered or accepted for payment shall continue to accrete or accrue interest; (d) that, unless the Company defaults in making such payment, any Note accepted for payment pursuant to the Asset Sale Offer shall cease to accrete or accrue interest after the Purchase Date; 34 (e) that Holders electing to have a Note purchased pursuant to an Asset Sale Offer may only elect to have all of such Note purchased and may not elect to have only a portion of such Note purchased; (f) that Holders electing to have a Note purchased pursuant to any Asset Sale Offer shall be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, or transfer by book-entry transfer, to the Company, a depositary, if appointed by the Company, or a Paying Agent at the address specified in the notice at least three days before the Purchase Date; (g) that Holders shall be entitled to withdraw their election if the Company, the depositary or the Paying Agent, as the case may be, receives, not later than the expiration of the Offer Period, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Note the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Note purchased; (h) that, if the aggregate principal amount of Notes surrendered by Holders exceeds the Offer Amount, the Company shall select the Notes to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Notes in denominations of $1,000, or integral multiples thereof, shall be purchased); and (i) that Holders whose Notes were purchased only in part shall be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered (or transferred by book-entry transfer). On or before the Purchase Date, the Company shall, to the extent lawful, accept for payment, on a pro rata basis to the extent necessary, the Offer Amount of Notes or portions thereof tendered pursuant to the Asset Sale Offer, or if less than the Offer Amount has been tendered, all Notes tendered, and shall deliver to the Trustee an Officers' Certificate stating that such Notes or portions thereof were accepted for payment by the Company in accordance with the terms of this Section 3.09. The Company, the Depositary or the Paying Agent, as the case may be, shall promptly (but in any case not later than five days after the Purchase Date) mail or deliver to each tendering Holder an amount equal to the purchase price of the Notes tendered by such Holder and accepted by the Company for purchase, and the Company shall promptly issue a new Note, and the Trustee, upon written request from the Company shall authenticate and mail or deliver such new Note to such Holder, in a principal amount equal to any unpurchased portion of the Note surrendered. Any Note not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. The Company shall publicly announce the results of the Asset Sale Offer on the Purchase Date. Other than as specifically provided in this Section 3.09, any purchase pursuant to this Section 3.09 shall be made pursuant to the provisions of Sections 3.01 through 3.06 hereof. ARTICLE 4. COVENANTS SECTION 4.01. PAYMENT OF NOTES. The Company shall pay or cause to be paid the principal of, premium, if any, and interest on the Notes on the dates and in the manner provided in the Notes. Principal, premium, if any, and interest shall be considered paid on the date due if the Paying Agent, if other than the Company or a Subsidiary thereof, holds as of 10:00 a.m. Eastern Time on the due date money deposited by the 35 Company in immediately available funds and designated for and sufficient to pay all principal, premium, if any, and interest then due. The Company shall pay all Liquidated Damages, if any, in the same manner on the dates and in the amounts set forth in the Registration Rights Agreement. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Notes to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace period) at the same rate to the extent lawful. SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. The Company shall maintain in the Borough of Manhattan, the City of New York, an office or agency (which may be an office of the Trustee or an affiliate of the Trustee, Registrar or co-registrar) where Notes may be surrendered for registration of transfer or for exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee as one such office or agency of the Company in accordance with Section 2.03. SECTION 4.03. REPORTS. (a) Whether or not required by the rules and regulations of the SEC, so long as any Notes are outstanding, the Company will furnish to the Trustee and the Holders of Notes (i) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if the Company were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (ii) all current reports that would be required to be filed with the SEC on Form 8-K if the Company were required to file such reports, in each case, within the time periods specified in the SEC rules and regulations. In addition, following the consummation of the Exchange Offer, whether or not required by the rules and regulations of the SEC, the Company shall file a copy of all such information and reports with the SEC for public availability (unless the SEC will not accept such a filing) and make such information available to the Trustee, securities analysts and prospective investors upon request. (b) The Company, the Guarantors and their respective subsidiaries shall at all times comply with TIAss. 314(a). 36 (c) For so long as any Notes remain outstanding, the Company shall furnish to the Holders, the Trustee and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. SECTION 4.04. COMPLIANCE CERTIFICATE. (a) The Company and each Subsidiary Guarantor (to the extent that such Subsidiary Guarantor is so required under the TIA) shall deliver to the Trustee, within 90 days after the end of each fiscal year, an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his or her knowledge the Company has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto) and that to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest, if any, on the Notes is prohibited or if such event has occurred, a description of the event and what action the Company is taking or proposes to take with respect thereto. (b) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the year-end financial statements delivered pursuant to Section 4.03(a) above shall be accompanied by a written statement of the Company's independent public accountants (who shall be a firm of established national reputation) that in making the examination necessary for certification of such financial statements, nothing has come to their attention that would lead them to believe that the Company has violated any provisions of Article 4 or Article 5 hereof or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. (c) The Company shall, so long as any of the Notes are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. SECTION 4.05. TAXES. The Company shall pay, and shall cause each of its Subsidiaries to pay, prior to delinquency, all material taxes, assessments, and governmental levies except such as are contested in good faith and by appropriate proceedings or where the failure to effect such payment is not adverse in any material respect to the Holders of the Notes. SECTION 4.06. STAY, EXTENSION AND USURY LAWS. The Company and each of the Subsidiary Guarantors covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Company 37 and each of the Subsidiary Guarantors (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. SECTION 4.07. RESTRICTED PAYMENTS. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of the Company's or any of its Restricted Subsidiaries' Equity Interests (including, without limitation, any payment on such Equity Interests in connection with any merger or consolidation involving the Company) or to the direct or indirect holders of the Company's or any of its Restricted Subsidiaries' Equity Interests in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company); (ii) purchase, redeem or otherwise acquire or retire for value (including, without limitation, in connection with any merger or consolidation involving the Company) any Equity Interests of the Company or any direct or indirect parent of the Company (other than any such Equity Interests owned by the Company or any Restricted Subsidiary of the Company); (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the Notes, except scheduled payments of interest or principal at Stated Maturity of such Indebtedness; or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (a) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; and (b) the Company would, after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.09 hereof; and (c) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the date of this Indenture (excluding Restricted Payments permitted by clauses (i), (ii), (iii), (iv), (viii) (other than those permitted by clause (f) of the definition of "Permitted Investments"), (ix), (xii) and (xiii) of the next succeeding paragraph), is less than the sum of (i) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date of this Indenture to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds received by the Company as a contribution to the Company's capital or received by the Company from the issue or sale since the date of this Indenture of Equity Interests of the Company (other than Disqualified Stock) or of Disqualified Stock or debt securities of the Company that have been converted into such Equity Interests (other than Equity Interests (or Disqualified Stock or debt securities) sold to a Restricted Subsidiary of the Company and other than Disqualified Stock or convertible debt securities that have been converted into Disqualified Stock), plus (iii) to the extent that any Restricted Investment that was made after the date of this Indenture is sold for cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (B) the initial amount of such Restricted Investment, plus (iv) if any Unrestricted Subsidiary (A) is redesignated as a Restricted Subsidiary, the fair 38 market value of such redesignated Subsidiary (as determined in good faith by the Board of Directors) as of the date of its redesignation or (B) pays any cash dividends or cash distributions to the Company or any of its Restricted Subsidiaries, 50% of any such cash dividends or cash distributions made after the date of this Indenture. The foregoing provisions shall not prohibit (i) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of this Indenture; (ii) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness or Equity Interests of the Company in exchange for, or out of the net cash proceeds of the substantially concurrent sale or issuance (other than to a Restricted Subsidiary of the Company) of, other Equity Interests of the Company (other than Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition shall be excluded from clause (c)(ii) of the preceding paragraph; (iii) the defeasance, redemption, repurchase or other acquisition of subordinated Indebtedness with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any dividend by a Restricted Subsidiary of the Company to the holders of its Equity Interests on a pro rata basis; (v) the declaration or payment of dividends to Acquisition Corp. or Holding for expenses incurred by Acquisition Corp. or Holding in their capacity as holding companies or for services rendered on behalf of the Company, including, without limitation, (a) customary salary, bonus and other benefits payable to officers and employees of Acquisition Corp. or Holding, (b) fees and expenses paid to members of the Board of Directors of Acquisition Corp. or Holding, (c) general corporate overhead expenses of Acquisition Corp. or Holding, (d) management, consulting or advisory fees paid to Acquisition Corp. or Holding not to exceed $4.0 million in any fiscal year, and (e) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of Acquisition Corp. or Holding held by any member or former member of Acquisition Corp.'s, Holding's or the Company's (or any of their Restricted Subsidiaries') management pursuant to any management equity subscription agreement, stockholders agreement or stock option agreement; provided, however, the aggregate amount paid pursuant to the foregoing clauses (a) through (e) does not exceed $5.0 million in any fiscal year (with any unused amounts in any fiscal year being carried over to succeeding fiscal years, subject to a maximum (without giving effect to the following clause (y)) of $10.0 million in any calendar year, plus (y) the aggregate cash proceeds received by the Company from any reissuance of Equity Interests by Acquisition Corp. or Holding to members of management of the Company and its Restricted Subsidiaries; (vi) Investments in any Person (other than the Company or a Restricted Subsidiary) engaged in a Permitted Business in an amount not to exceed $5.0 million; (vii) other Investments in Unrestricted Subsidiaries having an aggregate fair market value, taken together with all other Investments made pursuant to this clause (vii) that are at that time outstanding, not to exceed $2.0 million; (viii) Permitted Investments; (ix) the declaration or payment of dividends or other payments to Acquisition Corp. or Holding pursuant to any tax sharing agreement or other arrangement among Acquisition Corp., Holding and other members of the affiliated corporations of which Acquisition Corp. or Holding is the common parent; (x) other Restricted Payments in an aggregate amount not to exceed $10.0 million; (xi) so long as no Default or Event of Default has occurred and is continuing, the declaration and payment of dividends on Disqualified Stock issued or after the date of this Indenture, the incurrence of which satisfied the covenant set forth in the first paragraph of Section 4.09 hereof; (xii) the declaration or payment of dividends to Acquisition Corp. or Holding to satisfy any required purchase price adjustment payment arising out of the Acquisition; and (xiii) the declaration or payment of dividends or other payments to Acquisition Corp. or Holding in an amount not to exceed $2.0 million dollars to satisfy redemption obligations in respect of Equity Interests of Acquisition Corp. that are held by management of Acquisition Corp., Holding or the Company; provided, that such amount shall not be applied against expenses incurred pursuant to clause (v)(e) above. 39 The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments will be deemed to constitute Investments in an amount equal to the fair market value of such Investments at the time of such designation (as determined in good faith by the Board of Directors). Such designation will only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or such Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any non-cash Restricted Payment shall be determined in good faith by the Board of Directors whose resolution with respect thereto shall be delivered to the Trustee; such determination will be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if such fair market value exceeds $10.0 million. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this Section 4.07 were computed, together with a copy of any fairness opinion or appraisal required by this Indenture. SECTION 4.08. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits, or (b) pay any Indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or advances to the Company or any of its Restricted Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) Existing Indebtedness as in effect on the date of this Indenture, (b) the Credit Agreement as in effect as of the date of this Indenture, and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof, provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are no more restrictive in the aggregate (as determined in the good faith judgment of the Company's Board of Directors) with respect to such dividend and other payment restrictions than those contained in the Credit Agreement as in effect on the date of this Indenture, (c) this Indenture and the Notes, (d) any applicable law, rule, regulation or order, (e) any instrument of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of this Indenture to be incurred, (f) by reason of customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices, (g) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (e) above on the property so acquired, (h) Permitted Refinancing Indebtedness, provided that the material restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive, in the good faith judgment of the Company's Board of Directors, taken as a whole, to the Holders 40 of Notes than those contained in the agreements governing the Indebtedness being refinanced, (i) contracts for the sale of assets, including, without limitation, customary restrictions with respect to a Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary, (j) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business and (k) other Indebtedness or Disqualified Stock of Restricted Subsidiaries permitted to be incurred subsequent to the Issuance Date pursuant to the provisions of Section 4.09 hereof. SECTION 4.09. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and that the Company shall not issue any Disqualified Stock and shall not permit any of its Subsidiaries to issue any shares of preferred stock; provided, however, that the Company may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock or preferred stock and the Company's Restricted Subsidiaries may incur Indebtedness (including Acquired Debt) and issue Disqualified Stock or preferred stock if the Fixed Charge Coverage Ratio for the Company's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock is issued would have been at least 2.0 to 1, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock or preferred stock had been issued, as the case may be, at the beginning of such four-quarter period. The foregoing provisions shall not apply to the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"): (i) the incurrence by the Company of Indebtedness and letters of credit pursuant to the Credit Agreement; provided that the aggregate principal amount of all such Indebtedness (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of the Company thereunder) then classified as having been incurred in reliance on this clause (i) that remains outstanding under the Credit Agreement after giving effect to such incurrence does not exceed the sum of $20.0 million; (ii) the incurrence by the Company and its Restricted Subsidiaries of the Existing Indebtedness; (iii) the incurrence by the Company of Indebtedness represented by the Notes; (iv) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company or such Restricted Subsidiary (whether through the direct purchase of assets or the Capital Stock of any Person owning such Assets), in an aggregate principal amount or accreted value, as applicable, not to exceed $10.0 million; (v) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness in connection with the acquisition of assets or a new Restricted Subsidiary; provided that such Indebtedness was incurred by the prior owner of such assets or such Restricted Subsidiary prior to such acquisition by the Company or one of its Subsidiaries and was not incurred in connection with, or in contemplation of, such acquisition by the Company or one of its Subsidiaries; provided further that the principal amount (or 41 accreted value, as applicable) of such Indebtedness, together with any other outstanding Indebtedness incurred pursuant to this clause (v), does not exceed $5.0 million; (vi) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness that was permitted by this Indenture to be incurred; (vii) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Company and any of its Restricted Subsidiaries; provided, however, that (i) if the Company is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all Obligations with respect to the Notes and (ii)(A) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Company or a Restricted Subsidiary and (B) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Restricted Subsidiary shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be; (viii) the incurrence by the Company or any of its Restricted Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing or hedging (i) interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Indenture to be outstanding or (ii) exchange rate risk with respect to any agreement or Indebtedness of such Person payable in a currency other than U.S. dollars; (ix) the Guarantee by the Company or any of its Restricted Subsidiaries of Indebtedness of the Company or a Restricted Subsidiary of the Company that was permitted to be incurred by another provision of this Section 4.09; (x) the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse Debt; provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the Company; (xi) Indebtedness incurred by the Company or any of its Restricted Subsidiaries constituting reimbursement obligations with respect to letters of credit issued in the ordinary course of business, including, without limitation, to letters of credit in respect to workers' compensation claims or self-insurance, or other Indebtedness with respect to reimbursement type obligations regarding workers' compensation claims; provided, however, that upon the drawing of such letters of credit or the incurrence of such Indebtedness, such obligations are reimbursed within 30 days following such drawing or incurrence; (xii) Indebtedness arising from agreements of the Company or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, asset or Subsidiary, other than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or Subsidiary for the purpose of financing such acquisition; provided that (x) such Indebtedness is not reflected on the balance sheet of the Company or any Restricted Subsidiary (contingent obligations referred to in a footnote or footnotes to financial statements and not otherwise reflected on the balance sheet will not be deemed to be reflected on such balance sheet for purposes of this clause (x)) and (y) the maximum assumable liability in respect of such Indebtedness shall at no time exceed 50% of the gross proceeds including non-cash proceeds (the fair market value of such non-cash proceeds being measured at the time received and without giving effect to any such subsequent changes in value) actually received by the Company and/or such Restricted Subsidiary in connection with such disposition; 42 (xiii) obligations in respect of performance and surety bonds and completion guarantees provided by the Company or any Restricted Subsidiary in the ordinary course of business; (xiv) guarantees incurred in the ordinary course of business in an aggregate principal amount not to exceed $5.0 million at any time outstanding; and (xv) the incurrence by the Company or any of its Restricted Subsidiaries of additional Indebtedness, including Attributable Debt incurred after the date of this Indenture, in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any other Indebtedness incurred pursuant to this clause (xv), not to exceed $20.0 million. For purposes of determining compliance with this Section 4.09, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (i) through (xv) above or is entitled to be incurred pursuant to the first paragraph of this Section 4.09, the Company shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this Section 4.09 and such item of Indebtedness will be treated as having been incurred pursuant to only one of such clauses or pursuant to the first paragraph hereof. In addition, the Company may, at any time, change the classification of an item of Indebtedness (or any portion thereof) to any other clause or to the first paragraph hereof provided that the Company would be permitted to incur such item of Indebtedness (or portion thereof) pursuant to such other clause or the first paragraph hereof, as the case may be, at such time of reclassification. Accrual of interest, accretion or amortization of original issue discount and the accretion of accreted value will not be deemed to be an incurrence of Indebtedness for purposes of this Section 4.09. SECTION 4.10. ASSET SALES. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 75% of the consideration therefor received by the Company or such Restricted Subsidiary is in the form of cash or Cash Equivalents; provided that the amount of (x) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet) of the Company or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Notes or any Guarantee thereof) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Company or such Restricted Subsidiary from further liability and (y) any securities, notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are converted by the Company or such Restricted Subsidiary into cash or Cash Equivalents within 180 days (to the extent of the cash received), shall be deemed to be cash for purposes of this provision; and provided further that the 75% limitation referred to in clause (ii) above will not apply to any Asset Sale in which the cash or Cash Equivalents portion of the consideration received therefrom, determined in accordance with the foregoing proviso, is equal to or greater than what the after-tax proceeds would have been had such Asset Sale complied with the aforementioned 75% limitation. Within 360 days after the receipt of any Net Proceeds from an Asset Sale, the Company or any such Restricted Subsidiary may apply such Net Proceeds, at its option, (a) to repay or repurchase pari passu Indebtedness of the Company or any Indebtedness of any Restricted Subsidiary or (b) to the 43 acquisition of a controlling interest in another business, the making of a capital expenditure or the acquisition of other long-term assets, in each case, in a Permitted Business. Pending the final application of any such Net Proceeds, the Company may temporarily reduce the revolving Indebtedness under the Credit Agreement or otherwise invest such Net Proceeds in any manner that is not prohibited by this Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company will be required to make an offer to all Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal amount of Notes that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase, in accordance with the procedures set forth in this Indenture. To the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this Section 4.10, the Company will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described in this Indenture by virtue thereof. SECTION 4.11. TRANSACTIONS WITH AFFILIATES. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction") unless (i) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $1.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving either aggregate consideration in excess of $5.0 million or an aggregate consideration in excess of $3.0 million where there are no disinterested members of the Board of Directors, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing; provided that the following shall not be deemed Affiliate Transactions: (q) customary directors' fees, indemnification or similar arrangements or any employment agreement or other compensation plan or arrangement entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (r) transactions between or among the Company and/or its Restricted Subsidiaries, (s) Permitted Investments and Restricted Payments that are permitted by Section 4.07 hereof, (t) customary loans, advances, fees and compensation paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of the Company or any of its Restricted Subsidiaries, (u) transactions pursuant to any contract or 44 agreement in effect on the date of this Indenture as the same may be amended, modified or replaced from time to time so long as any such amendment, modification or replacement is no less favorable to the Company and its Restricted Subsidiaries than the contract or agreement as in effect on the Issue Date, (v) transactions between the Company or its Restricted Subsidiaries on the one hand, and Donaldson, Lufkin & Jenrette Securities Corporation or its Affiliates ("DLJ") on the other hand, involving the provision of financial, advisory, placement or underwriting services by DLJ; provided that fees payable to DLJ do not exceed the usual and customary fees of DLJ for similar services, (w) insurance arrangements among Acquisition Corp., Holding and its Subsidiaries that are not less favorable to the Company or any of its Subsidiaries than those that are in effect on the date hereof provided such arrangements are conducted in the ordinary course of business consistent with past practices, (x) payments under any tax sharing agreement or other arrangement among Acquisition Corp., Holding and other members of the affiliated group of corporations of which either is the common parent and (y) payments in connection with the Refinancing (including the payment of fees and expenses with respect thereto). SECTION 4.12. LIENS. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, create, incur, assume or otherwise cause or suffer to exist or become effective any Lien (other than Permitted Liens) upon any of their property or assets, now owned or hereafter acquired. SECTION 4.13. BUSINESS ACTIVITIES. The Company shall not, and shall not permit any Restricted Subsidiary to, engage in any business other than a Permitted Business, except to such extent as would not be material to the Company and its Restricted Subsidiaries taken as a whole. SECTION 4.14. CORPORATE EXISTENCE. Subject to Article 5 hereof, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect (i) its corporate existence, and the corporate, partnership or other existence of each of its Subsidiaries, in accordance with the respective organizational documents (as the same may be amended from time to time) of the Company or any such Subsidiary and (ii) the rights (charter and statutory), licenses and franchises of the Company and its Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any of its Subsidiaries, if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders of the Notes. SECTION 4.15. OFFER TO REPURCHASE UPON CHANGE OF CONTROL. (a) Upon the occurrence of a Change of Control, each Holder of Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the offer described in this Section 4.15 (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase (the "Change of Control Payment"). Within 60 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Notes on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"), pursuant to the procedures required by this Indenture and described in such notice. The Company will comply with the requirements of Rule 14e-1 45 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Notes as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this Indenture relating to such Change of Control Offer, the Company will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described in this Indenture by virtue thereof. (b) On the Change of Control Payment Date, the Company will, to the extent lawful, (1) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each Holder of Notes so tendered the Change of Control Payment for such Notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; provided that each such new Note will be in a principal amount of $1,000 or an integral multiple thereof. SECTION 4.16. LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, enter into any sale and leaseback transaction; provided that the Company or any Restricted Subsidiary may enter into a sale and leaseback transaction if (i) the Company or such Restricted Subsidiary could have (a) incurred Indebtedness in an amount equal to the Attributable Debt relating to such sale and leaseback transaction pursuant to Section 4.09 hereof and (b) incurred a Lien to secure such Indebtedness pursuant to Section 4.12 hereof; (ii) the gross cash proceeds of such sale and leaseback transaction are at least equal to the fair market value (as determined in good faith by the Board of Directors and set forth in an Officers' Certificate delivered to the Trustee) of the property that is the subject of such sale and leaseback transaction and (iii) the transfer of assets in such sale and leaseback transaction is permitted by, and the Company applies the proceeds of such transaction in compliance with, Section 4.10 hereof. SECTION 4.17. LIMITATION ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS. The Company shall not permit any Restricted Subsidiary, directly or indirectly, to incur Indebtedness or Guarantee or pledge any assets to secure the payment of any other Indebtedness of the Company or any Restricted Subsidiary unless either such Restricted Subsidiary (x) is a Subsidiary Guarantor or (y) simultaneously executes and delivers a supplemental Indenture to this Indenture and becomes a Subsidiary Guarantor, which Guarantee shall be senior to or pari passu with such Restricted Subsidiary's other Indebtedness or Guarantee of or pledge to secure such other Indebtedness. Notwithstanding the foregoing, any such Guarantee by a Restricted Subsidiary of the Notes shall provide by its terms that it shall be automatically and unconditionally released and discharged upon any sale, exchange or transfer, to any Person not an Affiliate of the Company, of all of the Company's stock in, or all or substantially all the assets of, such Restricted Subsidiary, which sale, exchange or transfer is made in compliance with the applicable provisions of this Indenture. The form of such Guarantee will be attached as an exhibit to this Indenture. 46 SECTION 4.18. ADDITIONAL GUARANTEES. (i) If the Company or any of its Restricted Subsidiaries shall, after the date of this Indenture, transfer or cause to be transferred, including by way of any Investment, in one or a series of transactions (whether or not related), any assets, businesses, divisions, real property or equipment having an aggregate fair market value (as determined in good faith by the Board of Directors) in excess of $10.0 million to any Restricted Subsidiary that is not a Subsidiary Guarantor or a Foreign Subsidiary, (ii) if the Company or any of its Restricted Subsidiaries shall acquire another Restricted Subsidiary other than a Foreign Subsidiary having total assets with a fair market value (as determined in good faith by the Board of Directors) in excess of $10.0 million, or (iii) if any Restricted Subsidiary other than a Foreign Subsidiary shall incur Acquired Debt in excess of $10.0 million, then the Company shall, at the time of such transfer, acquisition or incurrence (i) cause such transferee, acquired Restricted Subsidiary or Restricted Subsidiary incurring Acquired Debt (if not then a Subsidiary Guarantor) to execute a Note Guarantee of the Obligations of the Company under the Notes, (ii) such Subsidiary Guarantor and the Trustee shall execute and deliver a supplemental indenture, in the form attached hereto, evidencing such Subsidiary Guarantor's Guarantee of the Obligations of the Company under the Notes and (iii) deliver to the Trustee an Opinion of Counsel, in accordance with the terms of this Indenture. ARTICLE 5. SUCCESSORS SECTION 5.01. MERGER, CONSOLIDATION, OR SALE OF ASSETS. The Company shall not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another Person unless (i) the Company is the surviving corporation or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the entity or Person formed by or surviving any such consolidation or merger (if other than the Company) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of the Company under the Notes and this Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii) immediately after such transaction no Default or Event of Default exists; and (iv) the Company or the entity or Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made (a) will, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.09 hereof or (b) would (together with its Restricted Subsidiaries) have a higher Fixed Charge Coverage Ratio immediately after such transaction (after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period) than the Fixed Charge Coverage Ratio of the Company and its subsidiaries immediately prior to the transaction. The foregoing clause (iv) will not prohibit (a) a merger between the Company and a Wholly Owned Subsidiary of Acquisition Corp. or Holding created for the purpose of holding the Capital Stock of the Company, (b) a merger between the Company and a Wholly Owned Subsidiary or (c) a merger between the Company and an Affiliate incorporated solely for the purpose of reincorporating the Company in another state of the United States so long as, in each case, the amount of Indebtedness of the Company and its Restricted Subsidiaries is not increased thereby. The Indenture will also provide that the Company may not, directly or indirectly, lease all 47 or substantially all of its properties or assets, in one or more related transactions, to any other Person. The provisions of this Section 5.01 will not be applicable to a sale, assignment, transfer, conveyance or other disposition of assets between or among the Company and its Wholly Owned Restricted Subsidiaries. SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED. Upon any consolidation or merger, or any sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the assets of the Company in accordance with Section 5.01 hereof, the successor corporation formed by such consolidation or into or with which the Company is merged or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be substituted for (so that from and after the date of such consolidation, merger, sale, lease, conveyance or other disposition, the provisions of this Indenture referring to the "Company" shall refer instead to the successor corporation and not to the Company), and may exercise every right and power of the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein; provided, however, that the predecessor Company shall not be relieved from the obligation to pay the principal of and interest on the Notes except in the case of a sale of all of the Company's assets that meets the requirements of Section 5.01 hereof. ARTICLE 6. DEFAULTS AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT. Each of the following constitutes an "Event of Default": (a) default for 30 days in the payment when due of interest on, or Liquidated Damages with respect to, the Notes; (b) default in payment when due of the principal of or premium, if any, on the Notes; (c) failure by the Company to comply with the provisions described under Section 4.10 or 4.14 hereof; (d) failure by the Company for 30 days after notice from the Trustee or at least 25% in principal amount of the Notes then outstanding to comply with the provisions described under Sections 4.07 or 4.09 hereof; (e) failure by the Company for 60 days after notice from the Trustee or holders of at least 25% in principal amount of the Notes then outstanding to comply with any of its other agreements in this Indenture or the Notes; (f) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created after the date of this Indenture, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal 48 amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $10.0 million or more; (g) failure by the Company or any of its Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; and (h) the Company, any of its Restricted Subsidiaries that are Significant Subsidiaries, or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, pursuant to or within the meaning of Bankruptcy Law: (i) commences a voluntary case, (ii) consents to the entry of an order for relief against it in an involuntary case, (iii) consents to the appointment of a custodian of it or for all or substantially all of its property, (iv) makes a general assignment for the benefit of its creditors, or (v) generally is not paying its debts as they become due; or (i) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company, any of its Restricted Subsidiaries that are Significant Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, in an involuntary case; (ii) appoints a custodian of the Company, any of its Restricted Subsidiaries that are Significant Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, or for all or substantially all of the property of the Company, any of its Restricted Subsidiaries that are Significant Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, in an involuntary case; (iii) orders the liquidation of the Company, any of its Restricted Subsidiaries that are Significant Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary; and the order or decree remains unstayed and in effect for 60 consecutive days. SECTION 6.02. ACCELERATION. If any Event of Default (other than an Event of Default specified in clause (h) or (i) of Section 6.01 hereof with respect to the Company, any Restricted Subsidiary that is a Significant Subsidiary or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately. Upon any such declaration, the Notes shall become due and payable immediately. Notwithstanding the foregoing, if an 49 Event of Default specified in clause (h) or (i) of Section 6.01 hereof occurs with respect to the Company, any Restricted Subsidiary that is a Significant Subsidiary or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, all outstanding Notes shall be due and payable immediately without further action or notice. The Holders of a majority in aggregate principal amount of the then outstanding Notes by written notice to the Trustee may on behalf of all of the Holders rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal or interest that has become due solely because of the acceleration) have been cured or waived. If an Event of Default occurs on or after July 1, 2003 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium that the Company would have had to pay if the Company then had elected to redeem the Notes pursuant to Section 3.07 hereof, then, upon acceleration of the Notes, an equivalent premium shall also become and be immediately due and payable, to the extent permitted by law, anything in this Indenture or in the Notes to the contrary notwithstanding. If an Event of Default occurs prior to July 1, 2003 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding the prohibition on redemption of the Notes prior to such date, then, upon acceleration of the Notes, an additional premium shall also become and be immediately due and payable in an amount, for each of the years beginning on July 1 of the years set forth below, as set forth below (expressed as a percentage of the principal amount of the Notes to the date of payment that would otherwise be due but for the provisions of this sentence):
YEAR PERCENTAGE - ---- ---------- 1998................................................................110.500% 1999................................................................109.450% 2000................................................................108.400% 2001................................................................107.350% 2002................................................................106.300%
SECTION 6.03. OTHER REMEDIES. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal, premium, if any, and interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder of a Note in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. SECTION 6.04. WAIVER OF PAST DEFAULTS. Holders of not less than a majority in aggregate principal amount of the then outstanding Notes by notice to the Trustee may on behalf of the Holders of all of the Notes waive an existing Default or Event of Default and its consequences hereunder, except a continuing Default or Event of Default in the payment of the principal of, premium and Liquidated Damages, if any, or interest on, the Notes (including in connection with an offer to purchase) (provided, however, that the Holders of a majority in 50 aggregate principal amount of the then outstanding Notes may rescind an acceleration and its consequences, including any related payment default that resulted from such acceleration). Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. SECTION 6.05. CONTROL BY MAJORITY. Holders of a majority in principal amount of the then outstanding Notes may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture that the Trustee determines may be unduly prejudicial to the rights of other Holders of Notes or that may involve the Trustee in personal liability. SECTION 6.06. LIMITATION ON SUITS. A Holder of a Note may pursue a remedy with respect to this Indenture or the Notes only if: (a) the Holder of a Note gives to the Trustee written notice of a continuing Event of Default; (b) the Holders of at least 25% in principal amount of the then outstanding Notes make a written request to the Trustee to pursue the remedy; (c) such Holder of a Note or Holders of Notes offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and (e) during such 60-day period the Holders of a majority in principal amount of the then outstanding Notes do not give the Trustee a direction inconsistent with the request. A Holder of a Note may not use this Indenture to prejudice the rights of another Holder of a Note or to obtain a preference or priority over another Holder of a Note. SECTION 6.07. RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of principal, premium and Liquidated Damages, if any, and interest on the Note, on or after the respective due dates expressed in the Note (including in connection with an offer to purchase), or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default specified in Section 6.01(a) or (b) occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal of, premium and Liquidated Damages, if any, and interest 51 remaining unpaid on the Notes and interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders of the Notes allowed in any judicial proceedings relative to the Company (or any other obligor upon the Notes), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties that the Holders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10......PRIORITIES. If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee, its agents and attorneys for amounts due under Section 7.07 hereof, including payment of all compensation, expenses and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; Second: to Holders of Notes for amounts due and unpaid on the Notes for principal, premium and Liquidated Damages, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal, premium, and Liquidated Damages, if any, and interest, respectively; and Third: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders of Notes pursuant to this Section 6.10. 52 SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder of a Note pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Notes. ARTICLE 7. TRUSTEE SECTION 7.01. DUTIES OF TRUSTEE. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (i) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Indenture and the Trustee need perform only those duties and obligations that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any statements, certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the statements, certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 hereof. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), and (c) of this Section. 53 (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any liability. The Trustee shall be under no obligation to exercise any of its rights and powers under this Indenture at the request of any Holders, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 7.02. RIGHTS OF TRUSTEE. (a) The Trustee may conclusively rely upon any statement or document believed by it to be genuine and to have been signed or presented by the proper Person or parties. The Trustee need not investigate any fact or matter stated in the statement or document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within the rights or powers conferred upon it by this Indenture. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction. (g) In no event shall the Trustee be required to take notice of any default or breach hereof or any Event of Default hereunder, except for Events of Default specified in Sections 6.01(a) and (b) hereof, unless and until the Trustee shall have received from a Holder or from the Company express written notice of the circumstances constituting the breach, default or Event of Default and stating that said circumstances constitute an Event of Default hereunder. SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Company or any Affiliate of the Company with the same rights it would have if it were not Trustee. However, in the event that the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue as 54 trustee or resign. Any Agent may do the same with like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof. SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee assumes no responsibility for the correctness of, and makes no representation as to the validity or adequacy of, this Indenture or the Notes, it shall not be accountable for the Company's use of the proceeds from the Notes or any money paid to the Company or upon the Company's direction under any provision of this Indenture, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee, and it shall not be responsible for any statement or recital herein or any statement in the Notes or any other document in connection with the sale of the Notes or pursuant to this Indenture other than its certificate of authentication. SECTION 7.05. NOTICE OF DEFAULTS. If a Default or Event of Default occurs and is continuing and if it is known to the Trustee, or if appropriate notice is provided in writing in accordance with Section 7.02(g), as applicable, the Trustee shall mail to Holders of Notes a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment of principal of, premium, if any, or interest on any Note, the Trustee may withhold the notice if and so long as a committee of its Board of Directors, executive committee or a trust committee of directors or Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders of the Notes. SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES. Within 60 days after each July 1 beginning with the July 1 following the date of this Indenture, and for so long as Notes remain outstanding, the Trustee shall mail to the Holders of the Notes a brief report dated as of such reporting date that complies with TIA ss. 313(a) (but if no event described in TIA ss. 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA ss. 313(b)(2). The Trustee shall also transmit by mail all reports as required by TIA ss. 313(c). A copy of each report at the time of its mailing to the Holders of Notes shall be mailed to the Company and filed with the SEC and each stock exchange on which the Notes are listed in accordance with TIA ss. 313(d). The Company shall promptly notify the Trustee when the Notes are listed on any stock exchange. SECTION 7.07. COMPENSATION AND INDEMNITY. The Company shall pay to the Trustee from time to time reasonable compensation for its acceptance of this Indenture and services hereunder. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by or on behalf of it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties 55 under this Indenture, including the costs and expenses of enforcing this Indenture against the Company (including this Section 7.07) and defending itself against any claim (whether asserted by the Company or any Holder or any other person) or liability in connection with the exercise or performance of any of its powers or duties hereunder, except to the extent any such loss, liability or expense may be attributable to its negligence or bad faith. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The obligations of the Company under this Section 7.07 shall survive the satisfaction and discharge of this Indenture. To secure the Company's payment obligations in this Section, the Trustee shall have a Lien prior to the Notes on all money or property held or collected by the Trustee, except for money or property held in trust to pay principal and interest on particular Notes. Such Lien shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(g) or (h) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. The Trustee shall comply with the provisions of TIA ss. 313(b)(2) to the extent applicable. SECTION 7.08. REPLACEMENT OF TRUSTEE. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign in writing at any time and be discharged from the trust hereby created by so notifying the Company. The Holders of Notes of a majority in principal amount of the then outstanding Notes may remove the Trustee by so notifying the Trustee and the Company in writing. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10 hereof; (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor 56 Trustee takes office, the Holders of a majority in principal amount of the then outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company, or the Holders of Notes of at least 10% in principal amount of the then outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee, after written request by any Holder of a Note who has been a Holder of a Note for at least six months, fails to comply with Section 7.10, such Holder of a Note may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders of the Notes. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligations under Section 7.07 hereof shall continue for the benefit of the retiring Trustee. SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee. SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. There shall at all times be a Trustee hereunder that is a corporation organized and doing business under the laws of the United States of America or of any state thereof that is authorized under such laws to exercise corporate trustee power, that is subject to supervision or examination by federal or state authorities and that has a combined capital and surplus of at least $100 million as set forth in its most recent published annual report of condition. This Indenture shall always have a Trustee who satisfies the requirements of TIA ss. 310(a)(1), (2) and (5). The Trustee is subject to TIA ss. 310(b). SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The Trustee is subject to TIA ss. 311(a), excluding any creditor relationship listed in TIA ss. 311(b). A Trustee who has resigned or been removed shall be subject to TIA ss. 311(a) to the extent indicated therein. 57 ARTICLE 8. LEGAL DEFEASANCE AND COVENANT DEFEASANCE SECTION 8.01. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE. The Company may, at the option of its Board of Directors evidenced by a resolution set forth in an Officers' Certificate, at any time, elect to have either Section 8.02 or 8.03 hereof be applied to all outstanding Notes upon compliance with the conditions set forth below in this Article 8. SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.02, the Company shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be deemed to have been discharged from its obligations with respect to all outstanding Notes on the date the conditions set forth below are satisfied (hereinafter, "Legal Defeasance"). For this purpose, Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Notes, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.05 hereof and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all its other obligations under such Notes and this Indenture (and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following provisions which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of outstanding Notes to receive solely from the trust fund described in Section 8.04 hereof, and as more fully set forth in such Section, payments in respect of the principal of, premium, if any, and interest and Liquidated Damages on such Notes when such payments are due, (b) the Company's obligations with respect to such Notes under Article 2 and Section 4.02 hereof, (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder and the Company's obligations in connection therewith and (d) this Article 8. Subject to compliance with this Article 8, the Company may exercise its option under this Section 8.02 notwithstanding the prior exercise of its option under Section 8.03 hereof. SECTION 8.03. COVENANT DEFEASANCE. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, the Company shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be released from its obligations under the covenants contained in Sections 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.15, 4.16, 4.17, 4.18 and 5.01 hereof with respect to the outstanding Notes on and after the date the conditions set forth in Section 8.04 are satisfied (hereinafter, "Covenant Defeasance"), and the Notes shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Notes shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the outstanding Notes, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.01 hereof, but, except as specified above, the remainder of this Indenture and such Notes shall be unaffected thereby. In addition, upon the Company's exercise under Section 8.01 hereof of the option applicable to 58 this Section 8.03 hereof, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, Sections 6.01(d) through 6.01(f) hereof shall not constitute Events of Default. SECTION 8.04. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE. The following shall be the conditions to the application of either Section 8.02 or 8.03 hereof to the outstanding Notes: In order to exercise either Legal Defeasance or Covenant Defeasance: (a) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders, cash in United States dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium and Liquidated Damages, if any, and interest on the outstanding Notes on the stated date for payment thereof or on the applicable redemption date, as the case may be, and the Company must specify in writing whether the Notes are being defeased to maturity or to a particular redemption date; (b) in the case of an election under Section 8.02 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date hereof, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (c) in the case of an election under Section 8.03 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that, subject to customary assumptions and exclusions, the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (d) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds all or a portion of the proceeds of which will be used to defease the Notes pursuant to this Article 8 concurrently with such borrowing) or insofar as Sections 6.01(h) or 6.01(i) hereof is concerned, at any time in the period ending on the 91st day after the date of deposit; (e) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any material agreement or instrument (other than this Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (f) the Company shall have delivered to the Trustee an Opinion of Counsel (which may be subject to customary assumptions and exclusions) to the effect that on the 91st day following the deposit, the trust funds will not be subject to the effect of Section 547 of the United States Bankruptcy Code or 59 any analogous New York State law provision to any other applicable federal of New York bankruptcy, insolvency, reorganization or similar law affecting creditors' rights generally; (g) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders over any other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company; and (h) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel (which opinion may be subject to customary assumptions and exclusions), each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with. SECTION 8.05. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. Subject to Section 8.06 hereof, all money and non-callable Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 8.05, the "Trustee") pursuant to Section 8.04 hereof in respect of the outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any and all taxes, fees or other charge imposed on or assessed against the cash or non-callable Government Securities deposited pursuant to Section 8.04 hereof or the principal and interest received in respect thereof other than any such taxes, fees or other charges which by law are for the account of the Holders of the outstanding Notes. Anything in this Article 8 to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon the request of the Company any money or non-callable Government Securities held by it as provided in Section 8.04 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 8.04(a) hereof), are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. SECTION 8.06. REPAYMENT TO COMPANY. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on any Note and remaining unclaimed for two years after such principal, and premium, if any, or interest has become due and payable shall be paid to the Company on its request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as a secured creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as Trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may 60 at the expense of the Company cause to be published once, in the New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining shall be repaid to the Company. SECTION 8.07. REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any United States dollars or non-callable Government Securities in accordance with Section 8.02 or 8.03 hereof, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.02 or 8.03 hereof until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.02 or 8.03 hereof, as the case may be; provided, however, that, if the Company makes any payment of principal of, premium, if any, or interest on any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE 9. AMENDMENT, SUPPLEMENT AND WAIVER SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF NOTES. Notwithstanding Section 9.02 of this Indenture, the Company and the Trustee may amend or supplement this Indenture or the Notes without the consent of any Holder of a Note: (a) to cure any ambiguity, defect or inconsistency; (b) to provide for uncertificated Notes in addition to or in place of certificated Notes or to alter the provisions of Article 2 hereof (including the related definitions) in a manner that does not materially adversely affect any Holder; (c) to provide for the assumption of the Company's or a Subsidiary Guarantor's obligations to the Holders of the Notes by a successor to the Company or a Subsidiary Guarantor pursuant to Article 5 or Article 10 hereof; (d) to make any change that would provide any additional rights or benefits to the Holders of the Notes or that does not adversely affect the legal rights hereunder of any Holder of the Note; (e) to comply with requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA; or (f) to allow any Subsidiary Guarantor to execute a supplemental indenture and/or a Note Guarantee with respect to the Notes. Upon the request of the Company which shall be in writing and signed by an Officer of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such amended or supplemental Indenture, and upon receipt by the Trustee of the documents described in Section 7.02 hereof, the Trustee shall join with the Company and the Subsidiary Guarantors in the execution of any amended or supplemental Indenture authorized or permitted by the terms of this 61 Indenture and make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into such amended or supplemental Indenture that affects its own rights, duties or immunities under this Indenture or otherwise. SECTION 9.02. WITH CONSENT OF HOLDERS OF NOTES. Except as provided below in this Section 9.02, the Company and the Trustee may amend or supplement this Indenture (including Sections 3.09, 4.10 and 4.15 hereof), the Note Guarantees, if any, and the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding voting as a single class (including consents obtained in connection with a tender offer or exchange offer for, or purchase of, the Notes), and, subject to Sections 6.04 and 6.07 hereof, any existing Default or Event of Default (other than a Default or Event of Default in the payment of the principal of, premium, if any, or interest on the Notes, except a payment default resulting from an acceleration that has been rescinded) or compliance with any provision of this Indenture, the Note Guarantees, if any, or the Notes may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes voting as a single class (including consents obtained in connection with a tender offer or exchange offer for, or purchase of, the Notes). Section 2.08 hereof shall determine which Notes are considered to be "outstanding" for purposes of this Section 9.02. Upon the request of the Company which shall be in writing and signed by an Officer of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such amended or supplemental Indenture, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt by the Trustee of the documents described in Section 7.02 hereof, the Trustee shall join with the Company in the execution of such amended or supplemental Indenture unless such amended or supplemental Indenture directly affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such amended or supplemental Indenture. It shall not be necessary for the consent of the Holders of Notes under this Section 9.02 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section becomes effective, the Company shall mail to the Holders of Notes affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amended or supplemental Indenture or waiver. Subject to Sections 6.04 and 6.07 hereof, the Holders of a majority in aggregate principal amount of the Notes then outstanding voting as a single class may waive compliance in a particular instance by the Company with any provision of this Indenture or the Notes. However, without the consent of each Holder affected, an amendment or waiver under this Section 9.02 may not (with respect to any Notes held by a non-consenting Holder): (a) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; (b) reduce the principal of or change the fixed maturity of any Note or alter or waive any of the provisions with respect to the redemption of the Notes, except as provided above with respect to Sections 3.09, 4.10 and 4.15 hereof; 62 (c) reduce the rate of or change the time for payment of interest on any Note; (d) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the Notes (except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration); (e) make any Note payable in money other than that stated in the Notes; (f) make any change in the provisions of this Indenture relating to waivers of (a) past Defaults or (b) the rights of Holders of Notes to receive payments of principal of, interest, or premium, if any, on the Notes; (g) waive a redemption payment with respect to any Note (other than a payment required by Section 4.10 or 4.15 hereof); or (h) amend this Section 9.02. SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment or supplement to this Indenture or the Notes shall be set forth in a amended or supplemental Indenture that complies with the TIA as then in effect. SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Note is a continuing consent by the Holder of a Note and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder of a Note or subsequent Holder of a Note may revoke the consent as to its Note if the Trustee receives written notice of revocation before the date the waiver, supplement or amendment becomes effective. An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every Holder. SECTION 9.05. NOTATION ON OR EXCHANGE OF NOTES. The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Note thereafter authenticated. The Company in exchange for all Notes may issue and the Trustee shall, upon receipt of an Authentication Order, authenticate new Notes that reflect the amendment, supplement or waiver. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall sign any amended or supplemental Indenture authorized pursuant to this Article 9 if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. The Company may not sign an amendment or supplemental Indenture until the Board of Directors approves it. In executing any amended or supplemental indenture, the Trustee shall be entitled to receive and (subject to Section 7.01 hereof) shall be fully protected in relying upon, in 63 addition to the documents required by Section 11.04 hereof, an Officer's Certificate and an Opinion of Counsel stating that the execution of such amended or supplemental indenture is authorized or permitted by this Indenture. ARTICLE 10. NOTE GUARANTEES SECTION 10.01. GUARANTEE. Subject to this Article 10, and upon execution of a Supplemental Indenture and Note Guarantee, each Subsidiary Guarantor shall, jointly and severally, unconditionally guarantee to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of this Indenture, the Notes or the obligations of the Company hereunder or thereunder, that: (a) the principal of and interest on the Notes will be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of and interest on the Notes, if any, if lawful, and all other obligations of the Company to the Holders or the Trustee hereunder or thereunder will be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, that same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Subsidiary Guarantors shall be jointly and severally obligated to pay the same immediately. Each Note Guarantee shall be a guarantee of payment and not a guarantee of collection. The obligations of a Subsidiary Guarantor hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. Each Subsidiary Guarantor waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that this Note Guarantee shall not be discharged except by complete performance of the obligations contained in the Notes and this Indenture. If any Holder or the Trustee is required by any court or otherwise to return to the Company, the Subsidiary Guarantors or any custodian, trustee, liquidator or other similar official acting in relation to either the Company or the Subsidiary Guarantors, any amount paid by either to the Trustee or such Holder, the Note Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. Subsidiary Guarantors shall not be entitled to any right of subrogation in relation to the Holders in respect of any obligations guaranteed hereby until payment in full of all obligations guaranteed hereby. As between the Subsidiary Guarantors, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article 6 hereof for the purposes of a Note Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any declaration of acceleration of such obligations as provided in Article 6 hereof, 64 such obligations (whether or not due and payable) shall forthwith become due and payable by the Subsidiary Guarantors for the purpose of this Note Guarantee. The Subsidiary Guarantors shall have the right to seek contribution from any non-paying Subsidiary Guarantor so long as the exercise of such right does not impair the rights of the Holders under the Note Guarantee. SECTION 10.02. LIMITATION ON SUBSIDIARY GUARANTOR LIABILITY. Each Subsidiary Guarantor, and by its acceptance of Notes, each Holder, shall confirm that it is the intention of all such parties that the Note Guarantee of such Subsidiary Guarantor not constitute a fraudulent transfer or conveyance for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to any Note Guarantee. To effectuate the foregoing intention, the Trustee, the Holders and the Subsidiary Guarantors hereby irrevocably agree that the obligations of such Subsidiary Guarantor under its Note Guarantee and this Article 10 shall be limited to the maximum amount as will, after giving effect to such maximum amount and all other contingent and fixed liabilities of such Subsidiary Guarantor that are relevant under such laws, and after giving effect to any collections from, rights to receive contribution from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under this Article 10, result in the obligations of such Subsidiary Guarantor under its Note Guarantee not constituting a fraudulent transfer or conveyance. SECTION 10.03. EXECUTION AND DELIVERY OF NOTE GUARANTEE. To evidence its Note Guarantee set forth in Section 10.01, a notation of such Note Guarantee substantially in the form included in Exhibit F shall be endorsed by an Officer of such Subsidiary Guarantor on each Note authenticated and delivered by the Trustee and a Supplemental Indenture shall be executed on behalf of such Subsidiary Guarantor by its President or one of its Vice Presidents. The Note Guarantee set forth in Section 10.01 shall remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Note Guarantee. If an Officer whose signature is on the Supplemental Indenture or on the Note Guarantee no longer holds that office at the time the Trustee authenticates the Note on which a Note Guarantee is endorsed, the Note Guarantee shall be valid nevertheless. The delivery of any Note by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the Note Guarantee set forth in this Indenture on behalf of the Subsidiary Guarantors. SECTION 10.04. SUBSIDIARY GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN TERMS. No Subsidiary Guarantor may consolidate with or merge with or into (whether or not such Subsidiary Guarantor is the surviving Person) another Person whether or not affiliated with such Subsidiary Guarantor unless: (a) subject to Section 10.05 hereof, the Person formed by or surviving any such consolidation or merger (if other than a Subsidiary Guarantor or the Company) unconditionally assumes all the obligations of such Subsidiary Guarantor, pursuant to a supplemental indenture in form and 65 substance reasonably satisfactory to the Trustee, under the Notes, the Indenture and the Note Guarantee on the terms set forth herein or therein; and (b) immediately after giving effect to such transaction, no Default or Event of Default exists. In case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor Person, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the Note Guarantee endorsed upon the Notes and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Subsidiary Guarantor, such successor Person shall succeed to and be substituted for the Subsidiary Guarantor with the same effect as if it had been named herein as a Subsidiary Guarantor. Such successor Person thereupon may cause to be signed any or all of the Note Guarantees to be endorsed upon all of the Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee. All the Note Guarantees so issued shall in all respects have the same legal rank and benefit under this Indenture as the Note Guarantees theretofore and thereafter issued in accordance with the terms of this Indenture as though all of such Note Guarantees had been issued at the date of the execution hereof. Except as set forth in Articles 4 and 5 hereof, and notwithstanding clauses (a) and (b) above, nothing contained in this Indenture or in any of the Notes shall prevent any consolidation or merger of a Subsidiary Guarantor with or into the Company or another Subsidiary Guarantor, or shall prevent any sale or conveyance of the property of a Subsidiary Guarantor as an entirety or substantially as an entirety to the Company or another Subsidiary Guarantor. SECTION 10.05. RELEASES FOLLOWING SALE OF ASSETS. In the event of a sale or other disposition of all of the assets of any Subsidiary Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of any Subsidiary Guarantor, then such Subsidiary Guarantor (in the event of a sale or other disposition, by way of merger, consolidation or otherwise, of all of the capital stock of such Subsidiary Guarantor) or the corporation acquiring the property (in the event of a sale or other disposition of all or substantially all of the assets of such Subsidiary Guarantor) will be released and relieved of any obligations under its Note Guarantee; provided that the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of this Indenture, including without limitation Section 4.10 hereof. Upon delivery by the Company to the Trustee of an Officers' Certificate and an Opinion of Counsel to the effect that such sale or other disposition was made by the Company in accordance with the applicable provisions of this Indenture, including without limitation Section 4.10 hereof, the Trustee shall execute any documents reasonably required in order to evidence the release of any Subsidiary Guarantor from its obligations under its Note Guarantee. Any Subsidiary Guarantor not released from its obligations under its Note Guarantee shall remain liable for the full amount of principal of and interest on the Notes and for the other obligations of any Subsidiary Guarantor under this Indenture as provided in this Article 10. 66 ARTICLE 11. MISCELLANEOUS SECTION 11.01. TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA ss. 318(c), the imposed duties shall control. SECTION 11.02. NOTICES. Any notice or communication by the Company or the Trustee to the others is duly given if in writing and delivered in Person or mailed by first class mail (registered or certified, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery, to the others' address. If to the Company: AKI, Inc. 1815 East Main Street Chattanooga, Tennessee 37404 Telecopier No.: 423 624-3301 Attention: Chief Financial Officer With a copy to: Weil, Gotshal & Manges LLP 100 Crescent Court, Suite 1300 Dallas, Texas 75201-6950 Telecopier No.: 214-746-7777 Attention: R. Scott Cohen If to the Trustee: IBJ Schroder Bank & Trust Company One State Street, 11th Floor New York, New York 10004 Telecopier No.: 212-858-2952 Attention: Terence Rawlins With a copy to: Rogers & Wells LLP 200 Park Avenue New York, New York 10166-0153 Telecopier No.: 212-878-8375 Attention: David W. Bernstein, Esq. and Bonnie A. Barsamian, Esq. 67 The Company or the Trustee, by notice to the others may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Holder shall be mailed by first class mail, certified or registered, return receipt requested, or by overnight air courier guaranteeing next day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA ss. 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. SECTION 11.03. COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES. Holders may communicate pursuant to TIA ss. 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA ss. 312(c). SECTION 11.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company to the Trustee to take or refrain from taking any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 11.05 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied; and (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 11.05 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied. SECTION 11.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA ss. 314(a)(4)) shall comply with the provisions of TIA ss. 314(e) and shall include: 68 (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been satisfied; (d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been satisfied; and (d) such additional evidence of compliance with a condition or covenant as the Trustee may reasonably request. SECTION 11.06. RULES BY TRUSTEE AND AGENTS. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. SECTION 11.07. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS. No director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Notes, this Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. SECTION 11.08. GOVERNING LAW. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS INDENTURE AND THE NOTES WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. SECTION 11.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret any other indenture, loan or Indebtedness agreement of the Company or its Subsidiaries or of any other Person. Any such indenture, loan or Indebtedness agreement may not be used to interpret this Indenture. SECTION 11.10. SUCCESSORS. All agreements of the Company in this Indenture and the Notes shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. 69 SECTION 11.11. SEVERABILITY. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 11.12. COUNTERPART ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 11.13. TABLE OF CONTENTS, HEADINGS, ETC. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof. [Signatures on following page] 70 SIGNATURES Dated as of June 25, 1998 AKI, INC. BY: ------------------------------- Name: Title: IBJ SCHRODER BANK & TRUST COMPANY BY: ------------------------------- Name: Title: 71 EXHIBIT A-1 (Face of Global Note) =============================================================================== CUSIP/CINS____________ 10 1/2% Senior Notes due 2008 No. _______ $_________ AKI, INC. promises to pay to _______________, or registered assigns, the principal sum of Dollars on July 1, 2008. Interest Payment Dates: January 1 and July 1 Record Dates: December 15 and June 15 DATED: AKI, INC. BY:____________________________ Name: Title: This is one of the Global Notes referred to in the within-mentioned Indenture: IBJ Schroder Bank & Trust Company, as Trustee By:_________________________ Name: =============================================================================== A1-1 (Back of Note) 10 1/2% [Series A] [Series B] Senior Notes due 2008 [INSERT THE FOLLOWING IF THE NOTE IS ISSUED IN GLOBAL FORM.] [Unless and until it is exchanged in whole or in part for Notes in definitive form, this Debenture may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) ("DTC"), to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as may be requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as may be requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL in as much as the registered owner hereof, Cede & Co., has an interest herein.] [INSERT THE GLOBAL NOTE LEGEND, IF APPLICABLE, PURSUANT TO THE PROVISIONS OF THE INDENTURE] [INSERT THE PRIVATE PLACEMENT LEGEND, IF APPLICABLE, PURSUANT TO THE PROVISIONS OF THE INDENTURE] Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. INTEREST. AKI, Inc., a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Note at 10 1/2% per annum from June 25, 1998 until maturity and shall pay the Liquidated Damages payable pursuant to Section 5 of the Registration Rights Agreement referred to below. The Company shall pay interest and Liquidated Damages, if any, semi-annually in arrears on January 1 and July 1 of each year (the "Interest Payment Date"), or if any such day is not a Business Day, on the next succeeding Business Day. Interest on the Notes will accrue from the most recent Interest Payment Date to which interest has been paid or, if no interest has been paid, from the date of issuance; provided that if there is no existing Default in the payment of interest, and if this Note is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date; provided, further, that the first Interest Payment Date shall be January 1, 1999. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium, if any, from time to time on demand at a rate that is 1% per annum in excess of the rate then in effect; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. METHOD OF PAYMENT. The Company will pay interest on the Notes (except defaulted interest) and Liquidated Damages to the Persons who are registered Holders of Notes at the close of business on the December 15 or June 15 next preceding the Interest Payment Date, even if such Notes are canceled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Notes will be payable as A1-2 to principal, premium and Liquidated Damages, if any, and interest at the office or agency of the Company maintained for such purpose within or without the City and State of New York, or, at the option of the Company, payment of interest and Liquidated Damages may be made by check mailed to the Holders at their addresses set forth in the register of Holders, and provided that payment by wire transfer of immediately available funds will be required with respect to principal of and interest, premium and Liquidated Damages, if any, on, all Global Notes. Such payment shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. 3. PAYING AGENT AND REGISTRAR. Initially, IBJ Schroder Bank & Trust Company, the Trustee under the Indenture, will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. 4. INDENTURE. The Company issued the Notes under an Indenture dated as of June 25, 1998 (the "Indenture") between the Company and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code ss.ss. 77aaa-77bbbb). The Notes are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. To the extent any provision of this Note conflicts with the express provisions of the Indenture, the provisions of the Indenture shall govern and be controlling. The Notes are general, unsecured obligations of the Company limited to $115.0 million in aggregate principal amount, plus amounts, if any, issued to pay Liquidated Damages on outstanding Notes as set forth in Paragraph 2 hereof. 5. OPTIONAL REDEMPTION. (a) Except as set forth in clause (b) of this Paragraph 5, the Company shall not have the option to redeem the Notes prior to July 1, 2003. Thereafter, the Company shall have the option to redeem the Notes, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on July 1 of the years indicated below:
YEAR PERCENTAGE - ---- ---------- 2003...................................................................105.250% 2004...................................................................102.625% 2005 and thereafter....................................................100.0000%
(b) Notwithstanding the provisions of subparagraph (a) of this Paragraph 5, at any time prior to July 1, 2001, the Company may on one or more occasions redeem up to 35% of the original aggregate principal amount of Notes at a redemption price of 110.5% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the original aggregate principal amount of Notes remains outstanding immediately after the occurrence of such redemption (excluding Notes held by the Company and its Subsidiaries); and provided, further, that such redemption shall occur within 90 days of the date of the closing of such Public Equity Offering. A1-3 (c) Any redemption pursuant to this subparagraph 5 shall be made pursuant to the provisions of Section 3.01 through 3.06 of the Indenture. 6. MANDATORY REDEMPTION. Except as set forth in paragraph 7 below, the Company shall not be required to make mandatory redemption payments with respect to the Notes. 7. REPURCHASE AT OPTION OF HOLDER. (a) Upon the occurrence of a Change of Control, each Holder of Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the offer described in Section 4.15 of the Indenture (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase (the "Change of Control Payment"). Within 60 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Notes on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed, pursuant to the procedures required by the Indenture and described in such notice. (b) Within 360 days after the receipt of any Net Proceeds from an Asset Sale, the Company or any such Restricted Subsidiary may apply such Net Proceeds, at its option, (a) to repay or repurchase pari passu Indebtedness of the Company or any Indebtedness of any Restricted Subsidiary or (b) to the acquisition of a controlling interest in another business, the making of a capital expenditure or the acquisition of other long-term assets, in each case, in a Permitted Business. Pending the final application of any such Net Proceeds, the Company may temporarily reduce the revolving Indebtedness under the Credit Agreement or otherwise invest such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company will be required to make an offer to all Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal amount of Notes that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase, in accordance with the procedures set forth in the Indenture. To the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. Holders of Notes that are the subject of an offer to purchase may elect to have such Notes purchased by completing the form entitled "Option of Holder to Elect Purchase" on the reverse of the Notes. 8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Notes are to be redeemed at its registered address. Notes in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Notes held by a Holder are to be redeemed. On and after the redemption date interest ceases to accrue on Notes or portions thereof called for redemption. 9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Notes may A1-4 be registered and Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company need not exchange or register the transfer of any Note or portion of a Note selected for redemption, except for the unredeemed portion of any Note being redeemed in part. Also, the Company need not exchange or register the transfer of any Notes for a period of 15 days before a selection of Notes to be redeemed or during the period between a record date and the corresponding Interest Payment Date. 10. PERSONS DEEMED OWNERS. The registered Holder of a Note may be treated as its owner for all purposes. 11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the then outstanding Notes and any existing Default or compliance with any provision of the Indenture or the Notes may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes. Without the consent of any Holder of a Note, the Indenture or the Notes may be amended or supplemented to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for the assumption of the Company's obligations to Holders of the Notes in case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of the Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, to comply with the requirements of the SEC in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act, or to allow any Person to execute a supplemental indenture to the Indenture and/or a Note Guarantee with respect to the Notes. 12. DEFAULTS AND REMEDIES. Each of the following constitutes an "Event of Default": (a) default for 30 days in the payment when due of interest on, or Liquidated Damages with respect to, the Notes; (b) default in payment when due of the principal of or premium, if any, on the Notes; (c) failure by the Company to comply with the provisions described under Section 4.10 or 4.15 of the Indenture; (d) failure by the Company for 30 days after notice from the Trustee or at least 25% in principal amount of the Notes then outstanding to comply with the provisions described under Sections 4.07 or 4.09 of the Indenture; (e) failure by the Company for 60 days after notice from the Trustee or holders of at least 25% in principal amount of the Notes then outstanding to comply with any of its other agreements in the Indenture or the Notes; (f) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created after the date of the Indenture, which default (i) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (ii) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $10.0 million or more; (g) failure by the Company or any of its Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; and (h) certain events of bankruptcy or insolvency as described in the Indenture. A1-5 If any Event of Default (other than certain events of bankruptcy or insolvency) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately. Upon any such declaration, the Notes shall become due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, all outstanding Notes shall be due and payable immediately without further action or notice. The Holders of a majority in aggregate principal amount of the then outstanding Notes by written notice to the Trustee may on behalf of all of the Holders rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal or interest that has become due solely because of the acceleration) have been cured or waived. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default to deliver to the Trustee a statement specifying such Default or Event of Default. 13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates, as if it were not the Trustee. 14. NO RECOURSE AGAINST OTHERS. A director, officer, employee, incorporator or stockholder, of the Company, as such, shall not have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. 15. AUTHENTICATION. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 16. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 17. ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL NOTES AND RESTRICTED DEFINITIVE NOTES. In addition to the rights provided to Holders of Notes under the Indenture, Holders of Restricted Global Notes and Restricted Definitive Notes shall have all the rights set forth in the Registration Rights Agreement dated as of June 25, 1998, between the Company and the parties named on the signature pages thereof (the "Registration Rights Agreement"). 18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture and/or the Registration Rights Agreement. Requests may be made to: A1-6 AKI, Inc. 1815 East Main Street Chattanooga, Tennessee 37404 Telecopier no.: (423) 624-3301 Attention: Chief Financial Officer A1-7 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to (Insert assignee's soc. sec. or tax I.D. no.) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint ------------------------------------------------------- to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date: Your Signature: -------------------------------- (Sign exactly as your name appears on the Note) Tax Identification No: ------------------------- Signature Guarantee. A1-8 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 4.10 or 4.15 of the Indenture, check the box below: [ ] Section 4.10 [ ] Section 4.15 If you want to elect to have only part of the Note purchased by the Company pursuant to Section 4.10 or Section 4.15 of the Indenture, state the amount you elect to have purchased: $________ Date: Your Signature: -------------------------------- (Sign exactly as your name appears on the Note) Tax Identification No: ------------------------- Signature Guarantee. A1-9 SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE1 The following exchanges of a part of this Global Note for an interest in another Global Note or for a Definitive Note, or exchanges of a part of another Global Note or Definitive Note for an interest in this Global Note, have been made:
Principal Amount Amount of decrease in Amount of increase in of this Global Signature of Principal Amount Principal Amount Note following such authorized officer of of this of this decrease Trustee or Note Date of Exchange Global Note Global Note (or increase) Custodian ---------------- ----------- ----------- ------------ ---------
- ------------------------ 1 This should be included only in the Notes is issued in global form. A1-10 EXHIBIT A-2 (Face of Regulation S Temporary Global Note) =============================================================================== CUSIP/CINS____________ 10 1/2% Senior Notes due 2008 No._________________ $___________ AKI, INC. promises to pay to _______________, or registered assigns, the principal sum of Dollars on July 1, 2008. Interest Payment Dates: January 1 and July 1 Record Dates: December 15 and June 15 DATED: AKI, INC. BY: -------------------------------- Name: Title: This is one of the Global Notes referred to in the within-mentioned Indenture: IBJ Schroder Bank & Trust Company, as Trustee By: ______________________________ Name: =============================================================================== A2-1 (Back of Regulation S Temporary Global Note) 10 1/2% [Series A] [Series B] Senior Notes due 2008 THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON. "THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A OR REGULATION S THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (d) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) OF THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR") THAT, PRIOR TO SUCH TRANSFER, FURNISHES THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS (THE FORM OF WHICH CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF SECURITIES LESS THAN $250,000, AN OPINION OF COUNSEL THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT OR (e) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE." Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. A2-2 1. INTEREST. AKI, Inc., a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Note at 10 1/2% per annum from June 25, 1998 until maturity and shall pay the Liquidated Damages payable pursuant to Section 5 of the Registration Rights Agreement referred to below. The Company shall pay interest and Liquidated Damages, if any, semi-annually in arrears on January 1 and July 1 of each year (the "Interest Payment Date"), or if any such day is not a Business Day, on the next succeeding Business Day. Interest on the Notes will accrue from the most recent Interest Payment Date to which interest has been paid or, if no interest has been paid, from the date of issuance; provided that if there is no existing Default in the payment of interest, and if this Note is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date; provided, further, that the first Interest Payment Date shall be January 1, 1999. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium, if any, from time to time on demand at a rate that is 1% per annum in excess of the rate then in effect; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. METHOD OF PAYMENT. The Company will pay interest on the Notes (except defaulted interest) and Liquidated Damages to the Persons who are registered Holders of Notes at the close of business on the December 15 or June 15 next preceding the Interest Payment Date, even if such Notes are canceled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Notes will be payable as to principal, premium and Liquidated Damages, if any, and interest at the office or agency of the Company maintained for such purpose within or without the City and State of New York, or, at the option of the Company, payment of interest and Liquidated Damages may be made by check mailed to the Holders at their addresses set forth in the register of Holders, and provided that payment by wire transfer of immediately available funds will be required with respect to principal of and interest, premium and Liquidated Damages, if any, on, all Global Notes. Such payment shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. 3. PAYING AGENT AND REGISTRAR. Initially, IBJ Schroder Bank & Trust Company, the Trustee under the Indenture, will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. 4. INDENTURE. The Company issued the Notes under an Indenture dated as of June 25, 1998 (the "Indenture") between the Company and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code ss.ss. 77aaa-77bbbb). The Notes are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. To the extent any provision of this Note conflicts with the express provisions of the Indenture, the provisions of the Indenture shall govern and be controlling. The Notes are general, unsecured obligations of the Company limited to $115.0 million in aggregate principal amount, plus amounts, if any, issued to pay Liquidated Damages on outstanding Notes as set forth in Paragraph 2 hereof. A2-3 5. OPTIONAL REDEMPTION. (a) Except as set forth in clause (b) of this Paragraph 5, the Company shall not have the option to redeem the Notes prior to July 1, 2003. Thereafter, the Company shall have the option to redeem the Notes, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on July 1 of the years indicated below:
YEAR PERCENTAGE - ---- ---------- 2003...................................................................105.250% 2004...................................................................102.625% 2005 and thereafter....................................................100.0000%
(b) Notwithstanding the provisions of subparagraph (a) of this Paragraph 5, at any time prior to July 1, 2001, the Company may on one or more occasions redeem up to 35% of the original aggregate principal amount of Notes at a redemption price of 110.5% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the original aggregate principal amount of Notes remains outstanding immediately after the occurrence of such redemption (excluding Notes held by the Company and its Subsidiaries); and provided, further, that such redemption shall occur within 90 days of the date of the closing of such Public Equity Offering. (c) Any redemption pursuant to this subparagraph 5 shall be made pursuant to the provisions of Section 3.01 through 3.06 of the Indenture. 6. MANDATORY REDEMPTION. Except as set forth in paragraph 7 below, the Company shall not be required to make mandatory redemption payments with respect to the Notes. 7. REPURCHASE AT OPTION OF HOLDER. (a) Upon the occurrence of a Change of Control, each Holder of Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the offer described in Section 4.15 of the Indenture (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase (the "Change of Control Payment"). Within 60 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Notes on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed, pursuant to the procedures required by the Indenture and described in such notice. (b) Within 360 days after the receipt of any Net Proceeds from an Asset Sale, the Company or any such Restricted Subsidiary may apply such Net Proceeds, at its option, (a) to repay or repurchase pari passu Indebtedness of the Company or any Indebtedness of any Restricted Subsidiary or (b) A2-4 to the acquisition of a controlling interest in another business, the making of a capital expenditure or the acquisition of other long-term assets, in each case, in a Permitted Business. Pending the final application of any such Net Proceeds, the Company may temporarily reduce the revolving Indebtedness under the Credit Agreement or otherwise invest such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company will be required to make an offer to all Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal amount of Notes that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase, in accordance with the procedures set forth in the Indenture. To the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. Holders of Notes that are the subject of an offer to purchase may elect to have such Notes purchased by completing the form entitled "Option of Holder to Elect Purchase" on the reverse of the Notes. 8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Notes are to be redeemed at its registered address. Notes in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Notes held by a Holder are to be redeemed. On and after the redemption date interest ceases to accrue on Notes or portions thereof called for redemption. 9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company need not exchange or register the transfer of any Note or portion of a Note selected for redemption, except for the unredeemed portion of any Note being redeemed in part. Also, the Company need not exchange or register the transfer of any Notes for a period of 15 days before a selection of Notes to be redeemed or during the period between a record date and the corresponding Interest Payment Date. 10. PERSONS DEEMED OWNERS. The registered Holder of a Note may be treated as its owner for all purposes. 11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the then outstanding Notes and any existing Default or compliance with any provision of the Indenture or the Notes may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes. Without the consent of any Holder of a Note, the Indenture or the Notes may be amended or supplemented to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for the assumption of the Company's obligations to Holders of the Notes in case of a merger or consolidation, to A2-5 make any change that would provide any additional rights or benefits to the Holders of the Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, to comply with the requirements of the SEC in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act, or to allow any Person to execute a supplemental indenture to the Indenture and/or a Note Guarantee with respect to the Notes. 12. DEFAULTS AND REMEDIES. Each of the following constitutes an "Event of Default": (a) default for 30 days in the payment when due of interest on, or Liquidated Damages with respect to, the Notes; (b) default in payment when due of the principal of or premium, if any, on the Notes; (c) failure by the Company to comply with the provisions described under Section 4.10 or 4.15 of the Indenture; (d) failure by the Company for 30 days after notice from the Trustee or at least 25% in principal amount of the Notes then outstanding to comply with the provisions described under Sections 4.07 or 4.09 of the Indenture; (e) failure by the Company for 60 days after notice from the Trustee or holders of at least 25% in principal amount of the Notes then outstanding to comply with any of its other agreements in the Indenture or the Notes; (f) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created after the date of the Indenture, which default (i) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (ii) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $10.0 million or more; (g) failure by the Company or any of its Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; and (h) certain events of bankruptcy or insolvency as described in the Indenture. If any Event of Default (other than certain events of bankruptcy or insolvency) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately. Upon any such declaration, the Notes shall become due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, all outstanding Notes shall be due and payable immediately without further action or notice. The Holders of a majority in aggregate principal amount of the then outstanding Notes by written notice to the Trustee may on behalf of all of the Holders rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal or interest that has become due solely because of the acceleration) have been cured or waived. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default to deliver to the Trustee a statement specifying such Default or Event of Default. 13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates, as if it were not the Trustee. A2-6 14. NO RECOURSE AGAINST OTHERS. A director, officer, employee, incorporator or stockholder, of the Company, as such, shall not have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. 15. AUTHENTICATION. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 16. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 17. ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL NOTES AND RESTRICTED DEFINITIVE NOTES. In addition to the rights provided to Holders of Notes under the Indenture, Holders of Restricted Global Notes and Restricted Definitive Notes shall have all the rights set forth in the Registration Rights Agreement dated as of June 25, 1998, between the Company and the parties named on the signature pages thereof (the "Registration Rights Agreement"). 18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture and/or the Registration Rights Agreement. Requests may be made to: AKI, Inc. 1815 East Main Street Chattanooga, Tennessee 37404 Telecopier no.: (423) 624-3301 Attention: Chief Financial Officer A2-7 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to (Insert assignee's soc. sec. or tax I.D. no.) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date: Your Signature: -------------------------------- (Sign exactly as your name appears on the Note) Tax Identification No: ------------------------- Signature Guarantee. A2-8 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 4.10 or 4.15 of the Indenture, check the box below: [ ] Section 4.10 [ ] Section 4.15 If you want to elect to have only part of the Note purchased by the Company pursuant to Section 4.10 or Section 4.15 of the Indenture, state the amount you elect to have purchased: $________ Date: Your Signature: -------------------------------- (Sign exactly as your name appears on the Note) Tax Identification No: ------------------------- Signature Guarantee. A2-9 SCHEDULE OF EXCHANGES OF REGULATION S TEMPORARY GLOBAL NOTE The following exchanges of a part of this Regulation S Temporary Global Note for an interest in another Global Note, or of other Restricted Global Notes for an interest in this Regulation S Temporary Global Note, have been made:
Principal Amount Amount of decrease in Amount of increase in of this Global Signature of Principal Amount Principal Amount Note following such authorized officer of of this of this decrease Trustee or Note Date of Exchange Global Note Global Note (or increase) Custodian ---------------- ----------- ----------- ------------ ---------
A2-10 EXHIBIT B FORM OF CERTIFICATE OF TRANSFER AKI, Inc. 1815 East Main Street Chattanooga, Tennessee 37404 Telecopier no.: 423-624-3301 Attention: Chief Financial Officer IBJ Schroder Bank & Trust Company One State Street, 11th Floor New York, New York 10004 Telecopier no.: 212-858-2952 Attention: Terence Rawlins Re: 10 1/2% Senior Notes due 2008 Reference is hereby made to the Indenture, dated as of June 25, 1998 (the "Indenture"), between AKI, Inc. (the "Company"), as issuer, and IBJ Schroder Bank & Trust Company, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. ______________, (the "Transferor") owns and proposes to transfer the Note[s] or interest in such Note[s] specified in Annex A hereto, in the principal amount of $___________ in such Note[s] or interests (the "Transfer"), to __________ (the "Transferee"), as further specified in Annex A hereto. In connection with the Transfer, the Transferor hereby certifies that: [CHECK ALL THAT APPLY] 1. [ ] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE 144A GLOBAL NOTE OR A DEFINITIVE NOTE PURSUANT TO RULE 144A. The Transfer is being effected pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Transferor hereby further certifies that the beneficial interest or Definitive Note is being transferred to a Person that the Transferor reasonably believed and believes is purchasing the beneficial interest or Definitive Note for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A and such Transfer is in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the 144A Global Note and/or the Definitive Note and in the Indenture and the Securities Act. B-1 2. [ ] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE TEMPORARY REGULATION S GLOBAL NOTE, THE REGULATION S GLOBAL NOTE OR A DEFINITIVE NOTE PURSUANT TO REGULATION S. The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and, accordingly, the Transferor hereby further certifies that (i) the Transfer is not being made to a Person in the United States and (x) at the time the buy order was originated, the Transferee was outside the United States or such Transferor and any Person acting on its behalf reasonably believed and believes that the Transferee was outside the United States or (y) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither such Transferor nor any Person acting on its behalf knows that the transaction was prearranged with a buyer in the United States, (ii) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S under the Securities Act and (iii) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act and (iv) if the proposed transfer is being made prior to the expiration of the Restricted Period, the transfer is not being made to a U.S. Person or for the account or benefit of a U.S. Person (other than an Initial Purchaser). Upon consummation of the proposed transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will be subject to the restrictions on Transfer enumerated in the Private Placement Legend printed on the Regulation S Global Note , the Temporary Regulation S Global Note and/or the Definitive Note and in the Indenture and the Securities Act. 3. [ ] CHECK AND COMPLETE IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE IAI GLOBAL NOTE OR A DEFINITIVE NOTE PURSUANT TO ANY PROVISION OF THE SECURITIES ACT OTHER THAN RULE 144A OR REGULATION S. The Transfer is being effected in compliance with the transfer restrictions applicable to beneficial interests in Restricted Global Notes and Restricted Definitive Notes and pursuant to and in accordance with the Securities Act and any applicable blue sky securities laws of any state of the United States, and accordingly the Transferor hereby further certifies that (check one): (a) [ ] such Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act; or (b) [ ] such Transfer is being effected to the Company or a subsidiary thereof; or (c) [ ] such Transfer is being effected pursuant to an effective registration statement under the Securities Act and in compliance with the prospectus delivery requirements of the Securities Act; or (d) [ ] such Transfer is being effected to an Institutional Accredited Investor and pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A, Rule 144 or Rule 904, and the Transferor hereby further certifies that it has not engaged in any general solicitation within the meaning of Regulation D under the Securities Act and the Transfer complies with the transfer restrictions applicable to beneficial interests in a Restricted Global Note or Restricted Definitive Notes and the requirements of the exemption claimed, which certification is supported by (1) a certificate executed by the Transferee in the form of Exhibit D to the Indenture and (2) if such Transfer is in respect of a principal amount of Notes at the time of transfer of less than $250,000, an Opinion of Counsel provided by the Transferor or the Transferee (a copy of which the Transferor has attached to this certification), to the effect that B-2 such Transfer is in compliance with the Securities Act. Upon consummation of the proposed transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the IAI Global Note and/or the Definitive Notes and in the Indenture and the Securities Act. 4. [ ] Check if Transferee will take delivery of a beneficial interest in an Unrestricted Global Note or of an Unrestricted Definitive Note. (a) [ ] CHECK IF TRANSFER IS PURSUANT TO RULE 144. (i) The Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes, on Restricted Definitive Notes and in the Indenture. (b) [ ] CHECK IF TRANSFER IS PURSUANT TO REGULATION S. (i) The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes, on Restricted Definitive Notes and in the Indenture. (c) [ ] CHECK IF TRANSFER IS PURSUANT TO OTHER EXEMPTION. (i) The Transfer is being effected pursuant to and in compliance with an exemption from the registration requirements of the Securities Act other than Rule 144, Rule 903 or Rule 904 and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will not be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes or Restricted Definitive Notes and in the Indenture. This certificate and the statements contained herein are made for your benefit and the benefit of the Company. [Insert Name of Transferor] BY: -------------------------------- Name: Title: Dated: __________, ____ B-3 ANNEX A TO CERTIFICATE OF TRANSFER 1. The Transferor owns and proposes to transfer the following: [CHECK ONE OF (a) OR (b)] (a) [ ] a beneficial interest in the: (i) [ ] 144A Global Note (CUSIP ________), or (ii) [ ] Regulation S Global Note (CUSIP ________), or (iii) [ ] IAI Global Note (CUSIP ________), or (b) [ ] a Restricted Definitive Note. 2. After the Transfer the Transferee will hold: [CHECK ONE] (a) [ ] a beneficial interest in the: (i) [ ] 144A Global Note (CUSIP ________), or (ii) [ ] Regulation S Global Note (CUSIP ________), or (iii) [ ] IAI Global Note (CUSIP ________), or (iv) [ ] Unrestricted Global Note (CUSIP ________), or (b) [ ] a Restricted Definitive Note, or (c) [ ] an Unrestricted Definitive Note, in accordance with the terms of the Indenture. B-4 EXHIBIT C FORM OF CERTIFICATE OF EXCHANGE AKI, Inc. 1815 East Main Street Chattanooga, Tennessee 37404 Telecopier no.: (423) 624-3301 Attention: Chief Financial Officer IBJ Schroder Bank & Trust Company One State Street, 11th Floor New York, New York 10004 Telecopier no.: 212-858-2952 Attention: Terence Rawlins Re: 10 1/2% Senior Notes Due 2008 Reference is hereby made to the Indenture, dated as of June 25, 1998 (the "Indenture"), between AKI, Inc. (the "Company"), as issuer, and IBJ Schroder Bank & Trust Company, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. ____________, (the "Owner") owns and proposes to exchange the Note[s] or interest in such Note[s] specified herein, in the principal amount of $____________ in such Note[s] or interests (the "Exchange"). In connection with the Exchange, the Owner hereby certifies that: 1. Exchange of Restricted Definitive Notes or Beneficial Interests in a Restricted Global Note for Unrestricted Definitive Notes or Beneficial Interests in an Unrestricted Global Note (a) [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE TO BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for a beneficial interest in an Unrestricted Global Note in an equal principal amount, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with the United States Securities Act of 1933, as amended (the "Securities Act"), (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest in an Unrestricted Global Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (b) [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE TO UNRESTRICTED DEFINITIVE NOTE. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for an Unrestricted Definitive Note, the Owner hereby certifies (i) the C-1 Definitive Note is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the Definitive Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (c) [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE. In connection with the Owner's Exchange of a Restricted Definitive Note for a beneficial interest in an Unrestricted Global Note, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Definitive Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (d) [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO UNRESTRICTED DEFINITIVE NOTE. In connection with the Owner's Exchange of a Restricted Definitive Note for an Unrestricted Definitive Note, the Owner hereby certifies (i) the Unrestricted Definitive Note is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Definitive Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the Unrestricted Definitive Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. 2. Exchange of Restricted Definitive Notes or Beneficial Interests in Restricted Global Notes for Restricted Definitive Notes or Beneficial Interests in Restricted Global Notes (a) [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE TO RESTRICTED DEFINITIVE NOTE. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for a Restricted Definitive Note with an equal principal amount, the Owner hereby certifies that the Restricted Definitive Note is being acquired for the Owner's own account without transfer. Upon consummation of the proposed Exchange in accordance with the terms of the Indenture, the Restricted Definitive Note issued will continue to be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Definitive Note and in the Indenture and the Securities Act. (b) [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE. In connection with the Exchange of the Owner's Restricted Definitive Note for a beneficial interest in the [CHECK ONE] "144A Global Note", "Regulation S Global Note", "IAI Global Note" with an equal principal amount, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer and (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the Securities Act, and in compliance with any applicable blue C-2 sky securities laws of any state of the United States. Upon consummation of the proposed Exchange in accordance with the terms of the Indenture, the beneficial interest issued will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the relevant Restricted Global Note and in the Indenture and the Securities Act. C-3 This certificate and the statements contained herein are made for your benefit and the benefit of the Company. ----------------------------------- [Insert Name of Owner] BY: -------------------------------- Name: Title: Dated: __________, ____ C-4 EXHIBIT D FORM OF CERTIFICATE FROM ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR AKI, Inc. 1815 East Main Street Chattanooga, Tennessee 37404 Telecopier no.: 423-624-3301 Attention: Chief Financial Officer IBJ Schroder Bank & Trust Company One State Street, 11th Floor New York, New York 10004 Telecopier no.: 212-858-2952 Attention: Terence Rawlins Re: 10 1/2% Senior Notes due 2008 Reference is hereby made to the Indenture, dated as of June 25, 1998 (the "Indenture"), among AKI, Inc. (the "Company"), as issuer and IBJ Schroder Bank & Trust Company, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. In connection with our proposed purchase of $____________ aggregate principal amount of: (a) [ ] a beneficial interest in a Global Note, or (b) [ ] a Definitive Note, we confirm that: 1. We understand that any subsequent transfer of the Notes or any interest therein is subject to certain restrictions and conditions set forth in the Indenture and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Notes or any interest therein except in compliance with, such restrictions and conditions and the United States Securities Act of 1933, as amended (the "Securities Act"). 2. We understand that the offer and sale of the Notes have not been registered under the Securities Act, and that the Notes and any interest therein may not be offered or sold except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell the Notes or any interest therein, we will do so only (A) to the Company or any subsidiary thereof, (B) in accordance with Rule 144A under the Securities Act to a "qualified institutional buyer" (as defined therein), (c) to an institutional "accredited investor" (as defined below) that, prior to such transfer, furnishes (or D-1 has furnished on its behalf by a U.S. broker-dealer) to you and to the Company a signed letter substantially in the form of this letter and, if such transfer is in respect of a principal amount of Notes, at the time of transfer of less than $250,000, an Opinion of Counsel in form reasonably acceptable to the Company to the effect that such transfer is in compliance with the Securities Act, (D) outside the United States in accordance with Rule 904 of Regulation S under the Securities Act, (E) pursuant to the provisions of Rule 144(k) under the Securities Act or (F) pursuant to an effective registration statement under the Securities Act, and we further agree to provide to any person purchasing the Definitive Note or beneficial interest in a Global Note from us in a transaction meeting the requirements of clauses (A) through (E) of this paragraph a notice advising such purchaser that resales thereof are restricted as stated herein. 3. We understand that, on any proposed resale of the Notes or beneficial interest therein, we will be required to furnish to you and the Company such certifications, legal opinions and other information as you and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Notes purchased by us will bear a legend to the foregoing effect. We further understand that any subsequent transfer by us of the Notes or beneficial interest therein acquired by us must be effected through one of the Placement Agents. 4. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Notes, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment. 5. We are acquiring the Notes or beneficial interest therein purchased by us for our own account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. --------------------------------------- [Insert Name of Accredited Investor] By: ------------------------------------ Name: Title: Dated: __________________, ____ D-2 EXHIBIT E FORM OF NOTATION OF NOTE GUARANTEE For value received, each Subsidiary Guarantor (which term includes any successor Person under the Indenture) has, jointly and severally, unconditionally guaranteed, to the extent set forth in the Indenture and subject to the provisions in the Indenture dated as of June 25, 1998 (the "Indenture") between AKI, Inc. and IBJ Schroder Bank & Trust Company, as trustee (the "Trustee"), (a) the due and punctual payment of the principal of, premium and Liquidated Damages, if any, and interest on the Notes (as defined in the Indenture), whether at maturity, by acceleration, redemption or otherwise, the due and punctual payment of interest on overdue principal and premium, and, to the extent permitted by law, interest, and the due and punctual performance of all other obligations of the Company to the Holders or the Trustee all in accordance with the terms of the Indenture and (b) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Each Holder of a Note, by accepting the same, (a) agrees to and shall be bound by such provisions and (b) appoints the Trustee attorney-in-fact of such Holder for such purpose. [Name of Subsidiary Guarantor(s)] By: ---------------------------------- Name: Title: E-1 EXHIBIT F FORM OF SUPPLEMENTAL INDENTURE TO BE DELIVERED BY SUBSEQUENT GUARANTORS SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of ________________, among __________________ (the "Subsidiary Guarantor"), AKI, Inc., (the "Company"), and IBJ Schroder Bank & Trust Company, as trustee under the indenture referred to below (the "Trustee"). W I T N E S S E T H WHEREAS, the Company has heretofore executed and delivered to the Trustee an indenture (the "Indenture"), dated as of June 25, 1998 providing for the issuance of an aggregate principal amount of up to $115.0 million of 10 1/2% Senior Notes due 2008 (the "Notes"); WHEREAS, the Indenture provides that under certain circumstances the Subsidiary Guarantor shall execute and deliver to the Trustee a supplemental indenture pursuant to which the Subsidiary Guarantor shall unconditionally guarantee all of the Company's Obligations under the Notes and the Indenture on the terms and conditions set forth herein (the "Note Guarantee"); and WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is authorized to execute and deliver this Supplemental Indenture. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Subsidiary Guarantor and the Trustee mutually covenant and agree for the equal and ratable benefit of the Holders of the Notes as follows: 1. Capitalized Terms. Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture. 2. Agreement to Guarantee. The Subsidiary Guarantor hereby agrees as follows: (a) To jointly (with other Subsidiary Guarantors, if any) and severally Guarantee to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of the Indenture, the Notes or the obligations of the Company hereunder or thereunder, that: (i) the principal of and interest on the Notes will be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of and interest on the Notes, if any, if lawful, and all other obligations of the Company to the Holders or the Trustee hereunder or thereunder will be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and F-1 (ii) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, that same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Subsidiary Guarantors shall be jointly and severally obligated to pay the same immediately. (b) The obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or the Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. (c) The following is hereby waived: diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever. (d) This Note Guarantee shall not be discharged except by complete performance of the obligations contained in the Notes and the Indenture. (e) If any Holder or the Trustee is required by any court or otherwise to return to the Company, the Subsidiary Guarantors, or any Custodian, Trustee, liquidator or other similar official acting in relation to either the Company or the Subsidiary Guarantors, any amount paid by either to the Trustee or such Holder, this Note Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. (f) The Subsidiary Guarantor shall not be entitled to any right of subrogation in relation to the Holders in respect of any obligations guaranteed hereby until payment in full of all obligations guaranteed hereby. (g) As between the Subsidiary Guarantors, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article 6 of the Indenture for the purposes of this Note Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any declaration of acceleration of such obligations as provided in Article 6 of the Indenture, such obligations (whether or not due and payable) shall forthwith become due and payable by the Subsidiary Guarantors for the purpose of this Note Guarantee. (h) The Subsidiary Guarantors shall have the right to seek contribution from any non-paying Subsidiary Guarantor so long as the exercise of such right does not impair the rights of the Holders under the Note Guarantee. (i) Pursuant to Section 10.02 of the Indenture, after giving effect to any maximum amount and any other contingent and fixed liabilities that are relevant under any applicable F-2 Bankruptcy or fraudulent conveyance laws, and after giving effect to any collections from, rights to receive contribution from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under Article 10 of the Indenture shall result in the obligations of such Subsidiary Guarantor under its Note Guarantee not constituting a fraudulent transfer or conveyance. 3. EXECUTION AND DELIVERY. Each Subsidiary Guarantor agrees that the Note Guarantees shall remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Note Guarantee. 4. SUBSIDIARY GUARANTOR MAY CONSOLIDATE, ETC. ON CERTAIN TERMS. (a) The Subsidiary Guarantor may not consolidate with or merge with or into (whether or not such Subsidiary Guarantor is the surviving Person) another corporation, Person or entity whether or not affiliated with such Subsidiary Guarantor unless: (i) subject to Section 10.04 of the Indenture, the Person formed by or surviving any such consolidation or merger (if other than a Subsidiary Guarantor or the Company) unconditionally assumes all the obligations of such Subsidiary Guarantor, pursuant to a supplemental indenture in form and substance reasonably satisfactory to the Trustee, under the Notes, the Indenture and the Note Guarantee on the terms set forth herein or therein; and (ii) immediately after giving effect to such transaction, no Default or Event of Default exists. (b) In case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the Note Guarantee endorsed upon the Notes and the due and punctual performance of all of the covenants and conditions of the Indenture to be performed by the Subsidiary Guarantor, such successor corporation shall succeed to and be substituted for the Subsidiary Guarantor with the same effect as if it had been named herein as a Subsidiary Guarantor. Such successor corporation thereupon may cause to be signed any or all of the Note Guarantees to be endorsed upon all of the Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee. All the Note Guarantees so issued shall in all respects have the same legal rank and benefit under the Indenture as the Note Guarantees theretofore and thereafter issued in accordance with the terms of the Indenture as though all of such Note Guarantees had been issued at the date of the execution hereof. (c) Except as set forth in Articles 4 and 5 of the Indenture, and notwithstanding clauses (a) and (b) above, nothing contained in the Indenture or in any of the Notes shall prevent any consolidation or merger of a Subsidiary Guarantor with or into the Company or another Subsidiary Guarantor, or shall prevent any sale or conveyance of the property of a Subsidiary Guarantor as an entirety or substantially as an entirety to the Company or another Subsidiary Guarantor. 5. RELEASES. F-3 (a) In the event of a sale or other disposition of all of the assets of any Subsidiary Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all to the capital stock of any Subsidiary Guarantor, then such Subsidiary Guarantor (in the event of a sale or other disposition, by way of merger, consolidation or otherwise, of all of the capital stock of such Subsidiary Guarantor) or the corporation acquiring the property (in the event of a sale or other disposition of all or substantially all of the assets of such Subsidiary Guarantor) will be released and relieved of any obligations under its Note Guarantee; provided that the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the Indenture, including, without limitation, Section 4.10 of the Indenture. Upon delivery by the Company to the Trustee of an Officers' Certificate and an Opinion of Counsel to the effect that such sale or other disposition was made by the Company in accordance with the provisions of the Indenture, including, without limitation, Section 4.10 of the Indenture, the Trustee shall execute any documents reasonably required in order to evidence the release of any Subsidiary Guarantor from its obligations under its Note Guarantee. (b) Any Subsidiary Guarantor not released from its obligations under its Note Guarantee shall remain liable for the full amount of principal of and interest on the Notes and for the other obligations of any Subsidiary Guarantor under the Indenture as provided in Article 10 of the Indenture. 6. NO RECOURSE AGAINST OTHERS. No past, present or future director, officer, employee, incorporator, stockholder or agent of the Subsidiary Guarantor, as such, shall have any liability for any obligations of the Company or any Subsidiary Guarantor under the Notes, any Note Guarantees, the Indenture or this Supplemental Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of the Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the SEC that such a waiver is against public policy. 7. NEW YORK LAW TO GOVERN. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS SUPPLEMENTAL INDENTURE BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 8. COUNTERPARTS. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 9. EFFECT OF HEADINGS. The Section headings herein are for convenience only and shall not affect the construction hereof. 10. THE TRUSTEE. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made solely by the Subsidiary Guarantor and the Company. F-4 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed and attested, all as of the date first above written. Dated: _______________, ____ [SUBSIDIARY GUARANTOR] By: ---------------------------------- Name: Title: AKI, Inc. By: ---------------------------------- Name: Title: [EXISTING GUARANTORS] By: ---------------------------------- Name: Title: IBJ Schroder Bank & Trust Company as Trustee By: ---------------------------------- Name: Title: EX-4.3 5 REGISTRATION RIGHTS AGREEMENT Exhibit 4.3 EXECUTION COPY REGISTRATION RIGHTS AGREEMENT Dated as of June 25, 1998 BY AND BETWEEN AKI, Inc. AND DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION This Registration Rights Agreement (this "Agreement") is made and entered into as of June 25, 1998 by and between AKI, Inc., a Delaware corporation (the "Company") and Donaldson, Lufkin & Jenrette Securities Corporation (the "Initial Purchaser") who has agreed to purchase the Company's 10 1/2% Senior Notes due 2008 (the "Series A Notes") pursuant to the Purchase Agreement (as defined below). This Agreement is made pursuant to the Purchase Agreement, dated June 22, 1998 (the "Purchase Agreement"), by and between the Company and the Initial Purchaser. In order to induce the Initial Purchaser to purchase the Series A Notes, the Company has agreed to provide the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the obligations of the Initial Purchaser set forth in Section 2 of the Purchase Agreement. Capitalized terms used herein and not otherwise defined shall have the meaning assigned to them in the Indenture, dated June 25, 1998, between the Company and IBJ Schroder Bank & Trust Company, as Trustee, relating to the Series A Notes and the Series B Notes (the "Indenture"). The parties hereby agree as follows: SECTION 1. DEFINITIONS As used in this Agreement, the following capitalized terms shall have the following meanings: Act: The Securities Act of 1933, as amended. Affiliate: As defined in Rule 144 of the Act. Affiliated Market Maker: A Broker-Dealer who is deemed to be an Affiliate of the Company. Broker-Dealer: Any broker or dealer registered under the Exchange Act. Closing Date: The date hereof. Certificated Securities: Definitive Notes, as defined in the Indenture. Commission: The Securities and Exchange Commission. Consummate: An Exchange Offer shall be deemed "Consummated" for purposes of this Agreement upon the occurrence of (a) the filing and effectiveness under the Act of the Exchange Offer Registration Statement relating to the Series B Notes to be issued in the Exchange Offer, (b) the maintenance of such Exchange Offer Registration Statement continuously effective and the keeping of the Exchange Offer open for a period not less than the period required pursuant to Section 3(b) hereof and (c) the delivery by the Company to the Registrar under the Indenture of the Series B Notes in the same aggregate principal amount as the aggregate principal amount of Series A Notes tendered by Holders thereof pursuant to the Exchange Offer. Consummation Deadline: As defined in Section 3(b) hereof. Effectiveness Deadline: As defined in Sections 3(a) and 4(a) hereof. Exchange Act: The Securities Exchange Act of 1934, as amended. Exchange Offer: The exchange and issuance by the Company of a principal amount of Series B Notes (which shall be registered pursuant to the Exchange Offer Registration Statement) equal to the outstanding principal amount of Series A Notes that are tendered by such Holders in connection with such exchange and issuance. Exchange Offer Registration Statement: The Registration Statement relating to the Exchange Offer, including the related Prospectus. Exempt Resales: The transactions in which the Initial Purchaser proposes to sell the Series A Notes (i) to certain "qualified institutional buyers," as such term is defined in Rule 144A under the Act and (ii) in offshore transactions pursuant to Regulation S under the Act. Filing Deadline: As defined in Sections 3(a) and 4(a) hereof. Holders: As defined in Section 2 hereof. Indemnified Party: As defined in Section 8(c). 1 Indemnifying Party: As defined in Section 8(c). Prospectus: The prospectus included in a Registration Statement at the time such Registration Statement is declared effective, as amended or supplemented by any prospectus and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. Recommencement Date: As defined in Section 6(d) hereof. Registration Default: As defined in Section 5 hereof. Registration Statement: Any registration statement of the Company relating to (a) an offering of Series B Notes pursuant to an Exchange Offer or (b) the registration for resale of Transfer Restricted Securities pursuant to the Shelf Registration Statement, in each case, (i) that is filed pursuant to the provisions of this Agreement and (ii) including the Prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference therein. Regulation S: Regulation S promulgated under the Act. Rule 144: Rule 144 promulgated under the Act. Rule 144A: Rule 144A promulgated under the Act. Series B Notes: The Company's new 10 1/2% Senior Notes due 2008 to be issued pursuant to the Indenture: (i) in the Exchange Offer or (ii) as contemplated by Section 4 hereof. Shelf Registration Statement: As defined in Section 4(a) hereof. Suspension Notice: As defined in Section 6(d) hereof. TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb) as in effect on the date of the Indenture. Transfer Restricted Securities: Means (i) each Series A Note, until the earliest to occur of (a) the date on which such Series A Note is exchanged in the Exchange Offer for a Series B Note which is entitled to be resold to the public by the Holder thereof without complying with the prospectus delivery requirements of the Act, (b) the date on which such Series A Note has been disposed of in accordance with a Shelf Registration Statement (and the purchasers thereof have been issued Series B Notes), or (c) the date on which such Series A Note is distributed to the public pursuant to Rule 144 under the Act and (ii) each Series B Note issued to a Broker-Dealer until the date on which such Series B Note is disposed of by a Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the Exchange Offer Registration Statement (including the delivery of the Prospectus contained therein) SECTION 2. HOLDERS A Person is deemed to be a holder of Transfer Restricted Securities (each, a "Holder") whenever such Person owns Transfer Restricted Securities. SECTION 3. REGISTERED EXCHANGE OFFER (a) Unless the Exchange Offer shall not be permitted by applicable federal law (after the procedures set forth in Section 6(a)(i) below have been complied with), the Company shall (i) cause the Exchange Offer Registration Statement to be filed with the Commission as soon as practicable after the Closing Date, but in no event later than 45 days after the Closing Date (such 45th day being the "Filing Deadline"), (ii) use its reasonable best efforts to cause such Exchange Offer Registration Statement to become effective on or prior to 180 days after the Closing Date (such 180th day being the "Effectiveness Deadline"), (iii) in connection with the foregoing, (A) file all pre-effective amendments to such Exchange Offer Registration Statement as may be necessary in order to cause it to become effective, (B) file, if applicable, a post-effective amendment to such Exchange Offer Registration Statement pursuant to Rule 430A under the Act and (C) subject to the limitations set forth in Section 6(c)(xii) cause all necessary filings, if any, 2 in connection with the registration and qualification of the Series B Notes to be made under the Blue Sky laws of such jurisdictions as are necessary to permit Consummation of the Exchange Offer, and (iv) upon the effectiveness of such Exchange Offer Registration Statement, commence and Consummate the Exchange Offer. The Exchange Offer shall be on the appropriate form permitting (i) registration of the Series B Notes to be offered in exchange for the Series A Notes that are Transfer Restricted Securities and (ii) resales of Series B Notes by Broker-Dealers that tendered into the Exchange Offer Series A Notes that such Broker-Dealer acquired for its own account as a result of market making activities or other trading activities (other than Series A Notes acquired directly from the Company or any of its Affiliates) as contemplated by Section 3(c) below. (b) The Company shall use its reasonable best efforts to cause the Exchange Offer Registration Statement to be effective continuously, and shall keep the Exchange Offer open for a period of not less than the minimum period required under applicable federal and state securities laws to Consummate the Exchange Offer; provided, however, that in no event shall such period be less than 20 Business Days. The Company shall cause the Exchange Offer to comply with all applicable federal and state securities laws; provided that to the extent that any securities laws or regulations conflict with the provisions of this Registration Rights Agreement, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Agreement. No securities other than the Series B Notes shall be included in the Exchange Offer Registration Statement. The Company shall use its reasonable best efforts to cause the Exchange Offer to be Consummated on the earliest practicable date after the Exchange Offer Registration Statement has become effective, but in no event later than 30 Business Days thereafter (such 30th day being the "Consummation Deadline"). (c) The Company shall include a "Plan of Distribution" section in the Prospectus contained in the Exchange Offer Registration Statement and indicate therein that any Broker-Dealer who holds Transfer Restricted Securities that were acquired for the account of such Broker-Dealer as a result of market-making activities or other trading activities (other than Series A Notes acquired directly from the Company or any Affiliate of the Company), may exchange such Transfer Restricted Securities pursuant to the Exchange Offer. Such "Plan of Distribution" section shall also contain all other information with respect to such sales by such Broker-Dealers that the Commission may require in order to permit such sales pursuant thereto, but such "Plan of Distribution" shall not name any such Broker-Dealer or disclose the amount of Transfer Restricted Securities held by any such Broker-Dealer, except to the extent required by the Commission as a result of a change in policy, rules or regulations after the date of this Agreement. See the Shearman & Sterling no-action letter (available July 2, 1993). Because such Broker-Dealer may be deemed to be an "underwriter" within the meaning of the Act and must, therefore, deliver a prospectus meeting the requirements of the Act in connection with its initial sale of any Series B Notes received by such Broker-Dealer in the Exchange Offer, the Company shall permit the use of the Prospectus contained in the Exchange Offer Registration Statement by such Broker-Dealer to satisfy such prospectus delivery requirement. To the extent necessary to ensure that the prospectus contained in the Exchange Offer Registration Statement is available for sales of Series B Notes by Broker-Dealers, the Company agrees to use its reasonable best efforts to keep the Exchange Offer Registration Statement continuously effective, supplemented, amended and current as required by and subject to the provisions of Section 6(a) and (c) hereof and in conformity with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a 3 period of 180 days from the Consummation Deadline or such shorter period as will terminate when all Transfer Restricted Securities covered by such Registration Statement have been sold pursuant thereto. The Company shall provide sufficient copies of the latest version of such Prospectus to such Broker-Dealers, promptly upon request, and in no event later than one business day after such request, at any time during such period. SECTION 4. SHELF REGISTRATION (a) Shelf Registration. If (i) the Exchange Offer is not permitted by applicable law or Commission policy (after the Company has complied with the procedures set forth in Section 6(a)(i) below) or (ii) any Holder of Transfer Restricted Securities shall notify the Company in writing within 20 days following the Consummation Deadline that (A) such Holder was prohibited by applicable law or Commission policy from participating in the Exchange Offer, (B) such Holder may not resell the Series B Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the Prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such Holder or (C) such Holder is a Broker-Dealer and holds Series A Notes acquired directly from the Company or any of its Affiliates, then the Company shall: (x) cause to be filed, on or prior to 45 days after the earlier of (i) the date on which the Company determines that the Exchange Offer Registration Statement cannot be filed as a result of clause (a)(i) above and (ii) the date on which the Company receives the notice specified in clause (a)(ii) above, (such earlier date being the "Filing Deadline"), a shelf registration statement pursuant to Rule 415 under the Act (which may be an amendment to the Exchange Offer Registration Statement (the "Shelf Registration Statement")), relating to all Transfer Restricted Securities, and (y) shall use its reasonable best efforts to cause such Shelf Registration Statement to become effective on or prior to 180 days after the Filing Deadline for the Shelf Registration Statement (such 180th day being the "Effectiveness Deadline"). If, after the Company has filed an Exchange Offer Registration Statement that satisfies the requirements of Section 3(a) above, the Company is required to file and make effective a Shelf Registration Statement solely because the Exchange Offer is not permitted under applicable federal law (i.e., clause (a)(i) above), then the filing of the Exchange Offer Registration Statement shall be deemed to satisfy the requirements of clause (x) above; provided, however, that, in such event, the Company shall remain obligated to meet the Effectiveness Deadline set forth in clause (y). To the extent necessary to ensure that the Shelf Registration Statement is available for sales of Transfer Restricted Securities by the Holders thereof entitled to the benefit of this Section 4(a) and other securities required to be registered therein pursuant to Section 6(b)(ii) hereof, the Company shall use its reasonable best efforts to keep any Shelf Registration Statement required by this Section 4(a) continuously effective, supplemented, amended and current as required by, and subject to, the provisions of Sections 6(b) and (c) hereof, and in conformity with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for as long as the Initial Purchaser is deemed to be an affiliate of the Company but in no event less than the shorter of (i) two years (as extended pursuant to Section 6(d) following the Closing or (ii) the date on which all Transfer Restricted Securities covered by such Shelf Registration Statement have been sold pursuant thereto. (b) Provision by Holders of Certain Information in Connection with the Shelf Registration Statement. 4 No Holder of Transfer Restricted Securities may include any of its Transfer Restricted Securities in any Shelf Registration Statement pursuant to this Agreement unless and until such Holder furnishes to the Company in writing, within 20 days after receipt of a request therefor, the information specified in Item 507 or 508 of Regulation S-K, as applicable, of the Act for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. No Holder of Transfer Restricted Securities shall be entitled to liquidated damages pursuant to Section 5 hereof unless and until such Holder shall have provided all such information. Each selling Holder agrees to promptly furnish additional information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. (c) Holders of Transfer Restricted Securities that do not give the written notice within the 20 day period set forth in Section 4(a) hereof, if required to be given, will no longer have any registration rights pursuant to this Section 4 and will not be entitled to any Liquidated Damages pursuant to Section 5 hereof in respect of the Company's obligations with respect to the Shelf Registration Statement. SECTION 5. LIQUIDATED DAMAGES If (i) any Registration Statement required by this Agreement is not filed with the Commission on or prior to the applicable Filing Deadline, (ii) any such Registration Statement has not been declared effective by the Commission on or prior to the applicable Effectiveness Deadline, (iii) the Exchange Offer has not been Consummated within 30 Business Days after the Exchange Offer Registration Statement is first declared effective by the Commission or (iv) any Registration Statement required by this Agreement is filed and declared effective but shall thereafter cease to be effective or fail to be usable for its intended purpose without being succeeded immediately by a post-effective amendment to such Registration Statement that cures such failure and that is itself declared effective immediately (each such event referred to in clauses (i) through (iv), a "Registration Default"), then the Company hereby agrees to pay to each Holder of Transfer Restricted Securities affected thereby liquidated damages in an amount equal to $.05 per week per $1,000 in principal amount of Transfer Restricted Securities held by such Holder for each week or portion thereof that the Registration Default continues for the first 90-day period immediately following the occurrence of such Registration Default. The amount of the liquidated damages shall increase by an additional $.05 per week per $1,000 in principal amount of Transfer Restricted Securities with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of liquidated damages of $.25 per week per $1,000 in principal amount of Transfer Restricted Securities; provided, however, that the Company shall in no event be required to pay liquidated damages for more than one Registration Default at any given time. Notwithstanding anything to the contrary set forth herein, (1) upon filing of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of (i) above, (2) upon the effectiveness of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of (ii) above, (3) upon Consummation of the Exchange Offer, in the case of (iii) above, or (4) upon the filing of a post-effective amendment to the Registration Statement or an additional Registration Statement that causes the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement) to again be declared effective or made usable in the case of (iv) above, the liquidated damages payable with respect to the Transfer Restricted Securities as a result of such clause (i), (ii), (iii) or (iv), as applicable, shall cease. All accrued liquidated damages shall be paid to the Holders entitled thereto, in the manner provided for the payment of interest in the Indenture, on each Interest Payment Date, as more 5 fully set forth in the Indenture and the Notes. Notwithstanding the fact that any securities for which liquidated damages are due cease to be Transfer Restricted Securities, all obligations of the Company to pay liquidated damages with respect to securities shall survive until such time as all such obligations with respect to such securities shall have been satisfied in full. SECTION 6. REGISTRATION PROCEDURES (a) Exchange Offer Registration Statement. In connection with the Exchange Offer, the Company shall (x) comply with all applicable provisions of Section 6(c) below, (y) use its reasonable best efforts to effect such exchange and to permit the resale of Series B Notes by Broker-Dealers that tendered in the Exchange Offer Series A Notes that such Broker-Dealer acquired for its own account as a result of its market making activities or other trading activities (other than Series A Notes acquired directly from the Company or any of its Affiliates) being sold in accordance with the intended method or methods of distribution thereof, and (z) comply with all of the following provisions: (i) If, following the date hereof there has been announced a change in Commission policy with respect to exchange offers such as the Exchange Offer, that in the reasonable opinion of counsel to the Company raises a substantial question as to whether the Exchange Offer is permitted by applicable federal law, the Company hereby agrees to seek a no-action letter or other favorable decision from the Commission allowing the Company to Consummate an Exchange Offer for such Transfer Restricted Securities. The Company hereby agrees to pursue the issuance of such a decision from the Commission staff level. In connection with the foregoing, the Company hereby agrees to take all such other actions as may be requested by the Commission or otherwise required in connection with the issuance of such decision, including without limitation (A) participating in telephonic conferences with the Commission, (B) delivering to the Commission staff an analysis prepared by counsel to the Company setting forth the legal bases, if any, upon which such counsel has concluded that such an Exchange Offer should be permitted and (C) diligently pursuing a resolution (which need not be favorable) by the Commission staff. (ii) As a condition to its participation in the Exchange Offer, each Holder of Transfer Restricted Securities (including, without limitation, any Holder who is a Broker-Dealer) shall furnish, upon the request of the Company, prior to Consummation of the Exchange Offer, a written representation to the Company (which may be contained in the letter of transmittal contemplated by the Exchange Offer Registration Statement) to the effect that (A) it is not an Affiliate of the Company, (B) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the Series B Notes to be issued in the Exchange Offer and (C) it is acquiring the Series B Notes in its ordinary course of business. As a condition to its participation in the Exchange Offer, each Holder using the Exchange Offer to participate in a distribution of the Series B Notes shall acknowledge and agree that, if the resales are of Series B Notes obtained by such Holder in exchange for Series A Notes acquired directly from the Company or an Affiliate thereof, then such Holder (1) could not, under Commission policy as in effect on the date of this Agreement, rely on the position of the Commission enunciated in Morgan Stanley and Co., Inc. (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted in the Commission's letter to Shearman & Sterling dated July 2, 1993, and similar no-action letters (including, if applicable, any no-action letter obtained pursuant to clause (i) above), and (2) must comply with the registration and prospectus delivery requirements of the Act in connection with a secondary resale transaction and that such a secondary resale transaction must be covered by an effective 6 registration statement containing the selling security holder information required by Item 507 or 508, as applicable, of Regulation S-K. (iii) Prior to effectiveness of the Exchange Offer Registration Statement, the Company shall provide a supplemental letter to the Commission including (A) a statement that the Company is registering the Exchange Offer in reliance on the position of the Commission enunciated in Exxon Capital Holdings Corporation (available May 13, 1988), Morgan Stanley and Co., Inc. (available June 5, 1991) as interpreted in the Commission's letter to Shearman & Sterling dated July 2, 1993, and, if applicable, any no-action letter obtained pursuant to clause (i) above, (B) a representation that the Company has not entered into any arrangement or understanding with any Person to distribute the Series B Notes to be received in the Exchange Offer and that, to the best of the Company's information and belief, each Holder participating in the Exchange Offer is acquiring the Series B Notes in its ordinary course of business and has no arrangement or understanding with any Person to participate in the distribution of the Series B Notes received in the Exchange Offer and (C) any other undertaking or representation required by the Commission as set forth in any no-action letter obtained pursuant to clause (i) above, if applicable. (b) Shelf Registration Statement. In connection with the Shelf Registration Statement, the Company shall: (i) comply with all the provisions of Section 6(c) below and use its reasonable best efforts to effect such registration to permit the sale of the Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution thereof (as indicated in the information furnished to the Company pursuant to Section 4(b) hereof), and pursuant thereto the Company will prepare and file with the Commission a Registration Statement relating to the registration on any appropriate form under the Act, which form shall be available for the sale of the Transfer Restricted Securities in accordance with the intended method or methods of distribution thereof within the time periods and otherwise in accordance with the provisions hereof, and (ii) issue, upon the request of any Holder or purchaser of Series A Notes covered by any Shelf Registration Statement contemplated by this Agreement, Series B Notes having an aggregate principal amount equal to the aggregate principal amount of Series A Notes sold pursuant to the Shelf Registration Statement and surrendered to the Company for cancellation; the Company shall register Series B Notes on the Shelf Registration Statement for this purpose and issue the Series B Notes to the purchaser(s) of securities subject to the Shelf Registration Statement in the names as such purchaser(s) shall designate. (c) General Provisions. In connection with any Registration Statement and any related Prospectus required by this Agreement, the Company shall: (i) use its reasonable best efforts to keep such Registration Statement continuously effective and provide all requisite financial statements for the period specified in Section 3 or 4 of this Agreement, as applicable. Upon the occurrence of any event that would cause any such Registration Statement or the Prospectus contained therein (A) to contain an untrue statement of material fact or omit to state any material fact necessary to make the statements therein not misleading or (B) not to be effective and usable for resale of Transfer Restricted Securities during the period required by this Agreement, the Company shall file promptly an appropriate amendment to such Registration Statement curing such defect, and, if Commission review is required, use its reasonable best efforts to cause such amendment to be declared effective as soon as practicable; (ii) prepare and file with the Commission such amendments and post-effective amendments to the applicable Registration Statement as may be necessary to keep such Registration 7 Statement effective for the applicable period set forth in Section 3 or 4 hereof, as the case may be; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act, and to comply fully with Rules 424, 430A and 462, as applicable, under the Act in a timely manner; and comply with the provisions of the Act applicable to the Company with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; (iii) advise each Holder whose Transfer Restricted Securities are included in the Shelf Registration Statement, each Holder who is required to deliver a prospectus in connection with sales or market making activities (an "Affiliated Market Maker") and the Initial Purchaser promptly and, if requested by any of such Persons, confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to any applicable Registration Statement or any post-effective amendment thereto, when the same has become effective, (B) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information relating thereto, (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement under the Act or of the suspension by any state securities commission of the qualification of the Transfer Restricted Securities for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes, (D) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Registration Statement, the Prospectus, any amendment or supplement thereto or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in the Registration Statement in order to make the statements therein not misleading, or that requires the making of any additions to or changes in the Prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Transfer Restricted Securities under state securities or Blue Sky laws, the Company shall use its reasonable best efforts to obtain the withdrawal or lifting of such order at the earliest possible time; (iv) subject to Section 6(c)(i), if any fact or event contemplated by Section 6(c)(iii)(D) above shall exist or have occurred, prepare a supplement or post-effective amendment to the Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of Transfer Restricted Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (v) furnish to each Holder whose Transfer Restricted Securities are included in the Shelf Registration Statement and Affiliated Market Maker in connection with such exchange or sale, if any, before filing with the Commission, copies of any Registration Statement or any Prospectus included therein or any amendments or supplements to any such Registration Statement or Prospectus (including all documents incorporated by reference after the initial filing of such Registration Statement), which documents will be subject to the review and comment of such Persons in connection with such sale, if any, for a period of at least three Business Days, and the Company will not file any such Registration Statement or Prospectus or any amendment or 8 supplement to any such Registration Statement or Prospectus (including all such documents incorporated by reference) to which such Persons shall reasonably object within three Business Days after the receipt thereof. Such Person shall be deemed to have reasonably objected to such filing if such Registration Statement, amendment, Prospectus or supplement, as applicable, as proposed to be filed, contains an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading or fails to comply with the applicable requirements of the Act; (vi) promptly prior to the filing of any document that is to be incorporated by reference into a Registration Statement or Prospectus, provide copies of such document to each Holder whose Transfer Restricted Securities are included in the Shelf Registration Statement and Affiliated Market Maker in connection with such exchange or sale, if any, make the Company's representatives available for discussion of such document and other customary due diligence matters, and include such information in such document prior to the filing thereof as such Persons may reasonably request; (vii) make available upon execution of a customary confidentiality agreement, at reasonable times, for inspection by each Holder whose Transfer Restricted Securities are includable in the Shelf Registration Statement and Affiliated Market Maker and any attorney or accountant retained by such Persons, all financial and other records, pertinent corporate documents of the Company and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Persons, attorney or accountant in connection with such Registration Statement or any post-effective amendment thereto subsequent to the filing thereof and prior to its effectiveness; (viii) if requested by any whose Transfer Restricted Securities are included in the Shelf Registration Statement in writing or any Affiliated Market Maker, promptly include in any Registration Statement or Prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as such Persons may reasonably request to have included therein, including, without limitation, information relating to the "Plan of Distribution" of the Transfer Restricted Securities, and the use of the Registration Statement or Prospectus for market making activities, and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Company is notified of the matters to be included in such Prospectus supplement or post-effective amendment; (ix) furnish each Holder whose Transfer Restricted Securities are included in the Shelf Registration Statement, and each Affiliated Market Maker, without charge, at least one copy of the Registration Statement, as first filed with the Commission, and of each amendment thereto, including all documents incorporated by reference therein and all exhibits (including exhibits incorporated therein by reference); (x) deliver each Holder whose transfer Restricted Securities have been included in a Shelf Registration Statement and Affiliated Market Maker without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons reasonably may request; the Company hereby consents to the use (in accordance with law) of the Prospectus and any amendment or supplement thereto by each selling Person in connection with the offering and the sale of the Transfer Restricted Securities covered by the Prospectus or any amendment or supplement thereto and all market making activities of such Affiliated Market Maker, as the case may be; (xi) upon the request of (i) the Holders of a majority in aggregate principal amount of Series A Notes, (ii) a majority in aggregate principal amount of Transfer Restricted Securities included in a Shelf Registration Statement, (iii) an Affiliated Market Maker or (iv) the Initial Purchaser, 9 enter into such agreements (including underwriting agreements) and make such representations and warranties and take all such other actions in connection therewith in order to expedite or facilitate the disposition of the Transfer Restricted Securities pursuant to any applicable Registration Statement contemplated by this Agreement as may be reasonably requested by such Person in connection with any sale or resale pursuant to any applicable Registration Statement. In such connection, and also in connection with market making activities by any Affiliated Market Maker, the Company shall: (A) upon request of any such Person, furnish (or in the case of paragraphs (2) and (3), use its reasonable best efforts to cause to be furnished) to each such Person, upon Consummation of the Exchange Offer or upon the effectiveness of the Shelf Registration Statement, as the case may be: (1) a certificate, dated such date, signed on behalf of the Company by (x) the President or any Vice President and (y) a principal financial or accounting officer of the Company confirming, as of the date thereof, the matters set forth in Sections 9(a) and 9(b) of the Purchase Agreement and such other similar matters as such Persons may reasonably request; (2) an opinion, dated the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, of counsel for the Company covering matters similar to those set forth in paragraph (e) of Section 9 of the Purchase Agreement and such other matter as such Persons may reasonably request, and in any event including a statement substantially to the effect that such counsel has participated in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company and have considered the matters required to be stated therein and the statements contained therein, although such counsel has not independently verified the accuracy, completeness or fairness of such statements; and that such counsel advises that, on the basis of the foregoing (relying as to materiality to the extent such counsel deems appropriate upon the statements of officers and other representatives of the Company (and without independent check or verification), no facts came to such counsel's attention that caused such counsel to believe that the applicable Registration Statement, at the time such Registration Statement or any post-effective amendment thereto became effective and, in the case of the Exchange Offer Registration Statement, as of the date of Consummation of the Exchange Offer, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus contained in such Registration Statement as of its date and, in the case of the opinion dated the date of Consummation of the Exchange Offer, as of the date of Consummation, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Without limiting the foregoing, such counsel may state further that such counsel assumes no responsibility for, and has not independently verified, the accuracy, completeness or fairness of the financial statements, notes and schedules and other financial data included in any Registration Statement contemplated by this Agreement or the related Prospectus; and (3) a customary comfort letter dated the date of Consummation of the Exchange Offer, if the Company can reasonably obtain such letter, or as of the date of effectiveness of the Shelf Registration Statement, as the case may be, from the Company's independent accountants, in the customary form and covering matters of the type customarily covered in comfort letters to underwriters in connection with underwritten offerings, and affirming the matters set forth in the comfort letters delivered pursuant to Section 9(g) of the Purchase Agreement, and 10 (B) deliver such other documents and certificates as may be reasonably requested by such Persons to evidence compliance with the matters covered in clause (A) above and with any customary conditions contained in the any agreement entered into by the Company pursuant to this clause (xi); (C) make appropriate officers of the Company available at reasonable times with adequate notice to the selling Holders for meetings with prospective purchasers of the Transfer Restricted Securities and prepare and present to potential investors customary "road show" material in a manner consistent with other new issuances of other securities similar to the Transfer Restricted Securities; (xii) prior to any public offering of Transfer Restricted Securities, cooperate with the selling Holders and their counsel in connection with the registration and qualification of the Transfer Restricted Securities under the securities or Blue Sky laws of such jurisdictions as the selling Holders may request and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Transfer Restricted Securities covered by the applicable Registration Statement; provided, however, that the Company shall not be required to register or qualify as a foreign corporation where it is not now so qualified or to take any action that would subject it to the service of process in suits or to taxation, other than as to matters and transactions relating to the Registration Statement, in any jurisdiction where it is not now so subject; (xiii) in connection with any sale of Transfer Restricted Securities that will result in such securities no longer being Transfer Restricted Securities, cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Transfer Restricted Securities to be sold and not bearing any restrictive legends; and register such Transfer Restricted Securities in such denominations and such names as the selling Holders may request at least two Business Days prior to such sale of Transfer Restricted Securities; (xiv) use its reasonable best efforts to cause the disposition of the Transfer Restricted Securities covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof to consummate the disposition of such Transfer Restricted Securities, subject to the proviso contained in clause (xii) above; (xv) provide a CUSIP number for all Transfer Restricted Securities not later than the effective date of a Registration Statement covering such Transfer Restricted Securities and provide the Trustee under the Indenture with printed certificates for the Transfer Restricted Securities that are in a form eligible for deposit with the Depository Trust Company; (xvi) otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders with regard to any applicable Registration Statement, as soon as practicable, a consolidated earnings statement meeting the requirements of Rule 158 (which need not be audited) covering a twelve-month period beginning after the effective date of the Registration Statement (as such term is defined in paragraph (c) of Rule 158 under the Act); (xvii) cause the Indenture to be qualified under the TIA not later than the effective date of the first Registration Statement required by this Agreement and, in connection therewith, cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for such Indenture to be so qualified in accordance with the terms of the TIA; and execute and use its reasonable best efforts to cause the Trustee to execute all documents that may be required to effect such changes and all other forms and documents required to be filed with the Commission to enable such Indenture to be so qualified in a timely manner; and 11 (xviii) provide promptly to each Holder and Affiliated Market Maker, upon request, each document filed with the Commission pursuant to the requirements of Section 13 or Section 15(d) of the Exchange Act. (d) Restrictions on Holders. Each Holder agrees by acquisition of a Transfer Restricted Security and each Affiliated Market Maker agrees that, upon receipt of the notice referred to in Section 6(c)(iii)(C) or any notice from the Company of the existence of any fact of the kind described in Section 6(c)(iii)(D) hereof (in each case, a "Suspension Notice"), such Person will forthwith discontinue disposition of Transfer Restricted Securities pursuant to the applicable Registration Statement until (i) such Person has received copies of the supplemented or amended Prospectus contemplated by Section 6(c)(iv) hereof, or (ii) such Person is advised in writing by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus (in each case, the "Recommencement Date"). Each Person receiving a Suspension Notice hereby agrees that it will either (i) destroy any Prospectuses, other than permanent file copies, then in such Person's possession that have been replaced by the Company with more recently dated Prospectuses or (ii) deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Person's possession of the Prospectus covering such Transfer Restricted Securities that was current at the time of receipt of the Suspension Notice. The time period regarding the effectiveness of such Registration Statement set forth in Section 3 or 4 hereof, as applicable, shall be extended by a number of days equal to the number of days in the period from and including the date of delivery of the Suspension Notice to the date of delivery of the Recommencement Date. SECTION 7. REGISTRATION EXPENSES (a) All expenses incident to the Company's performance of, or compliance with, this Agreement will be borne by the Company, regardless of whether a Registration Statement becomes effective, including, without limitation: (i) all registration and filing fees and expenses; (ii) all fees and expenses of compliance with federal securities laws and state Blue Sky or securities laws; (iii) all expenses of printing (including printing certificates for the Series B Notes to be issued in the Exchange Offer and printing of Prospectuses, whether for exchanges, sales, market making or otherwise), messenger and delivery services and telephone expenses; (iv) all fees and disbursements of counsel for the Company and the Holders of Transfer Restricted Securities; (v) all application and filing fees in connection with listing the Series B Notes on a national securities exchange or automated quotation system pursuant to the requirements hereof; and (vi) all fees and disbursements of independent certified public accountants of the Company (including the expenses of any special audit and comfort letters required by or incident to such performance). The Company will, in any event, bear its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any Person, including special experts, retained by the Company. (b) In connection with any Registration Statement required by this Agreement (including, without limitation, the Exchange Offer Registration Statement and the Shelf Registration Statement), the Company will reimburse the Initial Purchaser and the Holders of Transfer Restricted Securities who are tendering Series A Notes into in the Exchange Offer and/or selling or reselling Series A Notes or Series B Notes pursuant to the "Plan of Distribution" contained in the Exchange Offer Registration Statement or the Shelf Registration Statement, as applicable, for the reasonable fees and disbursements of not more than one counsel, who shall be Latham & 12 Watkins, unless another firm shall be chosen by the Holders of a majority in principal amount of the Transfer Restricted Securities for whose benefit such Registration Statement is being prepared. SECTION 8. INDEMNIFICATION (a) The Company agrees to indemnify and hold harmless (i) each Holder, (ii) its directors and officers and (iii) each Person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) any Holder, from and against any and all losses, claims, damages, liabilities, judgments, (including, without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, preliminary prospectus or Prospectus (or any amendment or supplement thereto) provided by the Company to any Holder or any prospective purchaser of Series B Notes or registered Series A Notes, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by an untrue statement or omission or alleged untrue statement or omission that is based upon information relating to any of the Holders furnished in writing to the Company by any of the Holders. (b) Each Holder of Transfer Restricted agrees, severally and not jointly, to indemnify and hold harmless (i) the Company, (ii) its directors and officers and (iii) each Person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company to the same extent as the foregoing indemnity from the Company set forth in section (a) above, but only with reference to information relating to such Holder furnished in writing to the Company by such Holder expressly for use in any Registration Statement. In no event shall any Holder, its directors, officers or any Person who controls such Holder be liable or responsible for any amount in excess of the amount by which the total amount received by such Holder with respect to its sale of Transfer Restricted Securities pursuant to a Registration Statement exceeds (i) the amount paid by such Holder for such Transfer Restricted Securities and (ii) the amount of any damages that such Holder, its directors, officers or any Person who controls such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the "Indemnified Party"), the Indemnified Party shall promptly notify the person against whom such indemnity may be sought (the "Indemnifying Party") in writing and the Indemnifying Party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 8(a) and 8(b), a Holder shall not be required to assume the defense of such action pursuant to this Section 8(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of the Holder). Any Indemnified Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the Indemnified Party unless (i) the employment of such counsel shall have been specifically authorized in writing by the Indemnifying Party, (ii) the Indemnifying Party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the 13 Indemnified Party or (iii) the named parties to any such action (including any impleaded parties) include both the Indemnified Party and the Indemnifying Party, and the Indemnified Party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Indemnifying Party (in which case the Indemnifying Party shall not have the right to assume the defense of such action on behalf of the Indemnified Party). In any such case, the Indemnifying Party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all Indemnified Parties and all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by a majority of the Holders, in the case of the parties indemnified pursuant to Section 8(a), and by the Company, in the case of parties indemnified pursuant to Section 8(b). The Indemnifying Party shall indemnify and hold harmless the Indemnified Party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without its written consent if the settlement is entered into more than twenty Business Days after the Indemnifying Party shall have received a request from the Indemnified Party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the Indemnifying Party) and, prior to the date of such settlement, the Indemnifying Party shall have failed to comply with such reimbursement request. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the Indemnified Party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the Indemnified Party, unless such settlement, compromise or judgment (i) includes an unconditional release of the Indemnified Party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the Indemnified Party. (d) To the extent that the indemnification provided for in this Section 8 is unavailable to an Indemnified Party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, liabilities or judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, on the one hand, and the Holders, on the other hand, from their sale of Transfer Restricted Securities or (ii) if the allocation provided by clause 8(d)(i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 8(d)(i) above but also the relative fault of the Company, on the one hand, and of the Holder, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative fault of the Company, on the one hand, and of the Holder, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, on the one hand, or by the Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and judgments referred to above shall be deemed to include, subject to the limitations set forth in the second paragraph 14 of Section 8(a), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The Company and each Holder agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any matter, including any action that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 8, no Holder, its directors, its officers or any Person, if any, who controls such Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the total received by such Holder with respect to the sale of Transfer Restricted Securities pursuant to a Registration Statement exceeds (i) the amount paid by such Holder for such Transfer Restricted Securities and (ii) the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligations to contribute pursuant to this Section 8(c) are several in proportion to the respective principal amount of Transfer Restricted Securities held by each Holder hereunder and not joint. The Company agrees that the indemnity and contribution provisions of this Section 8 shall apply to Affiliated Market Makers to the same extent, on the same conditions, as it applies to Holders. SECTION 9. RULE 144A and RULE 144 The Company hereby agrees with each Holder, for so long as any Transfer Restricted Securities remain outstanding and during any period in which the Company (i) is not subject to Section 13 or 15(d) of the Exchange Act, to make available, upon request of any Holder, to such Holder or beneficial owner of Transfer Restricted Securities in connection with any sale thereof and any prospective purchaser of such Transfer Restricted Securities designated by such Holder or beneficial owner, the information required by Rule 144A(d)(4) under the Act in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144A, and (ii) is subject to Section 13 or 15 (d) of the Exchange Act , to make all filings required thereby in a timely manner in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144. SECTION 10. MISCELLANEOUS (a) Remedies. The Company acknowledges and agrees that any failure by the Company to comply with its obligations under Sections 3 and 4 hereof may result in material irreparable injury to the Initial Purchaser or the Holders or Affiliated Market Makers for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchaser or any Holder or Affiliated Market Maker may obtain such relief as may be required to specifically enforce the Company's obligations under Sections 3 and 4 hereof. The Company further agrees to waive the defense in any action for specific performance where a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company will not, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. 15 The Company has not previously entered into any agreement granting any registration rights with respect to its securities to any Person. The rights granted to the Holders hereunder do not in any way conflict with, and are not inconsistent with, the rights granted to the holders of the Company's securities under any agreement in effect on the date hereof. (c) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given unless (i) in the case of Section 5 hereof and this Section 10(c)(i), the Company has obtained the written consent of Holders of all outstanding Transfer Restricted Securities and (ii) in the case of all other provisions hereof, the Company has obtained the written consent of Holders of a majority of the outstanding principal amount of Transfer Restricted Securities (excluding Transfer Restricted Securities held by the Company or its Affiliates). Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof that relate exclusively to the rights of Holders whose Transfer Restricted Securities are being tendered pursuant to the Exchange Offer, and that does not affect directly or indirectly the rights of other Holders whose Transfer Restricted Securities are not being tendered pursuant to such Exchange Offer, may be given by the Holders of a majority of the outstanding principal amount of Transfer Restricted Securities subject to such Exchange Offer. (d) Third Party Beneficiary. The Holders and Affiliated Market Makers shall be third party beneficiaries to the agreements made hereunder between the Company, on the one hand, and the Initial Purchaser, on the other hand, and shall have the right to enforce such agreements directly to the extent they may deem such enforcement necessary or advisable to protect its rights or the rights of Holders and Affiliated Market Makers hereunder. (e) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing, by hand-delivery, first-class mail (registered or certified, return receipt requested), telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a Holder, at the address set forth on the records of the Registrar under the Indenture, with a copy to the Registrar under the Indenture; and (ii) if to the Company: AKI, Inc. 1815 East Main Street Chattanooga, TN 37404 Telecopier No.: 423-622-4634 Attention: Corporate Secretary and AKI, Inc. 120 East 56th Street New York, NY Telecopier No.: 212-223-5776 Attention: President With a copy to: Weil, Gotshal & Manges LLP 100 Crescent Court, Suite 1300 Dallas, TX 75201 Telecopier No.: 214-746-7777 Attention: R. Scott Cohen 16 All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and on the next business day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving the same to the Trustee at the address specified in the Indenture. Upon the date of filing of the Exchange Offer or a Shelf Registration Statement, as the case may be, notice shall be delivered to Donaldson, Lufkin & Jenrette Securities Corporation (in the form attached hereto as Exhibit A) and shall be addressed to: Louise Guarneri (Compliance Department), 277 Park Avenue, New York, New York 10172. (f) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; provided, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Transfer Restricted Securities in violation of the terms hereof or of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Transfer Restricted Securities in any manner, whether by operation of law or otherwise, such Transfer Restricted Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Transfer Restricted Securities such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement and, if applicable, the Purchase Agreement, and such Person shall be entitled to receive the benefits hereof. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. (j) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted with respect to the Transfer Restricted Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 17 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. AKI, INC. By: ------------------------------ Name: Title: 18 The foregoing Registration Rights Agreement is hereby confirmed and accepted as of the date first above written by Donaldson, Lufkin & Jenrette Securities Corporation, as the Initial Purchaser. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: ------------------------------ Name: Title: 19 EXHIBIT A NOTICE OF FILING OF A/B EXCHANGE OFFER REGISTRATION STATEMENT To: Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Attention: Louise Guarneri (Compliance Department) Fax: (212) 892-7272 From: AKI, Inc. Re: 10 1/2% Series A Notes due 2008 Date: , 199 For your information only (NO ACTION REQUIRED): Today, , 199 , we filed [an Exchange Registration Statement/a Shelf Registration Statement] with the Securities and Exchange Commission. We currently expect this registration statement to be declared effective within Business Days of the date hereof. 20 EX-10.1 6 1998 STOCK OPTION PLAN Exhibit 10.1 AHC I ACQUISITION CORP. 1998 STOCK OPTION PLAN A. PURPOSES AHC I ACQUISITION CORP., a Delaware corporation (the "Company"), desires to afford certain of its key employees and directors, and the key employees and directors of any parent corporation or subsidiary corporation of the Company now existing or hereafter formed or acquired, who are responsible for the continued growth of the Company, an opportunity to acquire a proprietary interest in the Company, and thus to create in such key employees an increased interest in and a greater concern for the welfare of the Company and its subsidiaries. The Company, by means of this 1998 Stock Option Plan (the "Plan"), seeks to retain the services of persons now holding key positions and to secure the services of persons capable of filling such positions. The stock options ("Options") offered pursuant to the Plan are a matter of separate inducement and are not in lieu of any salary or other compensation for the services of any key employee. The Options granted under the Plan are intended to be either incentive stock options ("Incentive Options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or options that do not meet the requirements of Incentive Options ("Non-Qualified Options"). The Company makes no warranty, however, as to the qualification of any Option as an Incentive Option. 2. NUMBER OF SHARES SUBJECT TO THE PLAN The total number of shares of common stock of the Company which may be purchased or acquired pursuant to the exercise of Options granted under the Plan shall not exceed, in the aggregate, 80,000 shares of the authorized common stock, par value $.01 per share, of the Company (the "Shares"); provided, that the maximum number of Shares which may be purchased or acquired pursuant to the exercise of Options granted to one key employee or director under the Plan is 32,500. Shares available for issuance acquired under the Plan may be either authorized but unissued Shares or Shares of issued stock held in the Company's treasury, or both, at the discretion of the Company. If and to the extent that Options granted under the Plan expire or terminate without having been exercised, the Shares covered by such expired or terminated Options may again be subject to an Option under the Plan. Except as provided in Article 18 and subject to Article 3, the Company may, from time to time during the period beginning on June 17, 1998 (the "Effective Date"), the date of approval by the board of directors of the Company (the "Board of Director's"), and ending on June 16, 2008, (the "Termination Date"), grant Incentive Options and Non-Qualified Options to certain key employees of the Company or any subsidiary corporation of the Company under the terms hereinafter set forth. As used in the Plan, the terms "parent corporation" and "subsidiary corporation" shall mean a corporation within the definitions of such terms contained in Sections 424(e) and 424(f) of the Code, respectively. 3. ADMINISTRATION The Board of Directors shall administer the Plan, provided that the Board of Directors may, from time to time, designate from any of its members a Compensation Committee, which shall be the Compensation Committee of the Board of Directors (the "Committee"), to administer the Plan. A majority of the members of the Committee shall constitute a quorum, and the act of a majority of the members of the Committee shall be the act of the Committee. Any member of the Committee may be removed at any time either with or without cause by resolution adopted by the Board of Directors, and any vacancy on the Committee at any time may be filled by resolution adopted by the Board of Directors. If the Board of Directors administers the Plan, then reference herein, or in any option agreement granting Options pursuant to the Plan, to the Committee shall mean the Committee or the Board of Directors, as appropriate. Subject to the express provisions of the Plan, the Committee shall have authority, in its discretion, to determine the key employees to whom Options shall be granted (the "Optionholders"), the time when such Options shall be granted, the number of Shares which shall be subject to each Option, the purchase price or exercise price of each Option, the period(s) during which such Options shall be exercisable (whether in whole or in part) and the other terms and provisions thereof (which need not be identical). Subject to the express provisions of the Plan, the Committee also shall have authority to construe the Plan and the Options granted thereunder, to amend the Plan and the Options granted thereunder, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the Options (which need not be identical) granted thereunder and to make all other determinations necessary or advisable for administering the Plan. The Committee may establish performance standards for determining the periods during which Options shall be exercisable, including without limitation standards based on the earnings of the Company and its subsidiaries for various fiscal periods. The Committee shall define such performance criteria and, from time to time, the Committee in its sole discretion and in administering the Plan may make adjustments to such performance criteria for any fiscal period so that extraordinary or unusual charges or credits, acquisitions, mergers, consolidations, and other corporate transactions and other elements of or factors influencing the calculations of earnings or any other performance standard do not distort or affect the operation of the Plan in a manner inconsistent with the achievement of its purpose. The determination of the Committee on matters referred to in this Article 3 shall be conclusive. The Committee may employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion or computation received from any such legal counsel, consultant or agent. Expenses incurred by the Committee in the engagement of such counsel, consultant or agent shall be paid by the Company. No member or former member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any award of Options granted hereunder. 4. ELIGIBILITY Options may be granted only to key employees or directors of the Company or any parent or subsidiary corporation of the Company. The Plan does not create a right in any employee or director to participate in the Plan, nor does it create a right in any employee or director to have any Options granted to him or her. 5. OPTION PRICE AND PAYMENT The price for each Share purchasable under any Option granted hereunder shall be such amount as the Committee shall determine in good faith to be the fair market value (as defined below) per Share at the date the Option is granted; provided, however, that the exercise price shall not be less than $1.00 per share; and provided further, that in the case of an Incentive Option granted to a key employee who, at the time such Incentive Option is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any subsidiary corporation or parent corporation of the Company, the purchase price for each Share shall not be less than one hundred ten percent (110%) of the fair market value per Share at the date the Incentive Option is granted. In determining the stock ownership of a key employee for any purpose under the Plan, the rules of Section 424(d) of the Code shall be applied, and the Committee may rely on representations of fact made to it by the key employee and believed by it to be true. For purposes of the Plan, "fair market value," with respect to any date of determination, means: (i) if the Shares are listed or admitted to trading on a national securities exchange in the United States or reported through The Nasdaq Stock Market ("Nasdaq") then the closing sale price on such exchange or Nasdaq on such date or, if no trading occurred or quotations were available on such date, then on the closest preceding date on which the Shares were traded or quoted; or (ii) if not so listed or reported but a regular, active public market for the Shares exists (as determined in the sole discretion of the Committee, whose decision shall be conclusive and binding), then the average of the closing bid and ask quotations per Share in the over-the-counter market for such Shares in the United States on such date or, if no such quotations are available on such date, then on the closest date preceding such date. For purposes of the foregoing, a market in which trading is sporadic and the ask quotations generally exceed the bid quotations by more than 15% shall not be deemed to be a "regular, active public market." If the Committee determines that a regular, active public market does not exist for the Shares, the Committee shall determine the fair market value of the Shares in its good faith judgment based on the total number of shares of Common Stock then outstanding, taking into account all outstanding options, warrants, rights or other securities exercisable or exchangeable for, or convertible into, shares of Common Stock. For purposes of this Plan, the determination by the Committee of the fair market value of a Share shall be conclusive. Upon the exercise of an Option granted hereunder, the Company shall cause the purchased Shares to be issued only when it shall have received the full purchase price for the Shares in cash or by certified check; provided, however, that in lieu of cash, the holder of an Option may, if and to the extent the terms of such Option so provide and to the extent permitted by applicable law, exercise an Option in whole or in part, by delivering to the Company (a) shares of common stock of the Company (in proper form for transfer and accompanied by all requisite stock transfer tax stamps or cash in lieu thereof) owned by such holder having a fair market value equal to the exercise price applicable to that portion of the Option being exercised or (b) such other form of payment as the Committee shall permit in its sole discretion at the time of grant of the Option. 6. USE OF PROCEEDS The cash proceeds of the sale of Shares pursuant to the Plan are to be added to the general funds of the Company and used for its general corporate purposes as the Board of Directors shall determine. 7. TERM OF OPTIONS AND LIMITATIONS ON THE RIGHT OF EXERCISE An Option shall be exercisable at such times, in such amounts and during such period or periods as the Committee shall determine at the date of the grant of such Option; provided, however, that an Option shall not be exercisable after the expiration of ten (10) years from the date such Option is granted; and provided, further, that an Incentive Option granted to a key employee who, at the time such Incentive Option is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any subsidiary corporation or parent corporation of the Company, shall not be exercisable after the expiration of five (5) years from the date such Incentive Option is granted. The Committee shall have the right to accelerate, in whole or in part, from time to time, conditionally or unconditionally, rights to exercise any Option granted hereunder. To the extent that an Option is not exercised within the period of exercisability specified therein, it shall expire as to the then unexercised part. Except as otherwise provided under the Code, to the extent that the aggregate fair market value of stock for which Incentive Options (under all stock option plans of the Company and of any parent corporation or subsidiary corporation of the Company) are exercisable for the first time by a key employee during any calendar year exceeds one hundred thousand dollars ($100,000), such Options shall be treated as Non-Qualified Options. For purposes of this limitation, (a) the fair market value of the stock is determined as of the time the Option is granted, and (b) Options will be taken into account in the order in which they were granted. In no event shall an Option granted hereunder be exercised for a fraction of a Share. 8. EXERCISE OF OPTIONS Options granted under the Plan shall be exercised by the Optionholder as to all or part of the Shares covered thereby by the giving of written notice of the exercise thereof to the Corporate Secretary of the Company at the principal business office of the Company, specifying the number of Shares to be purchased and specifying a business day not more than fifteen (15) days from the date such notice is given for the payment of the purchase price against delivery of the Shares being purchased. Subject to the terms of Articles 13, 14, 15 and 16, the Company shall cause certificates for the Shares so purchased to be delivered to the Optionholder at the principal business office of the Company, against payment of the full purchase price, on the date specified in the notice of exercise. 9. NON-TRANSFERABILITY OF OPTIONS No Option granted hereunder shall be transferable, whether by operation of law or otherwise, other than by will or the laws of descent and distribution and any Option granted hereunder shall be exercisable during the lifetime of the Optionholder only by such Optionholder. Except to the extent provided above, Options may not be assigned, transferred, pledged, hypothecated or disposed of in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process, and any purported assignment in contravention hereof shall be void and of no effect. Notwithstanding the foregoing, at the discretion of the Committee, a Non-Qualified Option may be transferred by a key employee solely to such key employee's spouse, siblings, parents, children and grandchildren or trusts for the benefit of such persons or partnerships, corporations, limited liability companies or other entities owned solely by such persons, subject to any restrictions included in the award of the Non-Qualified Option. 10. TERMINATION OF EMPLOYMENT Upon termination of employment of any Optionholder with the Company and all subsidiary corporations, an Option previously granted to the Optionholder, unless otherwise specified by the Committee in the Option, shall, to the extent not theretofore exercised, terminate and become null and void, provided that: (a) if the Optionholder shall die while in the employ of such corporation or during either the six (6) month or thirty (30) day period, whichever is applicable, specified in clauses (b) and (c) below, and at a time when such Optionholder was entitled to exercise an Option as herein provided, the legal representative of such Optionholder, or such person who acquired such Option by bequest or inheritance or by reason of the death of the Optionholder, shall have the right to exercise such Option so granted, to the extent not theretofore exercised, in respect of any or all of such number of Shares that such Optionholder is entitled to purchase pursuant to such Option at the time of such Optionholder's death, at any time up to and including one (1) year after the date of death; (b) if the employment of any Optionholder to whom such Option shall have been granted shall terminate by reason of the Optionholder's disability (as defined below), and while such Optionholder is entitled to exercise such Option as herein provided, such Optionholder shall have the right to exercise such Option so granted, to the extent not theretofore exercised, in respect of any or all of such number of Shares that such Optionholder is entitled to purchase pursuant to such Option at the time of such termination, at any time up to and including six (6) months after the date of termination of employment; and (c) if the employment of any Optionholder to whom such Option shall have been granted shall terminate by reason of dismissal by the employer other than for cause (as defined below), and while such Optionholder is entitled to exercise such Option as herein provided, such Optionholder shall have the right to exercise such Option so granted, to the extent not theretofore exercised, in respect of any or all of such number of Shares that such Optionholder is entitled to purchase pursuant to such Option at the time of such termination, at any time up to and including thirty (30) days after the date of termination of employment. If an Optionholder (i) voluntarily terminates his or her employment, or (ii) is discharged for cause, any Option granted hereunder shall, unless otherwise specified by the Committee in the Option, forthwith terminate with respect to any unexercised portion thereof. If an Option granted hereunder shall be exercised by the legal representative of a deceased or disabled Optionholder, or by a person who acquired an Option granted hereunder by bequest or inheritance or by reason of death of any Optionholder, written notice of such exercise shall be accompanied by a certified copy of letters testamentary or equivalent proof of the right of such legal representative or other person to exercise such Option. For all purposes of the Plan, the term "for cause" shall mean, (i) with respect to an Optionholder who is a party to a written employment agreement with the Company, which agreement contains a definition of "for cause" or "cause" (or words of like import) for purposes of termination of employment thereunder by the Company, "for cause" or "cause" as defined in the most recent of such agreements, or (ii) in all other cases, as determined by the Committee, in its sole discretion, that one or more of the following has occurred: (A) any intentional or willful failure, or failure due to bad faith, by such Optionholder to substantially perform his or her employment duties which shall not have been corrected within 30 days following written notice thereof, (B) any misconduct by such Optionholder which is significantly injurious to the Company or any of its subsidiaries or affiliates, (C) any breach by such Optionholder of any covenant contained in the instrument pursuant to which an Option is granted, (D) such Optionholder's conviction of, or entry of a plea of nolo contendere in respect of, any felony or a misdemeanor which results in, or is reasonably expected to result in, economic or reputational injury to the Company or any of its subsidiaries or affiliates. For all purposes of the Plan, the term "disability" means (i) with respect to an Optionholder who is a party to a written employment agreement with the Company, which agreement contains a definition of "disability" or "permanent disability" (or words of like import) for purposes of termination of employment thereunder by the Company, "disability" or "permanent disability" as defined in the most recent of such agreements, or (ii) in all other cases, means such Optionholder's inability to perform substantially his or her duties and responsibilities to the Company or any of its subsidiaries by reason of physical or mental illness, injury, infirmity or condition: (A) for a continuous period for 120 days or one or more periods aggregating 150 days in any twelve-month period; (B) at such time as such Optionholder is eligible to receive disability income payments under any long-term disability insurance plan maintained by the Company or any of its subsidiaries; or (C) at such earlier time as such Optionholder or the Company submits medical evidence, in the form of a physician's certification, that such Optionholder has a physical or mental illness, injury, infirmity or condition that will likely prevent such Optionholder from substantially performing his duties and responsibilities for 120 days or longer. A termination of employment shall not be deemed to occur by reason of (i) the transfer of an Optionholder from employment by the Company to employment by a subsidiary corporation of the Company or (ii) the transfer of an Optionholder from employment by a subsidiary corporation of the Company to employment by the Company or by another subsidiary corporation of the Company. Notwithstanding anything to the contrary contained in this Article 10, in no event shall any person be entitled to exercise any Option after the expiration of the period of exercisability of such Option as specified therein. 11. ADJUSTMENT OF SHARES; EFFECT OF CERTAIN TRANSACTIONS In the event of any change in the outstanding Shares through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, reverse split, split-up, split-off, spin-off, combination of shares, exchange of shares, or other like change in capital structure of the Company, the Committee shall make such adjustments to each outstanding Option that it, in its sole discretion, deems appropriate. The term "Shares" after any such change shall refer to the securities, cash and/or property then receivable upon exercise of an Option. In addition, in the event of any such change, the Committee shall make any further adjustment as may be appropriate to the maximum number of Shares which may be acquired under the Plan pursuant to the exercise of Options, the maximum number of Shares for which Options may be granted to any individual under the Plan, the minimum exercise price per Share for Options to be granted under the Plan, and the number of Shares and prices per Share subject to outstanding Options as shall be equitable to prevent dilution or enlargement of rights under such Options, and the determination of the Committee as to these matters shall be conclusive. 12. RIGHT TO TERMINATE EMPLOYMENT The Plan shall not impose any obligation on the Company or on any subsidiary corporation thereof to continue the employment of any Optionholder and it shall not impose any obligation on the part of any Optionholder to remain in the employ of the Company or of any subsidiary corporation thereof. 13. SECURITIES LAW MATTERS Except as hereinafter provided, the Committee may require an Optionholder, as a condition upon exercise of any Option granted hereunder, to execute and deliver to the Company a written statement, in form satisfactory to the Committee, in which the Optionholder represents and warrants that Shares are being acquired for such Optionholder's own account for investment only and not with a view to the resale or distribution thereof. The Optionholder shall, at the request of the Committee, be required to represent and warrant in writing that any subsequent resale or distribution of Shares by the Optionholder shall be made only pursuant to either (i) a Registration Statement on an appropriate form under the Securities Act of 1933, as amended (the "Securities Act"), which Registration Statement has become effective and is current with regard to the Shares being sold, or (ii) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption the Optionholder shall, prior to any offer of sale or sale of such Shares, obtain a prior favorable written opinion of counsel, in form and substance satisfactory to counsel for the Company, as to the application of such exemption thereto. The foregoing restriction shall not apply to (i) issuances by the Company so long as the Shares being issued are registered under the Securities Act and a prospectus in respect thereof is current or (ii) re-offerings of Shares by affiliates of the Company (as defined in Rule 405 or any successor rule or regulation promulgated under the Securities Act) if the Shares being re-offered are registered under the Securities Act and a prospectus in respect thereof is current. 14. ISSUE OF CERTIFICATES, LEGENDS, PAYMENT OF EXPENSES Subject to Articles 13, 15 and 16, upon any exercise of an Option which may be granted hereunder and payment of the purchase price, a certificate or certificates for the Shares shall be issued by the Company in the name of the person exercising the Option and shall be delivered to or upon the order of such person. The Company may endorse such legend or legends upon the certificates for Shares issued pursuant to the Plan and, if a transfer agent has been engaged by the Company, may issue such "stop transfer" instructions to its transfer agent in respect of such Shares as, in its discretion, it determines to be necessary or appropriate to (i) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act, or (ii) implement the provisions of the Plan and any agreement between the Company and the Optionholder with respect to such Shares, or (iii) permit the Company to determine the occurrence of a disqualifying disposition, as described in Section 421(b) of the Code, of Shares transferred upon exercise of an Incentive Option granted under the Plan. The Company shall pay all issue or transfer taxes with respect to the issuance or transfer of Shares, as well as all fees and expenses necessarily incurred by the Company in connection with such issuance or transfer. All Shares issued as provided herein shall be fully paid and non-assessable to the extent permitted by law. 15. WITHHOLDING TAXES The Company will require, as a condition to an Optionholder exercising an Option granted hereunder, that the Optionholder reimburse the corporation that employs such Optionholder for any taxes required by any government to be withheld or otherwise deducted and paid by such corporation in respect of the issuance or disposition of such Shares. In lieu thereof, the corporation that employs such Optionholder shall have the right to withhold the amount of such taxes from any other sums due or to become due from such corporation to the Optionholder upon such terms and conditions as the Committee shall prescribe. The corporation that employs such Optionholder may, in its discretion, hold the stock certificate to which such Optionholder is entitled upon the exercise of an Option as security for the payment of such withholding tax liability, until cash sufficient to pay that liability has been accumulated. 16. LISTING OF SHARES AND RELATED MATTERS The Committee may delay the issuance or delivery of Shares pursuant to any Option granted hereunder if it determines that listing, registration or qualification of Shares or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Option under the Plan or the issuance of Shares thereunder, until such listing, registration, qualification, consent or approval shall have been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Committee. 17. AMENDMENT OF THE PLAN The Committee may, from time to time, amend the Plan, provided that no amendment shall be made, without the approval of the stockholders of the Company, that will (i) increase the total number of Shares reserved for Options under the Plan or the amount of Options that may be granted to any key employee (in each case, other than an increase resulting from an adjustment provided for in Article 11), (ii) reduce the exercise price of any Option granted hereunder below the price required by Article 5, (iii) modify the provisions of the Plan relating to eligibility, or (iv) materially increase the benefits accruing to participants under the Plan. The rights and obligations under any Option granted before amendment of the Plan or any unexercised portion of such Option shall not be adversely affected by amendment of the Plan or such Option without the consent of the holder of such Option. 18. TERMINATION OR SUSPENSION OF THE PLAN The Board of Directors may at any time suspend or terminate the Plan. The Plan, unless sooner terminated by action of the Board of Directors, shall terminate at the close of business on the Termination Date. Options may not be granted while the Plan is suspended or after it is terminated. Rights and obligations under any Option granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except upon the consent of the person to whom the Option was granted. The power of the Committee to construe and administer any Options granted prior to the termination or suspension of the Plan under Article 3 nevertheless shall continue after such termination or during such suspension. 19. GOVERNING LAW The Plan and such Options as may be granted thereunder and all related matters shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware from time to time obtaining. 20. PARTIAL INVALIDITY The invalidity or illegibility of any provision hereof shall not be deemed to affect the validity of any other provision. 21. EFFECTIVE DATE The Plan shall become effective at 9:00 a.m., New York City Time, on the Effective Date, provided the Plan is approved by the stockholders of the Company at an annual meeting or any special meeting of stockholders of the Company within 12 months of the Effective Date, and such approval of stockholders shall be a condition to the right of each eligible key employee to receive any Options under the Plan. Any Options granted under the Plan prior to such approval of stockholders shall be effective as of the date of the grant (unless, with respect to any Option, the Committee specifies otherwise at the time of the grant), but no such Option may be exercised prior to such stockholder approval, and if stockholders fail to approve the Plan as specified hereunder, any such Option shall be cancelled. EX-10.2 7 GRANT OF INCENTIVE STOCK OPTION EXHIBIT 10.2 EXECUTION COPY "Special" Option AHC I Acquisition Corp. 120 East 56th Street New York, New York 10022 June 17, 1998 Roger L. Barnett 120 East 56th Street New York, New York 10022 Re: Grant of Incentive Stock Option Dear Mr. Barnett: The Board of Directors of AHC I Acquisition Corp. (the "Company") has authorized and approved the 1998 Stock Option Plan (the "Plan"), which has been submitted to the stockholders of the Company for their approval. The Plan provides for the grant of options to certain key employees and directors of the Company and any parent and subsidiary corporations of the Company. Pursuant to the Plan, the Compensation Committee of the Board of Directors of the Company (the "Committee") has approved the grant to you of an option to purchase shares of Common Stock, par value $.01 per share, of the Company (the "Shares") on the terms and subject to the conditions set forth in the Plan and in this grant letter; provided that if the Plan is not approved by the stockholders of the Company, this grant letter shall nevertheless be effective as of the date hereof as a stand-alone option, subject to the terms and conditions set forth herein and the terms and conditions of the Plan, which are hereby incorporated by reference into this grant letter for purposes of this proviso. A copy of the Plan is annexed hereto as Exhibit A and shall be deemed a part hereof as if fully set forth herein. Unless the context otherwise requires, all terms defined in the Plan shall have the same meanings when used herein. The Shares purchasable pursuant to this Option are subject to restrictions set forth in the Stockholders Agreement (as defined in Paragraph 8 hereof). Such Shares may be required to be surrendered to the Company under certain circumstances described in the Stockholders Agreement. 1. Grant of Option. The Company hereby grants to you, as a matter of separate inducement and not in lieu of any salary or other compensation for your services, the right and option (the "Option") to purchase, in accordance with the terms and conditions set forth in the Plan, but subject to the limitations set forth herein and in the Plan, an aggregate of 16,250 Shares of the Company (the "Total Shares") at a price of $1.00 per Share, such option price being, in the judgment of the Committee, not less than one hundred percent (100%) of the fair market value of such Share at the date hereof. Except to the extent that in a given year the Option vests with respect to Shares having a value greater than $100,000 (computed as of the date of grant), the Option is intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, but it is specifically understood that no warranty is made to you as to such qualification. 2. Vesting of Option. a. Time Vesting. Subject to the provisions and limitations set forth herein and in the Plan, this Option may be exercised by you during a period commencing on June 30, 1999 as follows: i) this Option may not be exercised by you during the period commencing on the date hereof and ending on June 29, 1999; ii) up to 5,417 Shares (i.e., one-third of the Total Shares) may be purchased by you on or after June 30, 1999; iii) up to an additional 5,417 Shares (i.e., one-third of the Total Shares) may be purchased by you on or after June 30, 2000; and iv) the balance of the Total Shares may be purchased by you on or after June 30, 2001. b. Change of Control. For purposes hereof, a "Change In Control" of the Company occurs if: (a) any "Person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended ("Exchange Act")), other than (i) DLJ Merchant Banking II, Inc. or any of its affiliates or any combination thereof (collectively, the "DLJ Entities"), (ii) Roger L. Barnett or any of his affiliates or any combination thereof (collectively, the "Barnett Parties"), or (iii) any combination of the DLJ Entities and the Barnett Parties, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the total combined voting power of all classes of capital stock of the Company normally entitled to vote for the election of directors of the Company; or (b) the Board of Directors shall approve a sale of all or substantially all of the assets of the Company, in one transaction or a series of related transactions, other than to an entity owned or controlled by the 2 DLJ Entities or the Barnett Parties or any combination thereof. Upon a Change In Control, each Option may, at the discretion of the Committee, be terminated within a specified number of days after notice to the holder of such Option, in which case each such holder will receive, in respect of each Share for which such Option then is exercisable, an amount equal to the excess of the then fair market value of such Share over the exercise price per Share, payable in the same consideration received by the stockholders of the Company upon the closing of such transaction. To the extent not previously exercised or exercisable, upon a Change In Control, this Option shall immediately become exercisable to purchase 16,250 Shares of the Company (i.e., 100% of the Total Shares). c. Maximum Limitation. Notwithstanding anything to the contrary set forth herein but subject to Section 11 of the Plan, in no event shall this Option become exercisable for more than 16,250 Shares (i.e., 100% of the Total Shares) in the aggregate. 3. Termination of Option. The unexercised portion of the Option granted herein will automatically and without notice terminate and become null and void upon the earliest to occur of the following: a. the expiration of ten (10) years from the date of grant of this Option; b. the date of termination of your employment if your employment (i) is terminated by you or (ii) is terminated by the Company or subsidiary corporation of the Company for cause (as defined in the Plan); c. the expiration of 30 days from the date of termination by the Company or its subsidiaries of your employment other than for cause (as defined in the Plan), except that this Option will be exercisable during such 30-day period only to the extent that it would have been exercisable immediately prior to the termination of your employment; d. the expiration of 6 months after the termination of your employment by reason of your disability (as defined in the Plan), except that this Option will be exercisable during such 6-month period only to the extent that it would have been exercisable immediately prior to the termination of your employment; or e. the expiration of one (1) year after your death if your death occurs during your employment or during the six (6) month or thirty (30) day period, as the case may be, specified in clauses (c) and/or (d) above, except that this Option will be exercisable during such 1-year period only to the extent that it would have been exercisable immediately prior to your death; 3 provided, however, that none of the events described above shall extend the period of exercisability of this Option beyond the day immediately preceding the tenth anniversary of the date hereof. 4. Non-transferability of Option. This Option is not transferable by you otherwise than by will or the laws of descent and distribution, and is exercisable, during your lifetime, only by you. This Option may not be assigned, transferred (except by will or the laws of descent and distribution), pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar proceeding. Any attempted assignment, transfer, pledge, hypothecation or other disposition of this Option contrary to the provisions hereof, and the levy of any attachment or similar proceeding upon the Option, shall be null and void and without effect. 5. Exercise of Option. a. Purchase of Shares. Any exercise of this Option shall be in writing addressed to the Secretary of the Company at the principal place of business of the Company, shall be substantially in the form attached hereto as Exhibit B and shall be accompanied by (i) a certified or bank cashier's check to the order of the Company in an amount equal to, or (ii) to the extent permitted by applicable law, shares of common stock, par value $.01 per share, of the Company (in proper form for transfer and accompanied by all requisite stock transfer tax stamps or cash in lieu thereof) owned by you having a fair market value (as defined in the Plan) as of the date immediately prior to the exercise of the Option equal to, the full amount of the purchase price of the Shares so purchased. b. Legends. If the Company, in its sole discretion, shall determine that it is necessary, to comply with applicable securities laws, the certificate or certificates representing the Shares purchased pursuant to the exercise of this Option shall bear an appropriate legend in form and substance, as determined by the Company, giving notice of applicable restrictions on transfer under or in respect of such laws. Further, you hereby acknowledge that the Company may endorse a legend upon the certificate evidencing the Shares as the Company, in its sole discretion, determines to be necessary and appropriate to implement the terms of the Plan. c. Investment Intent. You hereby covenant and agree with the Company that if, at the time of exercise of this Option, there does not exist a Registration Statement on an appropriate form under the Securities Act of 1933, as amended (the "Act"), which Registration Statement shall have become effective and shall include a prospectus which is current with respect to the Shares subject to this Option (i) that you will represent that you are purchasing the Shares for your own account and not with a view to the resale or distribution thereof and (ii) that any subsequent offer for sale or sale of any such Shares shall be made either pursuant to (x) a 4 Registration Statement on an appropriate form under the Act, which Registration Statement shall have become effective and shall be current with respect to the shares being offered and sold, or (y) a specific exemption from the registration requirements of the Act, but in claiming such exemption, you shall, if requested by the Company, prior to any offer for sale or sale of such Shares, obtain a favorable written opinion from counsel for or approved by the Company as to the applicability of such exemption. 6. Withholding Taxes. As provided in the Plan, the Company may withhold or cause to be withheld from sums due or to become due to you from the Company or a subsidiary corporation or affiliate thereof an amount necessary to satisfy its obligation (if any) to withhold taxes incurred by reason of the exercise of this Option or the disposition of Shares acquired hereunder, or may require you to reimburse the Company in such amount and may make such reimbursement a condition to the delivery of the Shares pursuant to the exercise of this Option. 7. Agreement Subject to the Plan. You and the Company agree that this agreement is subject to, and that you and the Company will both be bound by, all terms, conditions, limitations and restrictions contained in the Plan, which shall be controlling in the event of any conflicting or inconsistent provisions. 8. Stockholders Agreement. It is a condition to the effectiveness of this Option and the obligation of the Company to issue any Shares hereunder that you shall have executed, on or prior to the date hereof, the Stockholders Agreement, dated as of December 15, 1997, as amended, by and among the Company and the stockholders named therein, and it is hereby acknowledged that you have executed such Stockholders Agreement. Please indicate your acceptance of all the terms and conditions of this Option and the Plan by signing and returning a copy of this letter. Very truly yours, AHC I ACQUISITION CORP. By: ---------------------------------- David M. Wittels, Vice President ACCEPTED: 5 - ------------------------------------- Signature of Employee - ------------------------------------- Name of Employee - Please Print Date: , 1998 ------------- Exhibit A 1998 Employee Stock Option Plan Exhibit B Exercise Letter [Date] AHC I Acquisition Corp. 120 East 56th Street New York, New York 10022 Attention: Corporate Secretary Re: Special Incentive Stock Option Under the 1998 Stock Option Plan Dear Sir: I am the holder of a Special Option granted to me under the above-referenced Plan by AHC I Acquisition Corp. (the "Company") on _______, 199_ to purchase ____________ shares of Common Stock of the Company ("Shares") at a price of $________ per share. I hereby exercise that option with respect to ___________ Shares, the total purchase price for which is $____________. On _______________ [a business day not more than 15 days from the date of this letter], I will present [a certified check payable to the order of the Company in the amount of $_____________] [shares of common stock, par value $.01 per share, of the Company (in proper form for transfer and accompanied by all requisite stock transfer tax stamps or cash in lieu thereof) owned by me with a fair market value (as defined in the Plan)] representing the total purchase price for the Shares. The certificate or certificates representing the Shares should be registered in my name and upon the presentation of that check][such shares of common stock], the Shares should be [delivered to me] [forwarded to me at the address indicated below]. I hereby agree to pay the full amount of all withholding taxes which the Company or any subsidiary or parent corporation is required to withhold in connection with the exercise of this option or the disposition of Shares acquired hereunder and further authorize the Company, or the subsidiary or parent corporation, to withhold from any cash compensation paid to me or in my behalf an amount sufficient to discharge the federal, state or local income, employment or excise tax withholding obligation to which the Company, or the subsidiary or parent corporation, becomes subject by reason of the exercise of this option, but only to the extent I shall not have paid such amount to the Company or any parent or subsidiary corporation. I agree that the corporation by which I am employed may, in its discretion, hold the stock certificate to which I become entitled upon exercise of this option, as security for the payment of the aforementioned withholding tax liability, until cash sufficient to pay that liability has been accumulated. Please acknowledge receipt of the exercise of my stock option on the attached copy of this letter. Very truly yours, ------------------------------- Signature ------------------------------- Please Print Name ------------------------------- Address ------------------------------- ------------------------------- ------------------------------- Social Security Number RECEIPT ACKNOWLEDGED: AHC I ACQUISITION CORP. By: - ----------------------------------- Name: - ----------------------------------- Title: - ----------------------------------- EX-10.3 8 GRANT OF INCENTIVE STOCK OPTION Exhibit 10.3 Execution Copy AHC I Acquisition Corp. 120 East 56th Street New York, New York 10022 June 17, 1998 Roger L. Barnett 120 East 56th Street New York, New York 10022 Re: Grant of Incentive Stock Option Dear Mr. Barnett: The Board of Directors of AHC I Acquisition Corp. (the "Company") has authorized and approved the 1998 Stock Option Plan (the "Plan"), which has been submitted to the stockholders of the Company for their approval. The Plan provides for the grant of options to certain key employees and directors of the Company and any parent and subsidiary corporations of the Company. Pursuant to the Plan, the Compensation Committee of the Board of Directors of the Company (the "Committee") has approved the grant to you of an option to purchase shares of Common Stock, par value $.01 per share, of the Company (the "Shares") on the terms and subject to the conditions set forth in the Plan and in this grant letter; provided that if the Plan is not approved by the stockholders of the Company, this grant letter shall nevertheless be effective as of the date hereof as a stand-alone option, subject to the terms and conditions set forth herein and the terms and conditions of the Plan, which are hereby incorporated by reference into this grant letter for purposes of this proviso. A copy of the Plan is annexed hereto as Exhibit A and shall be deemed a part hereof as if fully set forth herein. Unless the context otherwise requires, all terms defined in the Plan shall have the same meanings when used herein. The Shares purchasable pursuant to this Option are subject to restrictions set forth in the Stockholders Agreement (as defined in Paragraph 8 hereof). Such Shares may be required to be surrendered to the Company under certain circumstances described in the Stockholders Agreement. 1. Grant of Option. The Company hereby grants to you, as a matter of separate inducement and not in lieu of any salary or other compensation for your services, the right and option (the "Option") to purchase, in accordance with the terms and conditions set forth in the Plan, but subject to the limitations set forth herein and in the Plan, an aggregate of 16,250 Shares of the Company (the "Total Shares") at a price of $1.00 per Share, such option price being, in the judgment of the Committee, not less than one hundred percent (100%) of the fair market value of such Share at the date hereof. Except to the extent that in a given year the Option vests with respect to Shares having a value greater than $100,000 (computed as of the date of grant), the Option is intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, but it is specifically understood that no warranty is made to you as to such qualification. 2. Vesting of Option. Subject to the provisions and limitations set forth herein and in the Plan, the number of Shares of stock for which this Option may be exercised shall be determined in accordance with this Section 2. a. Establishment of EBITDA Targets. For each of the fiscal years ending on June 30, of 1999, 2000 and 2001, the Company has established target amounts (each a "Target Amount"), floor amounts (each, a "Floor Amount") and ceiling amounts (each, a "Ceiling Amount") for EBITDA (as defined below) set forth below: Fiscal Year Floor Amount Target Amount Ceiling Amount - ----------- ------------ ------------- -------------- 1999 $24,300,000 $27,000,000 $29,700,000 2000 27,000,000 30,000,000 33,000,000 2001 28,800,000 32,000,000 35,200,000 b. If EBITDA Equals Target Amount. Subject to adjustment in accordance with Section 2(e) and subject to Section 2(g), if the EBITDA of the Company for a fiscal year is equal to or greater than the Target Amount for such fiscal year, this Option may be exercised to purchase 5,417 Shares (5,416 Shares with respect to the fiscal year ended June 30, 2001) (i.e., one-third of the Total Shares). c. If EBITDA Is At Least Equal to Floor Amount But Less Than Target Amount. Subject to adjustment in accordance with Section 2(e) and subject to Section 2(g), if the EBITDA of the Company for a fiscal year is at least equal to the Floor Amount, but less than the Target Amount, for such fiscal year, then this Option may be exercised to purchase a number of Shares equal to the product of (x) 5,417 (5,416 Shares with respect to the fiscal year ended June 30, 2001) (i.e., one-third of the Total Shares) and (y) a fraction, the numerator of which shall be equal to the excess of the EBITDA of the Company for such fiscal year over the Floor Amount for such fiscal year and the denominator of which is equal to the excess of Target 2 Amount for such fiscal year over the Floor Amount for such fiscal year. d. Carryback to Prior Year. If the EBITDA of the Company for the fiscal year ended June 30, 2000 or 2001 exceeds the Target Amount for such fiscal year (such excess, less any amount carried forward pursuant to Section 2.e. below, an "Excess Amount"), and the Target Amount for the immediately preceding fiscal year (the "Prior Year") exceeded the EBITDA of the Company for the Prior Year (such excess, a "Prior Year Shortfall Amount"), the (i) Excess Amount for such fiscal year may be carried back to the Prior Year (but in an amount not in excess of the lesser of (x) the Prior Year Shortfall Amount and (y) the difference between the Ceiling Amount and the Target Amount for such fiscal year), (ii) the EBITDA for such Prior Year shall be redetermined, and (iii) the number of Shares for which this Option may be exercised shall be increased based upon the EBITDA for the Prior Year as so redetermined. e. Carryforward from Prior Year. If (i) the Floor Amount for the fiscal year ended June 30, 2000 or 2001 (a "Current Year") exceeds the EBITDA of the Company for such Current Year, this Option shall not become exercisable for any Shares in respect of such Current Year and (ii) if the EBITDA of the Company for a fiscal year is at least equal to the Floor Amount, but less than the Target Amount, for such fiscal year, this Option may be exercised to purchase a number of Shares as determined in accordance with clause (c) above; provided, however, that if the EBITDA of the Company for the Prior Year exceeded the Target Amount for the Prior Year (such excess, less any amount carried back pursuant to Section 2.d. above, a "Carryforward Amount"), then you may elect that (i) the Carryforward Amount for the Prior Year shall be carried forward to such Current Year (but in an amount not in excess of the lesser of (x) the amount by which the Target Amount for the Current Year exceeds the EBITDA of the Company for such Current Year and (y) the difference between the Ceiling Amount and the Target Amount for the Prior Year), (ii) the EBITDA for the Current Year shall be redetermined to be an amount equal to the sum of the EBITDA for such Current Year and the amount so carried forward pursuant to clause (i), (iii) the EBITDA for the Prior Year shall be redetermined to be an amount equal to the EBITDA for such Prior Year, reduced by the amount carried forward pursuant to clause (i), and (iv) the number of Shares for which this Option may be exercised shall be adjusted based upon the EBITDA for the Current Year and the Prior Year as so redetermined in accordance with clauses (ii) and (iii), respectively. f. Change In Control. For purposes hereof, a "Change In Control" of the Company occurs if: (a) any "Person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended ("Exchange Act")), other than (i) DLJ Merchant Banking II, Inc. or any of its affiliates or any combination thereof (collectively, the "DLJ Entities"), (ii) Roger L. Barnett or any of his affiliates or any combination thereof (collectively, the "Barnett Parties"), or (iii) any combination of the DLJ Entities and the Barnett Parties, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the total combined voting power of all classes of capital stock of 3 the Company normally entitled to vote for the election of directors of the Company; or (b) the Board of Directors shall approve a sale of all or substantially all of the assets of the Company, in one transaction or a series of related transactions, other than to an entity owned or controlled by the DLJ Entities or the Barnett Parties or any combination thereof. Upon a Change In Control, each Option may, at the discretion of the Committee, be terminated within a specified number of days after notice to the holder of such Option, in which case each such holder will receive, in respect of each Share for which such Option then is exercisable after taking into account the vesting of this Option as a result of such Change In Control as provided herein, an amount equal to the excess of the then fair market value of such Share over the exercise price per Share, payable in the same consideration received by the stockholders of the Company upon the closing of such transaction. To the extent not previously exercised or exercisable, upon a Change In Control, this Option shall immediately become exercisable to purchase that number of Shares of the Company subject to the Option hereunder that would otherwise be exercisable upon the achievement of Target Amounts of EBITDA for fiscal years of the Company that have not been concluded at the time of the Change In Control; provided, however, that upon such a Change In Control the DLJ Entities shall have realized aggregate cash proceeds from the sale or other disposition of their equity interests (whether common or preferred) in the Company to third parties not affiliated with the DLJ Entities of at least the following: (i) if the Change In Control occurs prior to December 15, 1999, the DLJ Entities shall have realized an amount equal to at least 200% of their Equity Investment (as defined); (ii) if the Change In Control occurs on or after December 15, 1999 but prior to December 15, 2000, the DLJ Entities shall have realized an amount equal to at least 300% of their Equity Investment; and (iii) if the Change In Control occurs on or after December 15, 2000, the DLJ Entities shall have realized an amount equal to at least 350% of their Equity Investment. "Equity Investment" shall mean the aggregate amount invested by the DLJ Entities in equity interests (whether common or preferred) in the Company or any of its affiliates. g. Maximum Limitation. Notwithstanding anything to the contrary set forth herein but subject to Section 11 of the Plan, in no event shall this Option become exercisable for more than 16,250 Shares (i.e., 100% of the Total Shares) in the aggregate. h. Definition of EBITDA. For purposes of this Section 2, "EBITDA" for a fiscal 4 year (i) shall mean the income from operations of the Company and its subsidiaries for such fiscal year, determined in accordance with U.S. generally accepted accounting principles consistently applied in accordance with the accounting methodologies and procedures of the Company and its subsidiaries plus depreciation and amortization of the Company and its subsidiaries for such period to the extent any such expense was deducted in computing such income from operations, (ii) shall exclude any expense or charge relating to the "Cash Bonus," if any, earned by you pursuant to, and as such term is defined in, that certain Executive Employment Agreement between an indirect subsidiary of the Company and you dated the date hereof, and (iii) shall be subject to adjustment as set forth in paragraph i. below. i. Determinations of the Committee. From time to time, in administering the Plan the Committee shall make adjustments in the EBITDA for a fiscal year, which adjustments shall be in amounts as determined in the Committee's reasonable discretion, so that extraordinary charges or credits (provided that all adjustments, if any, in respect of acquired businesses shall be governed by paragraph (j) below) do not distort or affect the operation of the Plan in a manner inconsistent with its purpose, which inconsistency shall be determined by the Committee in its reasonable discretion. The determinations of the Committee as provided above shall be final, conclusive and binding on all parties, including optionholders, absent proof of error. j. Adjustment to Floor Amount, Target Amount and Ceiling Amount. An adjustment to the Floor Amount, Target Amount and Ceiling Amount shall be made for each fiscal year (including the fiscal year in which the transaction occurs) following any acquisition, merger, consolidation or other similar corporate transaction that is consummated, such adjustment to the Target Amount to be equal to management's forecast (as presented to the Board) of incremental acquired EBITDA for such fiscal year (or portion thereof with respect to the fiscal year in which the transaction occurs) and appropriate adjustments to the corresponding Floor Amount and Ceiling Amount, where (1) the Company or any direct or indirect parent or subsidiary corporation is the acquiror and (2) DLJ Merchant Banking Partners II, L.P. or any of its affiliated funds and entities make an additional investment in an amount exceeding $1 million in the aggregate (an "Additional Investment") in the equity (whether common or preferred) of the Company or any direct or indirect parent or subsidiary corporation of the Company. No such adjustment to Floor Amounts, Target Amounts and Ceiling Amounts shall be made following any acquisition, merger, consolidation or other similar corporate transaction, where (1) the Company or any direct or indirect parent or subsidiary corporation is the acquiror and (2) no Additional Investment is made. An Additional Investment shall not be deemed to have been made with respect to the potential acquisition of the sampling assets of Big Flower Press or its subsidiaries unless the aggregate amount of such investment is at least equal to $10 million in the aggregate. k. Notice. As soon as practicable following receipt by the Company of audited financial statements of the Company for a fiscal year, the Company shall notify you of the 5 amount of EBITDA achieved by the Company for such fiscal year. Upon receipt of such notice by you, this Option shall become exercisable in respect of the number of Shares determined in accordance with Section 2 hereof. l. Vesting of Remaining Shares. Notwithstanding anything to the contrary herein, on June 16, 2006, this Option shall become exercisable for the excess of (i) the number of Total Shares over (ii) the number of Shares, if any, for which this Option shall have become exercisable pursuant to paragraphs b., c., d., e. or f. of this Section 2. m. Fractional Shares. In no event shall you exercise this Option for a fraction of a Share. 3. Termination of Option. The unexercised portion of the Option granted herein will automatically and without notice terminate and become null and void upon the earliest to occur of the following: a. the expiration of ten (10) years from the date of grant of this Option; b. the date of termination of your employment if your employment (i) is terminated by you or (ii) is terminated by the Company or subsidiary corporation of the Company for cause (as defined in the Plan); c. the expiration of 30 days from the date of termination by the Company or its subsidiaries of your employment other than for cause (as defined in the Plan), except that this Option will be exercisable during such 30-day period only to the extent that it would have been exercisable immediately prior to the termination of your employment; d. the expiration of 6 months after the termination of your employment by reason of your disability (as defined in the Plan), except that this Option will be exercisable during such 6-month period only to the extent that it would have been exercisable immediately prior to the termination of your employment; or e. the expiration of one (1) year after your death if your death occurs during your employment or during the six (6) month or thirty (30) day period, as the case may be, specified in clauses (c) and/or (d) above, except that this Option will be exercisable during such 1-year period only to the extent that it would have been exercisable immediately prior to your death; provided, however, that none of the events described above shall extend the period of exercisability of this Option beyond the day immediately preceding the tenth anniversary of the date hereof. 6 4. Non-transferability of Option. This Option is not transferable by you otherwise than by will or the laws of descent and distribution, and is exercisable, during your lifetime, only by you. This Option may not be assigned, transferred (except by will or the laws of descent and distribution), pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar proceeding. Any attempted assignment, transfer, pledge, hypothecation or other disposition of this Option contrary to the provisions hereof, and the levy of any attachment or similar proceeding upon the Option, shall be null and void and without effect. 5. Exercise of Option. a. Purchase of Shares. Any exercise of this Option shall be in writing addressed to the Secretary of the Company at the principal place of business of the Company, shall be substantially in the form attached hereto as Exhibit B and shall be accompanied by (i) a certified or bank cashier's check to the order of the Company in an amount equal to, or (ii) to the extent permitted by applicable law, shares of common stock, par value $.01 per share, of the Company (in proper form for transfer and accompanied by all requisite stock transfer tax stamps or cash in lieu thereof) owned by you having a fair market value (as defined in the Plan) as of the date immediately prior to the exercise of the Option equal to, the full amount of the purchase price of the Shares so purchased. b. Legends. If the Company, in its sole discretion, shall determine that it is necessary, to comply with applicable securities laws, the certificate or certificates representing the Shares purchased pursuant to the exercise of this Option shall bear an appropriate legend in form and substance, as determined by the Company, giving notice of applicable restrictions on transfer under or in respect of such laws. Further, you hereby acknowledge that the Company may endorse a legend upon the certificate evidencing the Shares as the Company, in its sole discretion, determines to be necessary and appropriate to implement the terms of the Plan. c. Investment Intent. You hereby covenant and agree with the Company that if, at the time of exercise of this Option, there does not exist a Registration Statement on an appropriate form under the Securities Act of 1933, as amended (the "Act"), which Registration Statement shall have become effective and shall include a prospectus which is current with respect to the Shares subject to this Option (i) that you will represent that you are purchasing the Shares for your own account and not with a view to the resale or distribution thereof and (ii) that any subsequent offer for sale or sale of any such Shares shall be made either pursuant to (x) a Registration Statement on an appropriate form under the Act, which Registration Statement shall have become effective and shall be current with respect to the shares being offered and sold, or (y) a specific exemption from the registration requirements of the Act, but in claiming such exemption, you shall, if requested by the Company, prior to any offer for sale or sale of such Shares, obtain a favorable written opinion from counsel for or approved by the Company as to 7 the applicability of such exemption. 6. Withholding Taxes. As provided in the Plan, the Company may withhold or cause to be withheld from sums due or to become due to you from the Company or a subsidiary corporation or affiliate thereof an amount necessary to satisfy its obligation (if any) to withhold taxes incurred by reason of the exercise of this Option or the disposition of Shares acquired hereunder, or may require you to reimburse the Company in such amount and may make such reimbursement a condition to the delivery of the Shares pursuant to the exercise of this Option. 7. Agreement Subject to the Plan. You and the Company agree that this agreement is subject to, and that you and the Company will both be bound by, all terms, conditions, limitations and restrictions contained in the Plan, which shall be controlling in the event of any conflicting or inconsistent provisions; provided, that Section 2 hereof shall be controlling in the event of any conflicting or inconsistent provisions of the Plan. 8. Stockholders Agreement. It is a condition to the effectiveness of this Option and the obligation of the Company to issue any Shares hereunder that you shall have executed, on or prior to the date hereof, the Stockholders Agreement, dated as of December 15, 1997, as amended, by and among the Company and the stockholders named therein, and it is hereby acknowledged that you have executed such Stockholders Agreement. Please indicate your acceptance of all the terms and conditions of this Option and the Plan by signing and returning a copy of this letter. Very truly yours, AHC I ACQUISITION CORP. By: ------------------------------------- David M. Wittels, Vice President ACCEPTED: - --------------------------------- Signature of Employee - --------------------------------- Name of Employee - Please Print Date: , 1998 --------------- 8 Exhibit A 1998 Employee Stock Option Plan Exhibit B Exercise Letter [Date] AHC I Acquisition Corp. 120 East 56th Street New York, New York 10022 Attention: Corporate Secretary Re: Standard Incentive Stock Option Under the 1998 Stock Option Plan Dear Sir: I am the holder of a "Standard" Option granted to me under the above-referenced Plan by AHC I Acquisition Corp. (the "Company") on _______, ____ to purchase ____________ shares of Common Stock of the Company ("Shares") at a price of $____ per share. I hereby exercise that option with respect to ___________ Shares, the total purchase price for which is $____________. On _______________ [a business day not more than 15 days from the date of this letter], I will present [a certified check payable to the order of the Company in the amount of $_____________] [shares of common stock, par value $.01 per share, of the Company (in proper form for transfer and accompanied by all requisite stock transfer tax stamps or cash in lieu thereof) owned by me with a fair market value (as defined in the Plan)] representing the total purchase price for the Shares. The certificate or certificates representing the Shares should be registered in my name and upon the presentation of [that check] [such shares of common stock], the Shares should be [delivered to me] [forwarded to me at the address indicated below]. I hereby agree to pay the full amount of all withholding taxes which the Company or any subsidiary or parent corporation is required to withhold in connection with the exercise of this option or the disposition of Shares acquired hereunder and further authorize the Company, or the subsidiary or parent corporation, to withhold from any cash compensation paid to me or in my behalf an amount sufficient to discharge the federal, state or local income, employment or excise tax withholding obligation to which the Company, or the subsidiary or parent corporation, becomes subject by reason of the exercise of this option, but only to the extent I shall not have paid such amount to the Company or any parent or subsidiary corporation. I agree that the B-1 corporation by which I am employed may, in its discretion, hold the stock certificate to which I become entitled upon exercise of this option, as security for the payment of the aforementioned withholding tax liability, until cash sufficient to pay that liability has been accumulated. Please acknowledge receipt of the exercise of my stock option on the attached copy of this letter. Very truly yours, ------------------------------------- Signature ------------------------------------- Please Print Name ------------------------------------- Address ------------------------------------- ------------------------------------- ------------------------------------- Social Security Number RECEIPT ACKNOWLEDGED: AHC I ACQUISITION CORP. By: - ------------------------------------- Name: - ------------------------------------- Title: - ------------------------------------- B-2 EX-10.4 9 EXECUTIVE EMPLOYMENT AGREEMENT Exhibit 10.4 EXECUTIVE EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (hereinafter the "Agreement"), dated June 17, 1998, by and between Arcade Marketing, Inc., a Delaware corporation (the "Corporation"), and Roger L. Barnett (the "Executive"). WHEREAS, the Corporation desires to employ the Executive, and the Executive desires to be employed by the Corporation, upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and the obligations undertaken by the parties pursuant hereto and other good and valuable consideration, the Corporation and the Executive agree as follows: 1. Employment. Subject to the terms and conditions of this Agreement, during the Term (as defined below) the Corporation will employ the Executive, and the Executive will be employed exclusively by the Corporation. The Executive will hold the offices of President and Chief Executive Officer of the Corporation and, with the consent of the Executive, such additional offices as the Board of Directors of the Corporation (the "Board") may from time to time determine. The Executive will devote his full-time business efforts to the Corporation and the Corporation agrees that the Executive may engage in any other business or activity or have any business pursuits or interests, provided that such other business, activity, pursuit or interest does not (i) materially interfere or conflict with the performance of Executive's duties hereunder or (ii) result in a breach of any other provision of this Agreement. The Executive shall report directly to the Board. Executive's services hereunder shall be performed at the Corporation's principal executive offices in New York City and the Executive agrees to travel from time to time and to render his services in other locations in which the Corporation does business consistent with its reasonable business needs. 2. Term. Unless sooner terminated pursuant to this Agreement, the initial term of the Executive's employment shall be from the date hereof and shall end on June 30, 2001. Such initial term shall be extended for successive terms of one year each unless either party advises the other, at least 90 days prior to the end of the initial term 1 or annual extension, as the case may be, that it will not agree to extend this Agreement. The initial term, as so extended, is referred to in this Agreement as the "Term." 3. Compensation. (a) During the Term, the Corporation will pay the Executive a salary (the "Base Salary") at the annual rate (pro-rated for portions of any year) of $500,000, subject to increase in the sole discretion of the Board or a duly authorized committee thereof. The Base Salary will be paid to Executive in accordance with the Corporation's regular payroll policy for senior executives of the Corporation. (b) For each of the fiscal years ending on June 30 of 1999, 2000 and 2001, the Corporation has established target amounts (each, a "Target Amount") for EBITDA (as defined below) as set forth below: Fiscal Year Target Amount 1999 $27,000,000 2000 $30,000,000 2001 $32,000,000 (c) For each of the fiscal years ending on June 30 of 1999, 2000 and 2001, the Executive shall be entitled to a cash bonus (the "Cash Bonus") equal to 100% of the Base Salary if the EBITDA of the Corporation is at least equal to the Target Amount. (d) "EBITDA" for a fiscal year (i) shall mean income from operations of the Corporation and its subsidiaries for such fiscal year, determined in accordance with U.S. generally accepted accounting principles consistently applied in accordance with the accounting methodologies and procedures of the Corporation and its subsidiaries plus depreciation and amortization of the Corporation and its subsidiaries for such period to the extent any such expense was deducted in computing such income from operations, (ii) shall include any expense or charge relating to the Cash Bonus, if any, earned by the Executive pursuant to clause (c) above (i.e., EBITDA for a fiscal year excluding such expense or charge relating to such Cash Bonus must exceed the Target Amount for such fiscal year by at least the amount of such expense or charge or no Cash Bonus will be earned) and (iii) shall be subject to adjustment as set forth in paragraph (e) below. 2 (e) From time to time, the Board shall make such adjustments in the EBITDA for a fiscal year, which adjustments shall be in amounts as determined in the Board's reasonable discretion, so that extraordinary charges or credits (provided that all adjustments, if any, in respect of acquired businesses shall be governed by paragraph (f) below) do not distort or affect the calculation in a manner inconsistent with its purpose, which inconsistency shall be determined by the Board in its reasonable discretion. The determinations of the Board as provided above shall be final, conclusive and binding on all parties, including Executive, absent proof of error. (f) An adjustment to the Target Amount for each fiscal year (including the fiscal year in which the transaction occurs) shall be made following any acquisition, merger, consolidation or other similar corporate transaction that is consummated, such adjustment to be equal to management's forecast (as presented to the Board) of incremental acquired EBITDA for such fiscal year (or portion thereof with respect to the fiscal year in which the transaction occurs), where (1) the Corporation or any direct or indirect parent or subsidiary corporation is the acquiror and (2) DLJ Merchant Banking Partners II, L.P. or any of its affiliated funds and entities make an additional investment in an amount exceeding $1 million in the aggregate (an "Additional Investment") in the equity (whether common or preferred) of the Corporation or any direct or indirect parent or subsidiary corporation of the Corporation. No such adjustment to Target Amounts shall be made following any acquisition, merger, consolidation or other similar corporate transaction, where (1) the Corporation or any direct or indirect parent or subsidiary corporation is the acquiror and (2) no Additional Investment is made. An Additional Investment shall not be deemed to have been made with respect to the potential acquisition of the sampling assets of Big Flower Press or its subsidiaries unless the aggregate amount of such investment is at least equal to $10 million in the aggregate. (g) The Cash Bonus for any fiscal year, if any, will be paid to Executive in accordance with the Corporation's regular payroll policy for senior executives of the Corporation within 90 days after the end of the applicable fiscal year. 4. Executive Benefits. 3 (a) During the Term, the Executive shall be entitled to participate in such retirement, profit sharing and pension plans and life and other insurance programs, as well as other benefit programs, which are available to senior executives of the Corporation, subject to the Corporation's policies with respect to all of such benefits or insurance programs or plans; provided, however, that except as expressly set forth herein, the Corporation shall not be obligated to institute or maintain any particular benefit or insurance program or plan or aspect thereof. (b) The Executive shall be entitled to four weeks vacation per annum during the Term, to be scheduled at mutually agreeable times and to be taken in accordance with the Corporation's policies. (c) The Corporation shall reimburse the Executive or pay all reasonable, commercial first class travel and entertainment expenses undertaken on behalf of the Corporation in accordance with the Corporation's policies, including requirements with respect to reporting and documentation of such expenses. (d) The Corporation shall reimburse the Executive for, or pay on Executive's behalf, reasonable attorneys' fees and expenses incurred in connection with the preparation, review, negotiation, execution and delivery of this Agreement and any other option agreement or other document or instrument executed in connection herewith. 5. Death; Disability. (a) Death. The Term shall immediately terminate upon the Executive's death; provided, that the obligations of the Corporation upon the Executive's death shall be as set forth in Section 6(c)(i)(x). (b) Disability. If during the Term of this Agreement the Executive becomes unable to perform substantially his duties and responsibilities to the Corporation or any of its subsidiaries for a period of six months or nine months in any consecutive twelve month period by reason of physical or mental illness, injury, infirmity or condition ("Disability"): (i) the Base Salary otherwise payable during the Disability Period (as herein defined) shall nevertheless be payable on the terms set forth herein to the Executive as a disability benefit ("Disability 4 Benefit") but shall be reduced by disability insurance proceeds (as adjusted to an equivalent taxable benefit) pursuant to any benefit plan of the Corporation as provided in Section 4(a) or pursuant to any individual disability policy with respect to such Disability; and (ii) the Corporation shall not have the right to terminate this Agreement due to such Disability prior to the expiration of the Disability Period. Any dispute as to the existence of a Disability shall be resolved by an independent physician mutually acceptable to the Corporation and the Executive and such resolution shall be final, conclusive and binding on all parties. As used herein, the term "Disability Period" shall mean the period commencing on the first day of the calendar month following the month during which such Disability occurs and ending on the first to occur of the following: (i) the expiration of this Agreement; (ii) if the Disability is continuous throughout the six consecutive months following the month during which the Disability occurs, then the last day of such sixth consecutive calendar month; and (iii) if the Disability is intermittent during any 12 calendar months following the month during which the Disability initially occurs, then the last day of such 12th calendar month. The Corporation shall have the right to terminate the Term at the expiration of the Disability Period if and only if the Disability of the Executive is then continuing. Upon such termination, the obligation of the Corporation shall be set forth in Section 6(c)(i)(y). 6. Other Termination. (a) Termination by the Corporation. The Corporation shall have the right, at its election, to terminate the Executive's employment under this Agreement by written notice to the Executive for "Cause" (as defined below). As used herein, Cause shall be deemed to exist where (i) the Board shall have notified the Executive in writing of its reasonable determination that there shall have occurred any intentional or willful failure, or failure due to bad faith, by the Executive to substantially perform its duties hereunder or that the Executive has materially breached any of his covenants under this Agreement; (ii) the Executive's conviction of, or entry of a plea of nolo contendere in respect of, any felony or a misdemeanor that (in the case of a misdemeanor) results in, or is reasonably expected to result in, economic or reputational injury to the Corporation or any parent or subsidiary corporation or any affiliate thereof; (iii) the Executive shall have engaged in any misconduct that is significantly injurious to 5 the Corporation or any parent or subsidiary corporation or any affiliate thereof; or (iv) the Board shall have determined in its reasonable judgment that the Executive has committed one or more acts that indicates alcohol or drug abuse by the Executive that is significantly injurious to the Corporation's business or reputation (including its relationships with its customers, suppliers or employees). The Corporation may terminate this Agreement only if the Corporation shall have given written notice to the Executive specifying the claimed Cause, and in the case of (i) above, the Executive fails to correct (if correctable) the claimed breach within 30 days after the receipt of the applicable notice. In addition, the Corporation shall have the right, at its election, to terminate the Executive's employment under this Agreement for any reason other than Cause and, in such event, the Corporation shall pay the Executive the amounts set forth in (c)(i)(z) below. (b) Termination by the Executive. The Executive shall have the right, at his election, to terminate this Agreement for "Good Reason" (as defined below) by written notice to the Corporation to that effect. As used herein, Good Reason shall mean any of the following (without the Executive's consent): (i) any relocation of the Executive's principal office at the Corporation to a location outside of New York City, except for required travel in connection with the Corporation's business; (ii) any reduction in the Executive's title or any substantial reduction in the Executive's duties or responsibilities; and (iii) any failure to pay the Executive his compensation under Sections 3 and 4 when due pursuant to the terms of this Agreement. The Executive may terminate this Agreement for Good Reason only if the Executive shall have given written notice to the Corporation specifying the claimed Good Reason, and the Corporation fails to correct (if correctable) the claimed breach within 30 days after the receipt of the applicable notice. (c) Effect of Termination. (i) Upon termination of the Executive's employment under this Agreement by reason of the causes described below, the following shall be applicable to sums otherwise due to the Executive, notwithstanding anything to the contrary herein: (w) should this Agreement be terminated by the Corporation for Cause or by the Executive for any 6 reason, other than Good Reason, the Executive shall have no right to any further compensation beyond the date of termination of the Agreement; provided, that Executive's Base Salary shall accrue and be paid through the date of such termination and Executive shall be entitled to any bonus payment due pursuant to Section 3(c) for the fiscal year prior to the fiscal year in which such termination occurred; (x) should this Agreement be terminated by reason of the Executive's death, the Executive's Base Salary shall accrue and be paid through the date of death; to the extent not previously paid, any bonus payment due pursuant to Section 3(c) for the fiscal year prior to the fiscal year in which death occurred shall be paid; and any bonus payment due pursuant to Section 3(c) for the fiscal year in which death occurred shall be prorated to reflect only that portion of the year during which the Executive performed services hereunder, shall be payable only upon achievement of the Target Amount for such fiscal year and shall be paid within 90 days following the end of such fiscal year; (y) should this Agreement be terminated by reason of Disability pursuant to Section 5(b), the Executive's Base Salary shall accrue and be paid through the end of the Disability Period; to the extent not previously paid, any bonus payment due pursuant to Section 3(c) for the fiscal year prior to the fiscal year in which Disability occurred shall be paid; any bonus payment due pursuant to Section 3(c) for the fiscal year in which Disability occurred shall be prorated to reflect only that portion of the year prior to the end of the Disability Period, shall be payable only upon achievement of the Target Amount for such fiscal year and shall be paid within 90 days following the end of such fiscal year; and (z) should this Agreement be terminated by the Executive for Good Reason, or by the Corporation for any reason other than Cause or the Executive's death or Disability, the Executive's Base Salary shall accrue and be paid through the date of such termination; and to the extent not previously paid, any bonus payment due pursuant to Section 3(c) for the fiscal year prior to the fiscal year in which termination occurred shall be paid. In addition, in such event, the Executive shall be entitled to receive severance payments in an amount equal to his Base Salary for the fiscal year prior to the fiscal year in which such 7 termination occurred and any bonus payment, if any, due or paid pursuant to Section 3(c) for the fiscal year prior to the fiscal year in which such termination occurred. Such Base Salary and bonus payment, if any, shall be payable to Executive in the following manner: (i) one-half of such amount shall be due and payable upon such termination and (ii) one-half of such amount shall be due and payable in twelve equal monthly installments after such termination. Notwithstanding the foregoing, in the event the Executive breaches the provisions of Section 8, 9, 10, 11 or 12 hereof, then the Corporation shall have no obligation to pay any amounts due under the preceding sentences of this clause (z) in respect of the period from and after the date on which such breach occurs. (ii) In the event of termination of the Executive's employment under this Agreement, whether by the Corporation or the Executive, or pursuant to the expiration of this Agreement in accordance with Section 2, the Executive shall be deemed to have resigned all offices and directorships held with the Corporation and any direct or indirect parent or subsidiary corporation and any affiliate thereof and shall deliver such resignations or other instruments as reasonably requested by the Corporation in connection with or evidencing such resignations; provided that such resignations shall not be deemed to constitute a waiver of any right to indemnification accrued to the benefit of the Executive prior thereto. (iii) In all cases of termination, whether by the Corporation or the Executive, or pursuant to the expiration of this Agreement in accordance with Section 2, the Corporation will reimburse the Executive for all out-of-pocket expenses with respect to which the Executive is entitled pursuant to Section 4(c) through the date of termination. All payments shall be made for purposes of this Section 6(c) at the time they would have been made if this Agreement had not been terminated. (iv) In the event of termination of the Executive's employment under this Agreement, whether by the Corporation or the Executive, or pursuant to the expiration of the Agreement in accordance with Section 2, the payments, if any, required to be provided to Executive pursuant to this Section 6 shall be in full and complete satisfaction of any and all obligations owing to Executive pursuant to this Agreement. 8 7. Mitigation. The Corporation acknowledges that upon any termination of the Executive's employment, the Executive shall not have any obligation to seek or obtain other employment in any position to mitigate any damages to which the Executive may be entitled by reason of any termination of this Agreement (whether by the Corporation without Cause or otherwise). 8. Return of Property and Nondisclosure. Upon termination or expiration of his employment, the Executive will promptly deliver to the Corporation all data, lists, information, memoranda, documents and all other property belonging to the Corporation or containing "Confidential Information" or "Trade Secrets" of the Corporation (both as defined below), including, among other things, that which relates to services performed by the Executive for the Corporation, or was created or obtained by the Executive while performing services for the Corporation or by virtue of the Executive's relationship with the Corporation. Except as required in order to perform his obligations under this Agreement, the Executive shall not, without the express prior written consent of the Corporation, disclose or divulge to any other person or entity, or use or modify for use, directly or indirectly, in any way, for any person or entity any of the Corporation's Confidential Information or Trade Secrets at any time (during or after the Executive's employment) during which data or information continues to constitute Confidential Information or a Trade Secret. For purposes of this Agreement, "Confidential Information" of the Corporation shall mean any valuable, competitively sensitive data and information related to the Corporation's business other than Trade Secrets that are not generally known by or readily available to the Corporation's competitors other than as a result of a disclosure directly or indirectly by the Executive. "Trade Secrets" shall mean information or data of the Corporation including, but not limited to, technical or non-technical data, financial information, programs, devices, methods, techniques, drawings, processes, financial plans, product plans, or lists of actual or potential customers or suppliers, that: (a) derive economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from their disclosure or use; and (b) are the subject of efforts that are reasonable under the circumstances to maintain their secrecy. To the extent that the foregoing definition is inconsistent with a definition of "trade secret" mandated under applicable law, the latter 9 definition shall govern for purposes of interpreting the Executive's obligations under this Agreement. Except for disclosure required by law or to permit enforcement of this Agreement, the terms of this Agreement shall be deemed Confidential Information of the Corporation and shall not be discussed or disclosed by the Executive with any person other than the Executive's spouse, attorney or accountant, provided that such discussions or disclosures shall be conditioned upon the agreement of the person to whom the terms are disclosed to maintain the confidentiality of such terms. 9. Noncompetition. The Executive acknowledges that he has substantial experience and expertise in the business of the Corporation and that, as such, the services to be performed by him are of a special, unique, unusual, extraordinary and intellectual character. The Executive further acknowledges that the nature of the services, position and expertise of the Executive are such that he is capable of competing with the Corporation. In consideration of this Employment Agreement, the Executive shall not, without the prior written consent of the Board, during the "Restricted Period" (a) directly or indirectly be employed by or render any advice or services, whether or not for compensation, to any "Person" engaged in any "Competitive Business," (b) directly or indirectly engage in any Competitive Business, (c) directly or indirectly be interested, whether or not for compensation, in any Competitive Business as an individual, partner, shareholder, creditor, director, officer, principal, agent, employee, trustee, consultant, advisor or in any other relationship or capacity; provided, however, that in the case of a Competitive Business whose shares of common stock are traded on a national securities exchange in the United States or in the over-the-counter market, the Executive may acquire, directly or indirectly, an interest in such shares of common stock not to exceed five percent (5%) of the outstanding shares of common stock of such company. For purposes of this Section, "Restricted Period" shall mean while the Executive is employed by the Corporation and for a period of two years thereafter; provided, that if the Corporation terminates the employment of the Executive without Cause or if the Executive terminates his employment for Good Reason, the Restricted Period shall not extend beyond the lesser of (i) one year following termination of the Executive's employment hereunder and (ii) the period during which the Corporation is making payments to the Executive pursuant to Section 6(c)(i)(z), unless the Corporation shall cease 10 making such payments as the result of the Executive's prior material breach of the provisions of Sections 8, 9, 10, 11 or 12 hereof. For purposes of this Section, any "Competitive Business" shall mean any Person that is engaged in the manufacturing of, acting as the selling agent or other representative for a manufacturer of, or otherwise selling and causing (on such Person's behalf, other than as the ultimate customer) the manufacturing of, olfactory, cosmetic/skincare (including but not limited to treatment, makeup and lipstick) and flavor sampling products, nail and haircare sampling products and single dosage sampling products in the United States, Canada, Europe, South America, Asia, Australia and the Middle East. For purposes of this Section, "Person" shall mean any corporation, partnership, association, trust, individual or any other entity. In the event that any provision of this Section is considered by a court of competent jurisdiction to be excessive in its duration, in the area to which it applies or in any other respect, it shall be considered modified and valid for such duration, for such area and in such other respects as such court may determine reasonable under the circumstances. 10. Nonsolicitation. While he is employed by the Corporation, and for a period of two years thereafter, the Executive will not, directly or indirectly, without the prior written consent of the Corporation as approved by the Board, solicit or attempt to solicit any employee, consultant, contractor or other personnel of the Corporation to terminate, alter or lessen that party's affiliation with the Corporation or to violate the terms of any agreement or understanding with the Corporation except in the furtherance of the Executive's duties hereunder. 11. Original Material. The Executive acknowledges that the compensation paid to the Executive by the Corporation during the Executive's employment by the Corporation is intended to and does compensate the Executive for the Executive's originality, innovativeness and inventiveness as it relates to the Corporation or its business. The Executive agrees that any inventions, discoveries, improvements, ideas, concepts or original works of authorship relating to the Corporation or its business, including, without limitation, computer apparatus, programs and manufacturing techniques, whether or not protectable by patent or copyright, that have been originated, developed, made, conceived, authored or reduced to practice by 11 the Executive alone or jointly with others during the term of Executive's employment with the Corporations shall be the property of and belong exclusively to the Corporation. The Executive shall promptly and fully disclose to the Corporation the origination or development by the Executive of any such material, shall provide the Corporation with any information that it may reasonably request about such material and shall execute such agreements, assignments or other instruments as may be reasonably requested by the Corporation to reflect such ownership by the Corporation. 12. Post-Employment Property. The Executive agrees that any and all intellectual property that the Executive invents, discovers, originates, makes, conceives, creates or authors either solely or jointly with others and that is the result of or is substantially derived from Confidential Information or Trade Secrets and is reduced to writing, drawings or practice within two years after the termination of the Executive's employment by the Corporation for any reason, with or without Cause, shall be the sole and exclusive property of the Corporation. The Executive shall promptly and fully disclose all such property to the Corporation, shall provide the Corporation with any information that it may reasonably request about such property and shall execute such agreements, assignments or other instruments as may be reasonably requested by the Corporation to reflect such ownership by the Corporation. 13. Taxes, etc. All compensation payable to Executive hereunder is stated in gross amount and such compensation and all other compensation payable or deemed to be payable to Executive hereunder or pursuant to any other compensation, benefit or similar plan or arrangement of the Corporation or any direct or indirect parent or subsidiary corporation shall be subject to all applicable withholding taxes, other normal payroll and any other amounts required to be withheld by any federal, state, local or foreign statute, law, regulation, ordinance or order (collectively, "Withholding Amounts"). To the extent not withheld by the Corporation or any direct or indirect parent or subsidiary corporation, the Executive shall be liable for and shall remit to the Corporation or any direct or indirect parent or subsidiary corporation any such Withholding Amounts; provided that in lieu thereof, the Corporation or any direct or indirect parent or subsidiary corporation shall have the right to setoff any such Withholding Amounts against any and all amounts owed or payable to the Executive. 12 14. Specific Remedies. In the event of the violation or threatened violation by the Executive of any of the covenants or provisions of Sections 8, 9, 10, 11 or 12 hereof, the Corporation shall have (i) the right and remedy of specific enforcement and performance of Sections 8, 9, 10, 11 and 12, including injunctive relief, it being acknowledged and agreed that any such violation or threatened violation will cause irreparable injury to the Corporation and that monetary damages will not provide an adequate remedy to the Corporation, and (ii) rights to any and all damages available as a matter of law. 15. Notices. Any notices required to be given hereunder shall be in writing and shall be deemed given when personally delivered, telexed or sent certified mail, return receipt requested, or sent via express air delivery service, to the parties at the addresses set forth below, or at such other address as a party shall have given notice thereof to the other party: Executive: Roger L. Barnett 120 East 56th Street New York, NY 10022 (Marked "Private & Confidential") With a copy to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019-6064 Attention: Neale Albert Corporation: Arcade Marketing, Inc. 1815 East Main Street Chattanooga, Tennessee 37404 Attention: Chief Financial Officer With a copy to: Weil, Gotshal & Manges LLP 100 Crescent Court, Suite 1300 Dallas, Texas 75201 Attention: R. Scott Cohen 13 16. General. (a) This Agreement shall be governed by and construed under the laws and decisions of the State of New York with respect to contracts and agreements which are entirely made and entered into therein. (b) This Agreement contains the entire understanding of the parties hereto with respect to the subject matter hereof and supersedes all previous written and oral agreements between the parties with respect to the subject matter set forth herein. (c) This Agreement may not be modified or amended except by a writing signed by both of the parties hereto. (d) Any provision of this Agreement that is deemed invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction and subject to this section, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provision of this Agreement invalid, illegal or unenforceable in any other jurisdiction. If the covenant should be deemed invalid, illegal or unenforceable because its scope is considered excessive, such covenant shall be modified so that the scope of the covenant is reduced only to the minimum extent necessary to render the modified covenant valid, legal and enforceable. (e) The following provisions of this Agreement shall survive its expiration or termination for any reason: Sections 7, 8, 9, 10, 11, 12, 13, 14, 15 and 16. (f) This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement. (g) The headings and titles to the paragraphs of this Agreement are inserted for convenience only and shall not be deemed a part of or affect the construction or interpretation of any provisions hereof. (h) All references to Sections shall, unless otherwise specified, be to Sections of this Agreement. 14 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. ARCADE MARKETING, INC. By: --------------------------------- David M. Wittels, Vice President --------------------------------- Roger L. Barnett 15 EX-10.5 10 EMPLOYMENT AGREEMENT EXECUTION COUNTERPART EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") entered into as of May 12, 1998, by and between ARCADE, INC. (the "Company"), a Tennessee corporation, and BARRY MILLER (the "Executive"), a residing at 169 Lelawood Circle, Nashville, Tennessee 37209; -- W I T N E S S E T H: WHEREAS, the Company is engaged in the business of, among other things, manufacturing, marketing and distributing olfactory, cosmetics and flavor sampling products and related items (the "Products"), WHEREAS, the Company desires to employ the Executive, and the Executive desires to be employed by the Company on the terms and conditions of this Agreement, and WHEREAS, the Executive is not a party to any other contract or subject to the terms of any other agreement, which contract or agreement would prohibit his from being a party to this agreement or otherwise being employed by the Company; NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. Employment Term. The term of this Agreement shall commence on May 13, 1998 (the "Effective Date") and shall expire on June 30, 2001 (the "Initial Employment Term"); provided, however, that the Initial Employment Term shall be automatically extended for successive additional twelve-month periods (each an "Extended Employment Term") provided that neither party gives written notice to the other of termination not less than ninety (90) days prior to the end of the Initial Employment Term or any Extended Employment Term. (The Initial Employment Term and any Extended Employment Term sometimes hereinafter collectively called the "Employment Term"). 2. Employment. (a) Subject to the provisions of Section 7 hereof, the Company agrees to employ the Executive during the Employment Term. During the Employment Term, the Executive shall be employed as the Chief Operating Officer of the Company or in such other senior executive capacity as may later be decided by the Chief Executive Officer ("CEO"). The Executive shall perform the duties, undertake the responsibilities and exercise the authority customarily performed, 1 undertaken and exercised by persons situated in a similar executive capacity. The Executive shall report to the CEO of the Company. The Executive's offices shall be located in Chattanooga, Tennessee; however, the Executive shall undertake such travel as is reasonable and customary in the execution of the Executive's duties hereunder. (b) During the Employment Term, excluding periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote his full time, attention, knowledge and skills, faithfully and diligently to the best of his ability, to the business and affairs of the Company. 3. Compensation. (a) Base Salary. During the Employment Term, the Company agrees to pay or cause to be paid to the Executive an annual base salary of $220,000.00 or as may be increased from time to time in the sole discretion of the CEO of the Company (hereinafter referred to as the "Base Salary"). Such Base Salary shall be earned and accrued on a per day basis and be payable in accordance with the Company's customary practices applicable to its executives. (b) Annual Review. Within the period from June 1 through July 31 of each year during the Employment Term, the CEO of the Company shall conduct a review of the Executive's performance and compensation; provided, however, that the Company shall have no obligation to increase the Executive's compensation as a result of any such review. (c) Annual Bonus. In addition to Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Term, an annual bonus (the "Annual Bonus") in a maximum amount not to exceed one hundred percent (100%) of the Base Salary. The amount of the Annual Bonus to which the Executive will be entitled will be based on whether the Company meets certain financial performance goals which shall be determined by the Company in its sole discretion after consultation with the Executive, all to be as set forth in a bonus plan to be promulgated by the Company prior to the beginning of each fiscal year of the Company. It is anticipated that during the fiscal year of the Company ending June 30, 1999, fifty percent (50%) of the Executive's Annual Bonus will be based on whether the Company meets certain cost reduction goals and fifty percent (50%) will be based on whether the Company meets certain cash flow targets. The Annual Bonus shall be payable (sixty) 60 days after the end of the relevant fiscal year of the Company, beginning with the fiscal year ending June 30, 1999. The Executive acknowledges that the performance of his duties are subject to the direction of the CEO of the Company (or other officer designated in writing by the CEO) and that his entitlement to an Annual Bonus as set forth herein shall have no impact on the discretion of the CEO in delegating authority and duties to the Executive; the Executive agrees that he will not be entitled to claim that the Company failed to permit him to maximize the amount of the Annual Bonus in the management of the Company's business or in its delegation of authority and duties to him. (d) 401(k) Contribution. The Company will make a matching contribution to the Executive's account in the Company's 401(k) plan of up to sixty-one (61%) of any contribution made by the Executive, which percentage may be increased or decreased from time 2 to time to be consistent with any change in the Company's policy regarding matching contributions for executives. (e) Stock Options. The Company will grant to the Executive options to purchase up to 25,000 shares of the one million (1,000,000) shares of issued and outstanding common capital stock of the Company (the "Company Stock"), pursuant to an agreement or agreements which shall be satisfactory to the Company in its sole discretion in both form and substance and which shall contain the following terms: (i) options to purchase up to 12,500 shares of the Company Stock which shall vest over a four (4) year period based solely on the length of time that the Executive is employed by the Company; (ii) options to purchase up to 12,500 shares of the Company Stock, which options shall be earned and, to the extent earned, shall immediately vest over a period of four (4) full fiscal years of the Company based on whether the Company meets certain financial performance goals in each of those four (4) fiscal years of the Company, such goals to be determined by the Company annually in its sole discretion; and (iii) such other terms and conditions as shall be satisfactory to the Company in its sole discretion. 4. Employee Benefits. During the Employment Term, the Executive shall be entitled to participate in all employee benefit plans, practices and programs maintained by the Company and made available to employees generally, including, without limitation, any retirement, profit sharing, savings, medical, hospitalization, disability, dental, life or travel accident insurance benefit plans, but only to the extent maintained by the Company. Unless otherwise provided herein the compensation and benefits under, and the Executive's participation in, such plans, practices and programs shall be on the same basis and terms as are applicable to executive employees of the Company generally. 5. Expenses. (a) The Executive shall be entitled to receive, in accordance with normal Company practices, prompt reimbursement of all expenses reasonably incurred by him in connection with the performance of his duties hereunder or for promoting, pursuing or otherwise furthering the business or interests of the Company. (b) If the Executive should move his residence to Chattanooga, Tennessee, the Company will reimburse the Executive for reasonable moving expenses for himself and his family, real estate brokerage fees incurred by the Executive in connection with such move and closing costs in connection with the purchase of his residence in Chattanooga, Tennessee, such expenses, fees and costs not to exceed $40,000.00 in the aggregate. 3 6. Vacation and Sick Leave. (a) The Executive shall be entitled to annual vacation in accordance with the policies periodically established for similarly situated executives of the Company; provided, however, that in no event shall the Executive's annual vacation entitlement be less than three (3) weeks per year, provided that the operation of the business of the Company so permits. (b) The Executive shall be entitled to sick leave (without loss of pay) in accordance with the Company's policies in effect from time to time. 7. Termination. During the Employment Term, the Executive's employment hereunder may be terminated under the following circumstances: (a) Cause. The Company may terminate the Executive's employment at any time for "Cause". For purposes of this Agreement, a termination of employment is for "Cause" if: (i) the Executive has been convicted of a felony crime, or (ii) the Company makes a written finding that the Executive intentionally engaged in conduct which is demonstrably and materially injurious to the Company. (b) Disability. If the Executive fails, because of physical or mental illness or other incapacity, for a period of ninety (90) days in the aggregate during any twelve month period to substantially perform his duties under this Agreement ("Disability"), the Company may terminate the Executive's employment. (c) Death. The Executive's employment shall terminate immediately upon the death of the Executive. (d) Upon Notice by Company. The Company may terminate the Executive's employment at any time without Cause by giving a Notice of Termination. (e) Upon Notice by Executive. The Executive may terminate his employment at any time by giving a Notice of Termination not less than sixty (60) days prior to the Termination Date. 8. Compensation Upon Termination. Upon termination of the Executive's employment during the Employment Term, the Executive shall be entitled to the following benefits: (a) If the Executive's employment with the Company shall be terminated (1) by the Company for Disability, or (2) by reason of the Executive's death, the Company shall pay the Executive (i) his Base Salary which has been earned and is accrued but unpaid through the Termination Date, (ii) his Annual Bonus prorated for the number of weeks in such fiscal year during 4 which the Executive has been employed by the Company under this Agreement, (iii) reimbursement for reasonable and necessary expenses incurred by the Executive on behalf of the Company during the period ending on the Termination Date; and (iv) accrued vacation pay. The prorated Annual Bonus shall be payable not later than ninety (90) days following the end of the Company's fiscal year. (b) If the Executive's employment with the Company shall be terminated (1) by the Company for Cause, or (2) by the Executive, the Company shall pay the Executive (i) his Base Salary which has been earned and is accrued but unpaid through the Termination Date, and (ii) reimbursement for reasonable and necessary expenses incurred by the Executive on behalf of the Company during the period ending on the Termination Date. (c) If the Executive's employment with the Company shall be terminated by the Company other than by reason of death, Cause or Disability or other than pursuant to Section 1, the Executive shall be entitled to the following: (i) the Company shall pay the Executive (i) his Base Salary which has been earned but is accrued and unpaid through the Termination Date, (ii) if such termination occurs less than sixty (60) days prior to the end of the Company's fiscal year, his Annual Bonus prorated for the number of weeks in such fiscal year during which the Executive has been employed by the Company under this Agreement, (iii) reimbursement for reasonable and necessary expenses incurred by the Executive on behalf of the Company during the period ending on the Termination Date, and (iv) accrued vacation pay and sick leave; and (ii) the Company shall pay the Executive as severance pay and in lieu of any further compensation for periods subsequent to the Termination Date, six months of his Base Salary, payable in accordance with the Company's normal payroll practices or, if the Executive so chooses, the Company will pay the Executive a lump sum payment equivalent to six months of his Base Salary within thirty (30) days of the Termination Date. (d) The severance pay provided for in Section 8(c)(ii) shall be in lieu of any other severance pay to which the Executive may be entitled under any Company severance plan, program or arrangement. (e) The severance pay provided for in Section 8(c)(ii) and all other compensation paid under this Agreement shall be subject to withholding taxes and other employment taxes as required by law with respect to compensation paid by an employer to an employee. 9. Definitions. (a) Notice of Termination. For purposes of the Agreement, a "Notice of Termination" shall mean a written notice of termination of the Executive's employment, signed by the CEO of the Company if from the Company and by the Executive if from the Executive, which indicates the specific termination provision in this Agreement, if any, relied upon. 5 (b) Termination Date., Etc. For purposes of this Agreement, "Termination Date" shall mean (a) in the case of the Executive's death, his date of death, (b) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination for Cause under Section 7(a)(ii) shall not be less than seven (7) days from the date such Notice of Termination is given and in the case of a termination by the Executive under Section 7(e) shall not be less than sixty (60) days from the date such Notice of Termination is given). 10. Restrictive Covenants. (a) Covenants Against Competition. The Executive acknowledges that (i) the Company is currently engaged in the business of manufacturing, marketing and distributing, directly and through licensees (collectively, the "Activities"), olfactory, cosmetic/skincare (including but not limited to treatment, makeup, and lipstick) and flavor sampling products and encapsulated ingredients and printed materials as they relate to sampling, and is in the process of developing single dosage products and engaging in the Activities with respect to nail and hair care sampling products (collectively, the "Company Business"); (ii) the Company Business is conducted throughout North America, Europe (including the United Kingdom), South America, Asia and Australia; (iii) the Executive's work for the Company will give the Executive access to trade secrets of, and confidential information concerning the Company; (iv) the agreements and covenants contained in this Agreement are essential to protect the business and good will of the Company; and (v) the Executive has means to support the Executive and the Executive's dependents other than by engaging in the Company Business and the provisions of this Agreement will not impair such ability. Accordingly, the Executive covenants and agrees as follows: (i) Non-Compete. During the period of the Executive's employment hereunder and for a period of two years thereafter (the "Restricted Period"), the Executive shall not (except by reason of and in the Executive's capacity as an employee of the Company), and shall not permit any of his affiliates to, directly or indirectly, either themselves, or as a stockholder, partner, associate, employee, director, officer, advisor, consultant, owner, agent, creditor, coventurer or any person, or otherwise, directly or indirectly to establish, engage in, become employed by or associated with, any business, trade or occupation which is competitive with the Company Business or which involves the development, design, licensing, sale, distribution or manufacture of any products or services which are competitive with the Company Business. (ii) Referral of Contacts and Opportunities. During the Restricted Period, the Executive shall refer any contacts he obtains with respect to the Company Business and any opportunities relating to the Company Business only to the Company. (iii) Interference with Employment Relationships. The Executive shall not, directly or indirectly, and will not permit his affiliates to, during the Restricted Period, hire, solicit or cause others to hire or solicit, or take any action which is calculated to persuade, or have the effect of persuading, any employees, representatives or agents of the Company or its affiliates 6 (i) who are engaged in the Company Business, or (ii) whom the Executive has become aware of, or has come in contact with, including during the course of the negotiation of this Agreement and the consummation of the transactions contemplated hereby, to terminate their employment or other relationship with the Company or its affiliates. (iv) Interference with Business Relationships. The Executive shall not, directly or indirectly, and will not permit any of his affiliates to, during the Restrictive Period, interfere in any way with the relationship or prospective relationship between the Company or its affiliates and any customer, supplier, licensee or prospect of the Company or its affiliates. Without limiting the foregoing, the Executive shall not request, encourage, advise or attempt to persuade in any manner (including by making unfavorable or negative comments with respect to the Company, or its affiliates, products or conduct of business) any customers or suppliers of the Company or its affiliates to curtail or cancel such customer's or supplier's business relationship with the Company or its affiliates. (v) Confidential Information. The Executive acknowledges that the Company has a legitimate and continuing proprietary interest in the protection of its confidential information and that it has invested substantial sums and will continue to invest substantial sums to develop, maintain and protect confidential information. The Executive agrees that, during and after the Restricted Period, the Executive shall, and shall cause his affiliates to, keep secret and retain in strictest confidence, and shall not use or disclose to any person whatsoever for their benefit or the benefit of others any proprietary, confidential or secret matters used in, associated with or related to the Company or the Company Business ("Confidential Information") including know-how, technology, financial information, trade secrets, customer lists, names or identities, details or client or consultant contracts, pricing policies, operational methods, marketing plans or strategies, product development techniques or plan, business acquisition plans, new personnel acquisition plans, methods of manufacture, processes, formulas, designs and design projects, computer programs, inventions and research projects of the Company, its affiliates, or any other entity which may hereafter become an affiliate thereof, learned, acquired or developed by the Executive while employed by the Company. Notwithstanding the foregoing, Confidential Information shall not include information which (i) is already in the public domain through no breach of the Executive or his affiliates of this Agreement or any other agreement with the Company, (ii) the Executive can provide evidence that such information was legally in his possession without restriction prior to the Effective Date, or (iii) is disclosed in any printed patent or other publications without breach of any duty of confidentiality. (vi) Property of the Company. All memoranda, notes, lists, records, engineering drawings, technical specifications and related documents and other documents or papers (and all copies thereof) relating to the Company or the Company Business, including such items stored in computer memories, microfiche or by any other means, made or compiled by or on behalf of the Executive during the course of the Executive's employment by the Company, or made available to the Executive during the course of the Executive's employment by the Company relating to the Company, its affiliates or any entity which may hereafter become an affiliate thereof (collectively, "Company Property"), shall be the property of the Company. The Executive shall 7 promptly deliver to the Company all Company Property upon the termination of the Executive's employment with the Company, or at any other time upon request, and shall not retain any Company Property in any form whatsoever, except that the Executive may, at the sole discretion and with the written consent of the CEO of the Company, retain samples of his work at the Company that do not contain any Confidential Information. (vii) Original Material. The Executive acknowledges that the compensation paid to the Executive by the company during the Executive's employment by the company is intended to and does compensate the Executive for the Executive's originality, innovativeness and inventiveness as it relates to the Company Business. The Executive agrees that any inventions, discoveries, improvements, ideas, concepts or original works of authorship relating to the Company Business, including computer apparatus, programs and manufacturing techniques, whether or not protectable by patent or copyright, that have been originated, developed, make conceived, authored or reduced to practice by the Executive alone or jointly with others during the Executive's employment with the Company shall be the property of and belong exclusively to the Company. The Executive shall promptly and fully disclose to the Company the origination or development by the Executive of any such material and shall provide the Company with any information that it may reasonably request about such material. (viii) Post-Employment Property. The Executive agrees that any and all intellectual property which the Executive invents, discovers, originates, makes, conceives, creates or authorize either solely or jointly with others and which is the result of or is substantially derived from Confidential Information and is reduced to writing, drawings or practice after the termination of the Executive's employment by the Company for any reason, with or without cause, shall be the sole and exclusive property of the Company. The Executive shall promptly and fully disclose all such property to the Company. (b) Rights and Remedies Upon Breach. If the Executive breaches, or threatens to commit a breach of, any of the provisions contained in Section 10 of this Agreement (the "Restrictive Covenants"), the Company shall have the following rights and remedies, each of which rights and remedies shall be independent of the others and severally enforceable, and each of which is in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity: (i) Specific Performance. Recognizing that the remedy at law for any breach or threatened breach of the covenants contained in this Section 10 may be inadequate, in the event of any breach or threatened breach of such covenants by the Executive, in addition to any and all other legal and equitable remedies which may be available, the Company, or its successors or assigns, may obtain temporary and permanent injunctive relief without the necessity of proving actual damage by reason thereof, and, to the extent permissible under the applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such breach and, to the extent permitted by applicable law, without notice. 8 (ii) Accounting. The Company shall have the right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, moneys, accruals, increments or other benefits derived or received by the Executive as the result of any action constituting a breach of the Restrictive Covenants. (iii) Tolling. If the Executive engages in any business in violation of the covenants set forth in this Agreement, the running of the periods of limitation referred to in this Section 10 shall be tolled until such violation shall cease and shall begin to run again only when the Executive shall be in compliance with the provisions of such covenants, whether voluntarily or pursuant to an order of a court. (c) Independence of Covenants. The covenants contained in this Section 10 shall be construed as independent of any other provisions of this Agreement, and the existence of any other claim or cause of action by the Executive against the Company shall not constitute a defense to the enforcement of the covenants contained in this Section 10. (d) Severability of Covenants. The Executive acknowledges and agrees that the Restrictive Covenants are reasonable and valid in duration and geographical scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, (i) the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect without regard to the invalid portions, or (ii) such Restrictive Covenants may be reduced or limited by such court so as to make such Restrictive Covenants valid and the remainder of the Restrictive Covenants shall not thereby be affected. 9 11. Successors and Assigns. (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its Successors and Assigns. The term "Company" as used herein shall include such Successors and Assigns. The term "Successors and Assigns" as used herein shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company, as the case may be (including this Agreement), whether by operation of law or otherwise. (b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representative, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 12. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be sent by nationally-recognized overnight delivery service or certified, registered or express mail, postage prepaid, return receipt requested, addressed as set forth below; receipt shall be deemed to occur on the earlier of the date of actual receipt or receipt by the sender of confirmation that the delivery or transmission was completed or that the addressee has refused to accept such delivery or has changed its address without giving notice of such change as set forth herein. (a) if to the Company, to: Arcade, Inc. 120 East 56th Street New York, New York 10022 Attention: CEO and, to: Arcade, Inc. 1800 East Main Street Chattanooga, Tennessee 37404 Attention: CFO with a copy to counsel for the Company: Baker, Donelson, Bearman & Caldwell 1800 Republic Centre 633 Chestnut Street Chattanooga, Tennessee 37450 Attention: Thomas O. Helton, Esquire (b) if to the Executive, to: 10 Mr. Barry Miller 169 Lelawood Circle Nashville, Tennessee 37209 with a copy to counsel for the Executive: Mr. Kenneth Henry One North LaSalle Street Suite 3200 Chicago, Illinois 60602 Either party may change its address for notice hereunder by notice to the other party hereto in accordance with the terms of this Section. 13. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a wavier or similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 14. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the state of Tennessee without giving effect to the conflict of law principles thereof. Executive hereby submits himself to jurisdiction in the State of Tennessee for any action or cause of action arising out of or in connection with this Agreement, agrees that venue for any such action shall be Hamilton County, Tennessee, and waives any and all rights under the laws of any state to object to jurisdiction or venue within Hamilton County, Tennessee. 15. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 16. Entire Agreement. This Agreement constitute the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. 17. References. If the Company is contacted subsequent to the termination of the Executive, then the Company, consistent with Company policy, will only confirm that the Executive was employed with the Company for the dates of such employment as it existed. 11 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has executed this Agreement as of the day and year first above written. ARCADE, INC. By__________________________ Title:______________________ Barry Miller 12 EX-10.6 11 STOCKHOLDERS AGREEMENT STOCKHOLDERS AGREEMENT This STOCKHOLDERS AGREEMENT (this "Agreement") is entered into and effective as of December 15, 1997 among AHC I Acquisition Corp., a Delaware corporation (the "Company"), DLJ Merchant Banking Partners II, L.P., a Delaware limited partnership ("DLJMBII"), each DLJMB Party (as defined below), the other signatories hereto, and each other holder of record of Shares (as defined below) who may hereafter be bound by the terms hereof (each DLJMB Party, the other signatories hereto (excluding the Company) and each other Person (as defined below) that hereafter may become a party hereto as contemplated hereby being hereinafter referred to individually as a "Party" and collectively as the "Parties"). W I T N E S S E T H: WHEREAS, the Company has authorized 5,000,000 shares of common stock, $0.01 par value per share (the "Common Shares"); WHEREAS, the Company has authorized 5,000,000 shares of preferred stock, $0.01 par value per share (the "Preferred Shares"); and WHEREAS, the parties hereto are entering into this Agreement in order to define certain rights and obligations of such parties. NOW, THEREFORE, in consideration of the mutual covenants and obligations hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree as follows: ARTICLE I GENERAL PROVISIONS; REPRESENTATIONS AND WARRANTIES I.1 Certain Terms. In addition to the terms defined elsewhere herein, when used herein the following terms shall have the meanings indicated: "Accredited Investor" shall have the meaning set forth for such term in Regulation D. "Adverse Person" means Persons that are competitors of the Company, former or present suppliers, customers or employees of the Company or any other Persons, in each case as the Board of Directors reasonably designates as such from time to time. "Affiliate" means, with respect to any Person, any Person controlling, controlled by, or under common control with such Person. For the purposes of this definition, "control" means the possession of the power to direct or cause the direction of management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Arcade Acquisition Agreement" means the Stock Purchase Agreement, dated November 14, 1997, by and among the Company, Arcade Holding Corporation, a Delaware corporation, and the signatories thereto, as amended by that certain First Amendment to Securities Purchase Agreement, dated as of December 2, 1997, and by that certain Second Stock Purchase Agreement, dated as of December 12, 1997. With respect to any Capital Shares, "beneficial" ownership or "beneficially" owned shall have the same meaning as in Rule 13d-3 under the Securities Exchange Act of 1934, as amended. "Board of Directors" means the board of directors of the Company. "Bridge Party" means Scratch & Sniff Funding, Inc., and its successors, and any Permitted Minority Transferee of a Bridge Party. "Bridge Purchase Agreement" means the Securities Purchase Agreement, dated as of the date hereof, by and among the Company, AHC I Merger Corp., a Delaware corporation, and Scratch & Sniff Funding, Inc., a Delaware corporation. "Capital Shares" means any and all shares, interests, participations, or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation), and any and all warrants, options, or other rights to purchase or acquire any of the foregoing. "Common Share Equivalents" means (without duplication with any other Common Shares or Common Share Equivalents) rights, warrants, options, convertible securities, or exchangeable securities or indebtedness, or other rights, exercisable for or convertible or exchangeable into, directly or indirectly, Common Shares or securities convertible or exchangeable into Common Shares, whether at the time of issuance or upon the passage of time or the occurrence of some future event. "Demand Holder" means DLJMB. "DLJMB Party" means each of DLJMBII, DLJ Merchant Banking Partners II-A, L.P., DLJMB Funding II, Inc., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ Millennium Partners-A, L.P., DLJ First ESC L.P., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P. and UK Investment Plan 1997 Partners. "DLJMB" means all DLJMB Parties and Permitted Transferees; provided, that DLJMBII shall have authority to act hereunder on behalf of DLJMB. "DLJSC" means Donaldson, Lufkin & Jenrette Securities Corporation or any successor thereto. "Existing Arcade Investors" means Roger L. Barnett, Craig Barnett, Hubert Brown, Gordon W. Jones and Liberty Partners Holdings 4, L.L.C. "Fully-Diluted Common Shares" means, at any time, the then outstanding Common Shares of the Company plus (without duplication) all Common Shares issuable, whether at such time or upon the passage of time or the occurrence of future events, upon the exercise, conversion or exchange of all then-outstanding Common Share Equivalents. "GAAP" means the generally accepted accounting principles in the United States of America as in effect at the applicable time. "Holder" means any Party that holds Shares or Common Share Equivalents. "Initial Holdings" means, with respect to each Party as of the date of this Agreement, the number of Fully-Diluted Common Shares set forth on Schedule I beside such Party's name. "Minority Investors" means the Parties other than DLJMB. "Permitted Minority Transferee" means DLJMB and (i) in the case of a Bridge Party, (A) any transferee of all or any portion of the Notes issued pursuant to the Bridge Purchase Agreement and (B) any Affiliate of such Bridge Party or such a transferee and (ii) with respect to any other Minority Investor, (A) any trust, the beneficiaries of which, or any corporation, limited liability company or partnership, the stockholders of, members or general or limited partners of which, include only such Minority Investor, their spouse or one or more children of such Minority Investor, and (B) the heirs, executors, administrators or testamentary trustees, legatees or beneficiaries of such Minority Investor. "Permitted Transferee" means in the case of any DLJMB Party, (A) any other DLJMB Party, (B) any general or limited partner of any such entity (a "DLJMB Partner"), and any corporation, partnership, or other entity which is an Affiliate of any DLJMB Partner (collectively, the "DLJMB Affiliates"), (C) any managing director, general partner, director, limited partner, officer or employee of such DLJMB Party or a DLJMB Affiliate, or the heirs, executors, administrators, testamentary trustees, legatees or beneficiaries of any of the foregoing Persons referred to in this clause (C) (collectively, "DLJMB Associates"), (D) any trust, the beneficiaries of which, or any corporation, limited liability company or partnership, the stockholders, members or general or limited partners of which, include only such DLJMB Party, DLJMB Affiliates, DLJMB Associates, their spouses or their lineal descendants and (E) a voting trustee for one or more DLJMB Parties, DLJMB Affiliates or DLJMB Associates under the terms of a voting trust. "Person" means any natural person, corporation, limited liability company, limited partnership, general partnership, joint stock company, joint venture, association, company, trust, bank, trust company, land trust, business trust, or other organization, whether or not a legal entity, and any government or agency or political subdivision thereof. "Qualified IPO" means a consummated initial public offering of Common Shares which is underwritten on a firm commitment basis by a nationally-recognized investment banking firm, the proceeds of which are greater than $30 million. "Registrable Securities" means the Shares, whether acquired before or after the date hereof, and any other securities issued or issuable with respect to such Shares by way of a share dividend or share split or in connection with a combination of shares, recapitalization, merger, consolidation or reorganization; provided, that any Registrable Security will cease to be a Registrable Security when (a) a registration statement covering such Registrable Security has been declared effective by the SEC and it has been disposed of pursuant to such effective registration statement or (b) (i) it has been otherwise transferred, (ii) in connection with such transfer, the Company has delivered a new certificate or other evidence of ownership for it not bearing the any restrictive legend and (iii) it may be resold by the holder thereof without (x) registration under the Securities Act or (y) volume restrictions pursuant to Rule 144 under the Securities Act. "Regulation D" means Regulation D as promulgated under the Securities Act, as amended from time to time. "SEC" means the Securities and Exchange Commission or any successor governmental agency. "Securities Act" means the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations of the SEC thereunder, all as the same shall be in effect at the time. "Selling Holder" means a Party who is selling Registrable Securities pursuant to a registration statement under the Securities Act effected pursuant to the terms hereof. "Senior Preferred" means the 15% Senior Preferred Stock due 2012, par value $0.01 share, of the Company. "Shares" means Common Shares, shares of Senior Preferred, or any combination thereof. "Subsidiary" means (i) any corporation or other entity a majority of the Capital Shares of which having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions is at the time owned, directly or indirectly, with power to vote, by the Company or any direct or indirect Subsidiary of the Company or (ii) a partnership in which the Company or any direct or indirect Subsidiary is a general partner. I.2 Representations and Warranties. (a) Each of the Parties (as to itself only) represents and warrants to the Company and the other Parties that: (i) it has full power and authority to execute, deliver, and perform this Agreement and to consummate the transactions contemplated hereby, and the execution, delivery and performance by it of this Agreement and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary action; (ii) this Agreement has been duly and validly executed and delivered by such Party and constitutes the binding obligation of such Party enforceable against such Party in accordance with its terms; and (iii) the execution, delivery and performance by such Party of this Agreement and the consummation by such Party of the transactions contemplated hereby will not, with or without the giving of notice or the lapse of time, or both, (A) violate any provision of law, statute, rule, or regulation to which it is subject, (B) violate any order, judgment, or decree applicable to it, or (C) conflict with, or result in a breach or default under, any term or condition of its articles or certificate of incorporation or by-laws, certificate of limited partnership or partnership agreement or other organizational document, as applicable, or any agreement or other instrument to which such Party is a party or by which such Party is bound. (b) The Company hereby represents and warrants to each Party that: (i) it is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware, it has full corporate power and authority under its certificate of incorporation to execute, deliver, and perform this Agreement and to consummate the transactions contemplated hereby, and the execution, delivery and performance by it of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action; (ii) this Agreement has been duly and validly executed and delivered by the Company and constitutes the binding obligation thereof enforceable against the Company in accordance with its terms; and (iii) the execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby will not, with or without the giving of notice or the lapse of time, or both, (A) violate any provision of law, statute, rule, or regulation to which the Company is subject, (B) violate any order, judgment, or decree applicable to the Company, or (C) conflict with, or result in a breach or default under, any term or condition of its certificate of incorporation or by-laws or any agreement or other instrument to which the Company is a party or by which it is bound. ARTICLE II MANAGEMENT OF THE COMPANY; ACTIVITIES OF THE PARTIES II.1 Board of Directors. (a) Except as otherwise provided in this Section 2.1(a), the number of members of the Board of Directors of the Company shall be fixed at six. DLJMB shall have the right to designate four individuals to serve as members of the Board of Directors. The Existing Arcade Investors shall have the right to designate (by a majority in interest of the Existing Arcade Investors) one individual to serve as a member of the Board of Directors. In addition, the individual serving as the Chief Executive Officer of the Company from time to time as elected by the Board of Directors shall serve as a member of the Board of Directors. The Parties and the Company shall take all action within their respective powers, including, but not limited to, the nomination of candidates as specified above, on any slate of nominees for directors proposed by the Company, the voting of Capital Shares of the Company (to the extent that any such Person holds Capital Shares of the Company entitled to vote thereon; provided, that nothing set forth herein shall require any Party hereto to exercise any right to acquire Capital Shares of the Company) and the giving of consents, required to cause (i) the Board of Directors to include four directors designated by DLJMB (the "DLJMB Designees"), (ii) the Board of Directors to include one director designated by the Existing Arcade Investors and (iii) the Board of Directors to include the Chief Executive Officer of the Company. The Parties and the Company also shall take all such action to cause two of the DLJMB Designees (as designated by DLJMB) to serve as members of each committee of the Board of Directors, including, without limitation, the Audit Committee and the Compensation Committee of the Board of Directors, and a DLJMB Designee shall serve as chairman of each such committee. The provisions of this Section 2.1 are subject to any rights to elect additional directors granted pursuant to the terms of any Preferred Shares or pursuant to the terms of any indebtedness for borrowed money of the Company or any of its Subsidiary. (b) In the event that any director (a "Withdrawing Director") designated in the manner set forth in Section 2.1(a) is unable to serve, or once having commenced to serve, is removed or withdraws from the Board of Directors, such Withdrawing Director's replacement (the "Substitute Director") on the Board of Directors (and, if applicable, any committee) shall be designated in accordance with Section 2.1(a). The Company and each of the Parties agrees to take all action within its or his power, including, but not limited to, (i) the voting of Capital Shares of the Company to cause the election of such Substitute Director as soon as practicable following his designation and (ii) the instructing of any directors that it previously nominated to serve as members of the Board of Directors, as the first order of business at the first meeting thereof after such Substitute Director has been so designated, to vote to seat such designated Substitute Director as a director in place of the Withdrawing Director. (c) Each of the Parties agrees that it will at all times vote as a stockholder of the Company (to the extent such Party has the right to vote its Capital Shares of the Company), provide any necessary consents and use all reasonable efforts to cause those individuals whom it has nominated to serve as a member of, or elected to, the Board of Directors, if any, to vote as a director of the Company in such a manner as to ensure that the terms and intention of this Agreement, and the certificate of incorporation and the by-laws of the Company are carried out and observed. In addition, each of the Parties agrees that it will not vote any Capital Shares of the Company to cause the removal from the Board of Directors of any directors designated by DLJMB or the Existing Arcade Investors, except as set forth in Section 2.1(d) hereof. (d) If a director designated and elected pursuant to Section 2.1(a) hereof has been designated by DLJMB or the Existing Arcade Investors and such designating Party requests that such director be removed (with or without cause) by written notice thereof to the other Parties, then such director shall be removed, with or without cause, upon the affirmative vote of holders of a majority of the outstanding Capital Shares of the Company entitled to vote thereon, and each Party hereby agrees to vote all Capital Shares of the Company owned or held of record by such Party to effect such removal upon such request. No director designated by DLJMB or the Existing Arcade Investors shall otherwise be involuntarily removed as a director of the Company (or as a member of any committee of the Board of Directors with respect to a director designated by DLJMB), except (i) for cause or (ii) with respect to a director designated by the Existing Arcade Investors, at such time as the Existing Arcade Investors cease to own at least five percent of the Fully-Diluted Common Shares. II.2 Termination of Rights. The rights of the Existing Arcade Investors under Section 2.1 and the obligations of the other Parties with respect to a director designated by the Existing Arcade Investors shall terminate upon the first to occur of (i) the termination or expiration of this Agreement or (ii) such time as the Existing Arcade Investors cease to own at least five percent of the Fully-Diluted Common Shares. II.3 Quorum. The by-laws of the Company shall provide that a quorum of the Board of Directors must include at least two DLJMB Designees. II.4 Director's Expenses. Members of the Board of Directors shall be entitled to reimbursement for all reasonable out-of-pocket expenses incurred in connection with their service as directors of the Company. II.5 Exclusive Financial Advisor and Investment Banking Advisor. During the five-year period beginning on the date hereof, DLJSC, or any Affiliate of DLJSC that DLJMB or DLJSC may choose in their sole discretion, shall be engaged as the exclusive financial and investment banking advisor for the Company and its subsidiaries pursuant to the terms of an agreement substantially in the form of the agreement attached hereto as Exhibit A. II.6 Certain Transactions. The Parties and the Company agree that, without the consent of the Existing Arcade Investors, the Company shall not, directly or indirectly, enter into any transaction, including without limitation the purchase, sale, lease or exchange of any property (including securities), the rendering of any service or the making of any investments, loans or advances, with any Affiliate, except for (i) transactions on terms no less favorable to the Company than could be obtained in an arm's-length transaction as determined and approved in good faith by a majority of the members of the Board of Directors, (ii) transactions contemplated by this Agreement, the Arcade Acquisition Agreement and the Bridge Purchase Agreement, (iii) transactions with any wholly-owned Subsidiary of the Company, (iv) indemnification provisions of applicable laws and the Certificate of Incorporation and By-laws of the Company, (v) arrangements entered into at, or simultaneously with, the closing of the Arcade Acquisition Agreement and (vi) as contemplated by Section 2.5. ARTICLE III PREEMPTIVE RIGHTS III.1 Right of Participation. In the event the Company proposes to issue or sell Common Shares or Common Share Equivalents (the "Offered Securities"), the Company shall, no later than 20 days prior to the consummation of such transaction (a "Preemptive Rights Transaction"), give notice in writing of such Preemptive Rights Transaction (the "Offer Notice") to the Parties holding Common Shares. The Offer Notice shall describe the proposed Preemptive Rights Transaction and contain an offer (the "Preemptive Rights Offer") to sell to each such Party who certifies (to the reasonable satisfaction of the Company) that such Party is an Accredited Investor (an "Accredited Offeree"), at the same price and for the same consideration to be paid by the proposed purchaser, all or part of such Accredited Offeree's pro rata portion of the Offered Securities (which shall be such Accredited Offeree's percentage ownership of the Fully-Diluted Common Shares). III.2 Procedures for Participation. Within 15 days after its receipt of the Offer Notice, each Accredited Offeree shall deliver to the Company a written notice (the "Acceptance Notice") specifying whether or not it desires to accept the Offer, whereupon each Accredited Offeree, who has elected to accept the Preemptive Rights Offer, shall be obligated to purchase its pro rata share of the Offered Securities at the closing of the Preemptive Rights Transaction, if and when it occurs. Except to the extent the Preemptive Rights Offer has been duly accepted pursuant to this Section 3.2 and the Acceptance Notice, the Company may proceed with the proposed issue or sale of the Offered Securities, free of any right on the part of any Party under this Article III in respect thereof during the 120 days following the expiration of such 15-day period at a price and on terms no less favorable to the Company than those offered to the Accredited Offerees. Common Shares or Common Share Equivalents proposed to be issued or sold by the Company after such 120-day period shall be reoffered to Accredited Offerees pursuant to the terms of this Article III. III.3 Exceptions to Preemptive Rights. This Section 3 shall not apply to issuances and sales (a) to employees, officers and/or directors of the Company pursuant to employee benefit or similar plan or arrangement, (b) upon exercise or conversion of any Common Share Equivalent that, when originally issued, was subject to or exempt from the preemptive rights provided herein, (c) distributed or set aside ratably to all holders of Common Shares or Common Share Equivalents (or any class or series thereof) on a per share equivalent basis, (d) pursuant to the Arcade Acquisition Agreement or other equity investment or financing documents executed at the closing of the Arcade Acquisition Agreement or any refinancing, extension, modification or amendment with respect to any preferred equity or debt financing documents (provided that any such new preferred equity is not a Common Share Equivalent), (e) pursuant to a registered underwritten public offering or an offering pursuant to Rule 144A under the Securities Act, (f) pursuant to a merger of the Company or any subsidiary into or with another unaffiliated entity or an acquisition by the Company or any subsidiary of another unaffiliated business or corporation or (g) to Roger Barnett in connection with an equity investment by him in the Company. ARTICLE IV DRAG-ALONG RIGHTS IV.1 Drag-Along Rights. Except for a sale pursuant to a registered public offering or pursuant to Rule 144 under the Securities Act, in the event DLJMB proposes to sell 60% or more of its Initial Holdings (DLJMB being referred to herein as the "Seller") to a third party that is not an Affiliate of DLJMB, then the Seller shall have the right, subject to the provisions of this Article IV, to require the Minority Investors (collectively, the "Drag-Along Sellers"), to include in such sale (a "Required Sale") a portion of the Fully-Diluted Common Shares held by the Drag-Along Sellers equal to the same percentage of the Fully-Diluted Common Shares held by the Seller to be sold by Seller. 4.2 Procedures for Participation. (a) The Seller shall deliver notice of the Required Sale to the Minority Investors (the "Required Sale Notice"), which shall set forth: (i) the date of such notice (the "Notice Date"), (ii) the proposed amount of consideration to be paid per share for the Common Shares (the "Sale Shares") and the other terms and conditions of payment offered by the transferee in reasonable detail, together with written proposals or agreements, if any, with respect thereto, (iv) the aggregate number of Sale Shares and (v) the proposed date of the Required Sale (the "Required Sale Date"), which shall be not less than 30 nor more than 180 days after the Notice Date. (b) The Drag-Along Sellers shall cooperate in good faith with the Seller in connection with consummating the Required Sale (including, without limitation, the giving of consents and the voting of any Capital Shares of the Company held by the Drag-Along Sellers to approve such Required Sale). On the Required Sale Date, the Drag-Along Sellers shall deliver, free and clear of all liens, claims or encumbrances, a certificate or certificates and/or other instrument or instruments for its Common Shares, duly endorsed and in proper form for transfer, with the signature guaranteed, to such transferee in the manner and at the address indicated in the Required Sale Notice and the Seller shall cause each Drag-Along Seller's share of the purchase price to be paid to such Drag-Along Seller. ARTICLE V TAG-ALONG RIGHTS V.1 Tag-Along Rights. If DLJMB (DLJMB being referred to herein as the "Tag-Along Seller") desires to sell (other than pursuant to a registered public offering or pursuant to Rule 144 of the Securities Act) Common Shares in an aggregate amount of 15% or more of the Fully-Diluted Common Shares in one or a series of related transactions (a "Significant Sale"), then at least 30 days prior to the closing of such Significant Sale, the Tag-Along Seller shall make an offer (the "Participation Offer") to each Minority Investor (a "Co-Seller") to include in the proposed Significant Sale a portion of the Fully-Diluted Common Shares held by such Co-Seller equal to the same percentage of the Fully-Diluted Common Shares held by the Tag-Along Seller to be sold by the Tag-Along Seller; provided that, if the consideration to be received by the Tag-Along Seller includes any securities, only Co-Sellers who have certified to the reasonable satisfaction of the Tag-Along Seller that they are Accredited Investors ("Accredited Holders") shall be entitled to participate in such transfer, unless the transferee consents otherwise. V.2 Procedures for Participation. (a) The Participation Offer shall describe the terms and conditions of the proposed Significant Sale and shall be conditioned upon (i) the consummation of the transactions contemplated in the Participation Offer with the transferee named therein and (ii) each Co-Seller's execution and delivery of all agreements and other documents as the Tag-Along Seller is required to execute and deliver in connection with such Significant Sale; provided, that such agreements and documents are reasonable and customary with respect to the Tag-Along Seller's participation. If any Co-Seller shall accept the Participation Offer, the Tag-Along Seller shall reduce, to the extent necessary, the number of Common Shares it otherwise would have sold in the proposed transfer so as to permit those Co-Sellers who have accepted the Participation Offer to sell the number of Common Shares that they are entitled to sell under this Section, and the Tag-Along Seller and such Co-Sellers shall transfer the number of Common Shares specified in the Participation Offer to the proposed transferee in accordance with the terms of such transfer as set forth in the Participation Offer; provided, however, that in no event shall any Co-Seller be entitled to sell a greater percentage of its Fully-Diluted Common Shares than the percentage of Fully-Diluted Common Shares of the Tag-Along Seller being sold by the Tag-Along Seller. (b) Within 20 days after its receipt of the Participation Offer, each Co-Seller shall deliver to the Tag-Along Seller a written notice specifying whether or not it desires to accept the Participation Offer and the number of Common Shares that each such Co-Seller desires to sell in the Participation Offer, whereupon each such Co-Seller shall be obligated to sell such Common Shares at the closing of such Significant Sale, if and when it occurs. In the event no Co-Seller duly accepts the Participation Offer within such 20-day period, the Tag-Along Seller may proceed with the proposed transaction, free of any right on the part of a Co-Seller under this Article V in respect thereof for a period of 120 days following the expiration of such 20-day period. ARTICLE VI EXCEPTIONS TO DRAG-ALONG AND TAG-ALONG RIGHTS VI.1 Certain Events Not Deemed Transfers. In no event shall any of the following constitute a sale of Common Shares for purposes of Article IV or V or be subject to the terms hereof: (a) an exchange, reclassification, or other conversion of Common Shares into any cash, securities, or other property pursuant to a merger, consolidation, or recapitalization of the Company or any Subsidiary of the Company with, or a sale or transfer by the Company or any Subsidiary of the Company of all or substantially all its assets to, any Person or (b) a conversion of outstanding Common Share Equivalents into Common Shares in accordance with the terms thereof. VI.2 Permitted Transferees. Notwithstanding anything in this Agreement to the contrary, any DLJMB Party or any Permitted Transferee may, without compliance with Article IV or V, at any time transfer any or all of its Capital Shares to one or more Permitted Transferees or other DLJMB Party. ARTICLE VII TRANSFERS OF SECURITIES No Party may transfer any Capital Shares to any Adverse Person; provided, however, that any DLJMB Party or Permitted Transferee may at any time transfer any or all of its Capital Shares to one or more Permitted Transferees or other DLJMB Parties. Except pursuant to Articles IV and V of this Agreement, prior to the date that is the earlier of (i) the consummation of a Qualified IPO or (ii) 5 years after the date of this Agreement, no Minority Investor may transfer any Shares or Common Share Equivalents except to (x) one or more Permitted Minority Transferees or (y) pursuant to an offering of equity securities registered under the Securities Act. ARTICLE VIII REGISTRATION VIII.1 Request for Demand Registration. (a) A Demand Holder may make a written request of the Company (a "Demand Request") for registration under the Securities Act (a "Demand Registration") of Registrable Securities. (b) Each Demand Request shall specify the number of shares of Registrable Securities proposed to be sold and the intended method of distribution. Subject to Section 8.8, the Company shall file the Demand Registration with the SEC within 60 days after receiving a Demand Request (the "Required Filing Date") and shall use all commercially reasonable efforts to cause the same to be declared effective by the SEC as promptly as practicable after such filing; provided, that the Company need effect only three Demand Registrations in respect of DLJMB, unless the Company is eligible to register its Common Shares on Form S-3 under the Securities Act (in which event the Company shall effect an unlimited number of Demand Registrations in respect of DLJMB). (c) Notwithstanding anything to the contrary contained in this Agreement, the Company shall not be required to register any Common Shares pursuant to a Demand Request prior to the earlier of a Qualified IPO or five years from the date of this Agreement. VIII.2 Effective Registration and Expenses. A registration will not count as a Demand Registration until it has become effective pursuant to the Securities Act (unless the Demand Holder withdraw all their Registrable Securities, in which case such demand will count as a Demand Registration unless the Demand Holder pay all Registration Expenses in connection with such withdrawn registration), provided that if, after it has become effective, an offering of Registrable Securities pursuant to a registration is materially interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court, such registration will be deemed not to have been effected. VIII.3 Priority on Demand Registrations. No securities to be sold for the account of any Person (including the Company) other than a Demand Holder shall be included in a Demand Registration unless the managing Underwriter or Underwriters shall advise the Demand Holder in writing that the inclusion of such securities will not potentially impede or interfere with the offering. Furthermore, in the event the managing Underwriter or Underwriters shall advise the Demand Holder that even after exclusion of all securities of other Persons pursuant to the immediately preceding sentence, the amount of Registrable Securities proposed to be included in such Demand Registration by Demand Holder is sufficiently large to potentially impede or interfere with the offering, the Registrable Securities of the Demand Holder to be included in such Demand Registration shall be allocated pro rata among the Demand Holder on the basis of the number of Registrable Securities requested to be included in such registration by the Demand Holder. Notwithstanding anything to the contrary contained in this Section 8.3, the provisions of this Section 8.3 shall be subject to the piggyback registration rights of the Minority Investors set forth in Section 8.5 below, if applicable. VIII.4 Multiple Demands. If the Company shall receive, within a period of 30 days, a request to file a registration statement from more than one Person who has the contractual right (whether exercisable alone or in conjunction with other rights) to require the Company to file a registration statement, all such requesting Persons shall be considered "Demand Holders" for purposes of this Article VIII; provided, that if the first request received by the Company is from any Demand Holder pursuant to Section 8.1(a), then only the Demand Holder shall be considered a "Demand Holder" and no other Person who has tendered a request shall be deemed to have requested registration of such Person's Registrable Securities for purposes of this Agreement. In the event the Company shall receive a request for a Demand Registration from any Persons (including a Demand Holder) who have the contractual right to cause the Company to do so, the Company shall promptly (and in any event within 5 days after its receipt of such request) notify all Demand Holders thereof. VIII.5 Piggy-Back Registration. (a) Subject to the provisions of this Agreement, if the Company proposes to file a registration statement under the Securities Act with respect to an offering of any Common Shares by the Company for its own account or for the account of any of its equity holders (other than a registration statement on Form S-4 or S-8 or any substitute form that may be adopted by the SEC or any registration statement filed in connection with an exchange offer or offering of securities solely to the Company's existing security holders), then the Company shall give written notice of such proposed filing to the Parties holding Registrable Securities as soon as practicable (but in no event less than 30 days before the anticipated effective date of such registration statement), and such notice shall offer the Parties the opportunity to register such number of Registrable Securities as each such holder may request (a "Piggyback Registration"). Subject to Section 8.5(b), the Company shall include in each such Piggyback Registration all Registrable Securities requested by the Parties to be included in the registration for such offering. Each such holder of Registrable Securities shall be permitted to withdraw all or part of such holder's Registrable Securities from a Piggyback Registration at any time prior to the effective date thereof. For purposes of any Piggyback Registration, Registrable Securities shall mean only Common Shares. (b) The Company shall use all commercially reasonable efforts to cause the managing Underwriter of a proposed underwritten offering to permit the Registrable Securities requested to be included in the registration statement for such offering under Section 8.5(a) or pursuant to other piggyback registration rights granted by the Company ("Piggyback Securities") to be included on the same terms and conditions as any similar securities included therein. Notwithstanding the foregoing, the Company shall not be required to include any holder's Piggyback Securities in such offering unless such holder accepts the terms, which shall be reasonable and customary, of the underwriting agreement between the Company and the managing Underwriter or Underwriters, and otherwise complies with the provisions of Section 8.15 below. If the managing Underwriter or Underwriters of a proposed underwritten offering advise the Company in writing that in their opinion the total amount of securities, including Piggyback Securities, to be included in such offering is sufficiently large to potentially impede or interfere with the offering, then in such event the securities to be included in such offering shall be allocated first to the Company or the holder or holders initiating such request for registration, as appropriate, and then, to the extent that any additional securities can, in the opinion of such managing Underwriter or Underwriters, be sold without any such potential to impede or interfere with the offering, pro rata among the holders of Piggyback Securities on the basis of the number of Registrable Securities requested to be included in such registration by each such holder; provided, however, that in the event a Piggyback Registration is triggered by a Demand Holder pursuant to Section 8.1, if the Demand Holder has sold or is selling (other than to a Permitted Transferee) at least 50% of its Initial Holdings, then the Registrable Securities to be included in such offering (after the inclusion in such registration of the number of Registrable Securities of the Demand Holder triggering such 50% threshold) shall be allocated pro rata among the Demand Holder and the Parties holding Piggyback Securities on the basis of the number of Common Shares requested to be included in such registration by each such holder. VIII.6 Restrictions on Public Sale by Holder of Registrable Securities. Each Party (whether or not such Registrable Securities are included in a registration statement pursuant hereto) agrees not to effect any public sale or distribution of the class of securities being registered or of any securities convertible into or exchangeable or exercisable for such securities, including a sale pursuant to Rule 144 under the Securities Act, during the 14 days prior to, and during the 180-day period beginning on the effective date of a registration statement filed pursuant hereto except as part of such registration if and to the extent requested by the managing Underwriter or Underwriters in the case of an underwritten public offering; provided, that such Underwriter requests all officers and directors of the Company and all Parties to enter into similar agreements. VIII.7 Restrictions on Public Sale by the Company and Others. The Company agrees (a) not to effect any public sale or distribution of any securities similar to those being registered, or any securities convertible into or exchangeable or exercisable for such securities, during the 14 days prior to, and during the 180-day period (90-day period after the Company is a public reporting company) beginning on, the effective date of any registration statement which includes Registrable Securities and (b) that any agreement entered into after the date hereof pursuant to which the Company issues or agrees to issue any privately placed securities shall contain a provision under which holders of such securities agree not to effect any public sale or distribution of any such securities during the period described in (a) above, including a sale pursuant to Rule 144 under the Securities Act (except as part of any such registration, if permitted); provided, however, that the provisions of this Section 8.7 shall not prevent the conversion or exchange of any securities pursuant to their terms into or for other securities. VIII.8 Deferral of Filing. The Company may defer the filing (but not the preparation) of a registration statement required hereunder until a date not later than 45 days after the Required Filing Date if (a) at the time the Company receives the Demand Request, the Company or its Subsidiaries are engaged in confidential negotiations or other confidential business activities, disclosure of which would be required in such registration statement (but would not be required if such registration statement were not filed), and the Board of Directors of the Company determines in good faith that such disclosure would be materially detrimental to the Company and its stockholders. A deferral of the filing of a registration statement pursuant to this Section 8.8 shall be lifted, and the requested registration statement shall be filed forthwith, if the negotiations or other activities are disclosed or terminated. In order to defer the filing of a registration statement pursuant to this Section 8.8, the Company shall promptly, upon determining to seek such deferral, deliver to each Demand Holder a certificate signed by the President or Chief Executive Officer of the Company stating that the Company is deferring such filing pursuant to this Section 8.8 and the basis therefor in reasonable detail. Within 20 days after receiving such certificate, the holders of a majority of the Registrable Securities held by the Demand Holders and for which registration was previously requested may withdraw such request by giving notice to the Company; if withdrawn, the Demand Request shall be deemed not to have been made for all purposes of this Agreement. The Company may defer the filing of a particular registration statement pursuant to this Section 8.8 only once in any 12-month period. VIII.9 Registration Procedures. Whenever any Registrable Securities are to be registered pursuant to Article VIII hereof, the Company will, at its expense, use its best efforts to effect the registration and the sale of such Registrable Securities under the Securities Act in accordance with the intended method of disposition thereof as quickly as practicable, and in connection with any such request, the Company will as expeditiously as practicable: (a) prepare and file with the SEC a registration statement on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate and which form shall be available for the sale of the Registrable Securities to be registered thereunder in accordance with the intended method of distribution thereof, and use its best efforts and proceed diligently and in good faith to cause such filed registration statement to become effective under the Securities Act; provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company will furnish to all Selling Holders and to one counsel reasonably acceptable to the Company selected by the Selling Holders, copies of all such documents proposed to be filed, which documents will be subject to the review of such counsel, and the Company will pay the reasonable fees of such counsel; provided, that in connection with a Demand Registration, the Company shall not file any registration statement or prospectus, or any amendments or supplements thereto, if the Demand Holders who hold a majority of the Registrable Securities covered by such registration statement, their counsel, or the managing Underwriters shall reasonably object, in writing, on a timely basis; (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period (except as provided in the last paragraph of this Article VIII) of not less than 270 consecutive days or, if shorter, the period terminating when all Registrable Securities covered by such registration statement have been sold (but not before the expiration of the applicable period referred to in Section 4(3) of the Securities Act and Rule 174 thereunder, if applicable) and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the Selling Holders thereof set forth in such registration statement; (c) furnish to each such Selling Holder such number of copies of such registration statement, each amendment and supplement thereto (in each case including all exhibits thereto), the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such Selling Holder may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Selling Holder; (d) notify the Selling Holders promptly, and (if requested by any such Person) confirm such notice in writing, (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and, with respect to a registration statement or any post-effective amendment, when the same has become effective under the Securities Act and each applicable state law, (ii) of any request by the SEC or any other Federal or state governmental authority for amendments or supplements to a registration statement or related prospectus or for additional information, (iii) of the issuance by the SEC of any stop order suspending the effectiveness of a registration statement or the initiation of any proceedings for that purpose, (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, (v) of the happening of any event which makes any statement made in such registration statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in such registration statement, prospectus or documents so that, in the case of the registration statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and (vi) of the Company's reasonable determination that a post-effective amendment to a registration statement would be appropriate; (e) use its best efforts to obtain the withdrawal of any order suspending the effectiveness of a registration statement, or the lifting of any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment; (f) cooperate with the Selling Holders and the managing Underwriter or Underwriters to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold, which certificates shall not bear any restrictive legends and shall be in a form eligible for deposit with The Depositary Trust Company; and enable such Registrable Securities to be registered in such names as the managing Underwriter or Underwriters may request at least 2 business days prior to any sale of Registrable Securities; (g) use its best efforts to register or qualify such Registrable Securities as promptly as practicable under such other securities or blue sky laws of such jurisdictions as any Selling Holder or managing Underwriter reasonably (in light of the intended plan of distribution) requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such Selling Holder or managing Underwriter to consummate the disposition in such jurisdictions of the Registrable Securities owned by such Selling Holder; provided that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (g), (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction; (h) use its best efforts to cause such Registrable Securities to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company to enable the Selling Holder or Selling Holders thereof to consummate the disposition of such Registrable Securities; (i) enter into customary agreements (including an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Securities; (j) make available for inspection by any Selling Holder of such Registrable Securities, any Underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other professional retained, and paid, by any such Selling Holder or Underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Inspectors in connection with such registration statement. Records which the Company determines, in good faith, to be confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such registration statement or (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction. Each Selling Holder of such Registrable Securities agrees that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company or its Affiliates unless and until such is made generally available to the public. Each Selling Holder of such Registrable Securities further agrees that it will, as soon as practicable upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company at its expense to undertake appropriate action to prevent disclosure of the Records deemed confidential; (k) use its best efforts to obtain a comfort letter or comfort letters from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by comfort letters as the Selling Holders of a majority of the shares of Registrable Securities being sold or the managing Underwriter or Underwriters reasonably requests; (l) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering a period of 12 months, beginning within 3 months after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; (m) use its best efforts to cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed or quoted on any inter-dealer quotation system on which similar securities issued by the Company are then quoted; (n) if any event contemplated by paragraph (d)(v) above shall occur, as promptly as practicable prepare a supplement or amendment or post-effective amendment to such registration statement or the related prospectus or any document incorporated therein by reference or promptly file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, the prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (o) cooperate and assist in any filing required to be made with the National Association of Securities Dealers, Inc. and in the performance of any due diligence investigation by any underwriter, including any "qualified independent underwriter," or any Selling Holder; and (p) cooperate fully with the marketing and sale of securities in accordance with this Agreement including, without limitation, providing marketing support and causing the appropriate member(s) of management to participate in "road show" presentations and attend meetings with Underwriters as requested by the Parties or the Underwriters. The Company may require each Selling Holder to promptly furnish in writing to the Company such information regarding the distribution of the Registrable Securities as it may from time to time reasonably request and such other information as may be legally required in connection with such registration. Notwithstanding anything herein to the contrary, the Company shall have the right to exclude from any offering the Registrable Securities of any Selling Holder who does not comply with the provisions of the immediately preceding sentence. Each Selling Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in paragraph (d)(v) above, such Selling Holder will forthwith discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Selling Holder's receipt of the copies of the supplemented or amended prospectus contemplated by paragraph (d)(v) above, and, if so directed by the Company, such Selling Holder will deliver to the Company all copies, other than permanent file copies, then in such Selling Holder's possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice. In the event the Company shall give such notice, the Company shall extend the period during which such registration statement shall be maintained effective by the number of days during the period from and including the date of the giving of notice pursuant to paragraph (d)(v) above to the date when the Company shall make available to the Selling Holders of Registrable Securities covered by such registration statement a prospectus supplemented or amended to conform with the requirements of paragraph (d)(v) above. VIII.10 Registration Expenses. Subject to the provisions in Section 8.2 above with respect to a Demand Registration, in connection with any registration statement required to be filed hereunder, the Company shall pay the following registration expenses (the "Registration Expenses"): (a) all registration and filing fees (including, without limitation, with respect to filings to be made with the National Association of Securities Dealers, Inc.), (b) fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities), (c) printing expenses, (d) internal expenses of the Company (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), (e) the fees and expenses incurred in connection with the listing on an exchange of the Registrable Securities, (f) fees and disbursements of counsel for the Company and customary fees and expenses for independent certified public accountants retained by the Company (including the expenses of any comfort letters), (g) the fees and expenses of any special experts retained by the Company in connection with such registration, (h) the reasonable fees and expenses of one counsel reasonably acceptable to the Company selected by the Selling Holders incurred in connection with the registration of such Registrable Securities hereunder and (i) fees and expenses of any "qualified independent underwriter" or other independent appraiser participating in an offering pursuant to Rule 2720(c) of the National Association of Securities Dealers, Inc. The Company shall not have any obligation to pay any underwriting fees, discounts or commissions attributable to the sale of Registrable Securities or to pay any out-of-pocket expenses of any Party or their agents except as expressly set forth above. VIII.11 Indemnification by the Company. The Company agrees to indemnify and hold harmless each Selling Holder, each Person, if any, who controls such Selling Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the officers, directors, agents, general and limited partners, and employees of each Selling Holder and each such controlling person from and against any and all losses, claims, damages, liabilities, and expenses (including reasonable costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus relating to the Registrable Securities or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of, or are based upon, any such untrue statement or omission or allegation thereof based upon information furnished in writing to the Company by such Selling Holder or on such Selling Holder's behalf expressly for use therein; provided, however, that with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus, the indemnity agreement contained in this Section 8.11 shall not apply to the extent that any such loss, claim, damage, liability or expense results from the fact that a current copy of the prospectus was not sent or given to the Persons asserting any such loss, claim, damage, liability or expense at or prior to the written confirmation of the sale of the Registrable Securities concerned to such Person if it is determined that (a) it was the responsibility of such Selling Holder or any Underwriter or dealer for Selling Holder to provide such person with a current copy of the prospectus, (b) such Selling Holder was provided with a sufficient number of copies of the prospectus prior to the written confirmation of sale and (c) such current copy of the prospectus would have cured the defect giving rise to such loss, claim, damage, liability or expense. The Company also agrees to indemnify any Underwriters of the Registrable Securities, their officers and directors and each Person who controls such Underwriters on substantially the same basis as that of the indemnification of the Selling Holders provided in this Section 8.11. VIII.12 Indemnification by Holder of Registrable Securities. Each Selling Holder agrees to indemnify and hold harmless the Company, and each Person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act and the officers, directors, agents and employees of the Company and each such controlling Person to the same extent as the foregoing indemnity from the Company to such Selling Holder, but only with respect to information furnished in writing by such Selling Holder or on such Selling Holder's behalf expressly for use in any registration statement or prospectus relating to the Registrable Securities. The liability of any Selling Holder under this Section 8.12 shall be limited to the aggregate cash and property received by such Selling Holder pursuant to the sale of Registrable Securities covered by such registration statement or prospectus. VIII.13 Conduct of Indemnification Proceedings. If any action or proceeding (including any governmental investigation) shall be brought or asserted against any Person entitled to indemnification under Section 8.11 or 8.12 above (an "Indemnified Party") in respect of which indemnity may be sought from any party who has agreed to provide such indemnification under Section 8.11 or 8.12 above (an "Indemnifying Party"), the Indemnified Party shall give prompt notice to the Indemnifying Party and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party, and shall assume the payment of all reasonable expenses of such defense. Such Indemnified Party shall have the right to employ separate counsel in any such action or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (a) the Indemnifying Party has agreed to pay such fees and expenses or (b) the Indemnifying Party fails promptly to assume the defense of such action or proceeding or fails to employ counsel reasonably satisfactory to such Indemnified Party or (c) the named parties to any such action or proceeding (including any impleaded parties) include both such Indemnified Party and Indemnifying Party (or an Affiliate of the Indemnifying Party), and such Indemnified Party shall have been advised by counsel that there is a conflict of interest on the part of counsel employed by the Indemnifying Party to represent such Indemnified Party and such counsel reasonably determines that it is inappropriate for such counsel to represent both the Indemnifying Party (or such Affiliate of the Indemnifying Party) and the Indemnified Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Party). Notwithstanding the foregoing, the Indemnifying Party shall not, in connection with any one such action or proceeding or separate but substantially similar related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable at any time for the fees and expenses of more than one separate firm of attorneys (together in each case with appropriate local counsel). The Indemnifying Party shall not be liable for any settlement of any such action or proceeding effected without its written consent (which consent will not be unreasonably withheld), but if settled with its written consent, or if there be a final judgment for the plaintiff in any such action of proceeding, the Indemnifying Party shall indemnify and hold harmless such Indemnified Party from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment. The Indemnifying Party shall not consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release, in form and substance satisfactory to the Indemnified Party, from all liability in respect of such action or proceeding for which such Indemnified Party would be entitled to indemnification hereunder. VIII.14 Contribution. If the indemnification provided for in this Article VIII is unavailable to the Indemnified Parties in respect of any losses, claims, damages, liabilities or judgments referred to herein, then each such Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, liabilities and judgments as between the Company on the one hand and each Selling Holder on the other, in such proportion as is appropriate to reflect the relative fault of the Company and of each Selling Holder in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of each Selling Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Selling Holders agree that it would not be just and equitable if contribution pursuant to this Section 8.14 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8.14, no Selling Holder shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities of such Selling Holder were offered to the public exceeds the amount of any damages which such Selling Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. VIII.15 Participation In Underwritten Registrations. No Party may participate in any underwritten registration hereunder unless such Party (a) agrees to sell such Party's Registrable Securities on the basis provided in any underwriting arrangements approved by the Person entitled hereunder to approve such arrangements, (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably and customarily required under the terms of such underwriting arrangements and this Agreement, and (c) if requested by another Person participating in such underwritten registration, provides that all securities convertible or exchangeable into Registrable Securities that are included in such underwritten registration shall be so converted or exchanged on or prior to the consummation thereof. ARTICLE IX TERMINATION This Agreement shall terminate upon the earlier of (i) the dissolution, liquidation, or winding-up of the Company or (ii) the date on which DLJMB is no longer the beneficial owner of at least five percent of the Fully-Diluted Common Shares; provided, that the provisions of Article VIII shall survive until the earlier of (i) the date that neither DLJMB nor the Existing Arcade Investors beneficially own at least one percent of the Fully-Diluted Common Shares or (ii) 10 years from the date hereof. A Person who ceases to hold any Shares or Common Share Equivalents and who ceases to beneficially own any Shares or Common Share Equivalents shall cease to be a Party and shall have no further rights or obligations under this Agreement. ARTICLE X MISCELLANEOUS X.1 Amendment. Any provision of this Agreement may be altered, supplemented, amended, or waived only by the written consent of a majority of the Fully-Diluted Common Shares held by DLJMB; provided, however, that no supplement, amendment or waiver shall adversely affect the rights of the Minority Investors hereunder without the written consent of a majority of the holders of the Fully-Diluted Common Shares held by the Minority Investors; and provided further that no supplement, amendment or waiver shall adversely affect the rights of any Bridge Party hereunder without the written consent of a majority of the holders of the Fully-Diluted Common Shares held by the Bridge Parties. X.2 Specific Performance. The Parties and the Company recognize that the obligations imposed on them in this Agreement are special, unique, and of extraordinary character, and that in the event of breach by any party, damages will be an insufficient remedy; consequently, it is agreed that the Parties and the Company may have specific performance and injunctive relief (in addition to damages) as a remedy for the enforcement hereof, without proving damages. X.3 Assignment. Except as otherwise expressly provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and permitted assigns of the Parties and the Company. No such assignment shall relieve the assignor from any liability hereunder. Any purported assignment made in violation of this Section 10.3 shall be void and of no force and effect. X.4 Shares Subject to this Agreement. All Shares now owned or hereafter acquired by any of the Parties shall be subject to, and entitled to the benefits of, the terms of this Agreement. X.5 Legends and Restrictions. (a) Each certificate for Shares and Common Share Equivalents held by any Party shall include each of the legends in substantially the following form, until such time as such legend(s) is no longer required by applicable securities laws or by this Agreement, at which time the holder thereof shall be entitled to receive from the Company, without expense to such holder, new certificate(s) not bearing such restrictive legends. THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR PURSUANT TO THE SECURITIES OR "BLUE SKY" LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED, EXCEPT PURSUANT TO (i) A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER SUCH ACT, OR (ii) ANY OTHER EXEMPTION FROM REGISTRATION UNDER SUCH ACT. THIS SECURITY IS SUBJECT TO CERTAIN VOTING AGREEMENTS, RESTRICTIONS ON TRANSFER, AND OTHER TERMS AND CONDITIONS SET FORTH IN THE STOCKHOLDERS AGREEMENT, DATED AS OF DECEMBER 15, 1997, AS THE SAME MAY BE AMENDED FROM TIME TO TIME, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES. (b) Any purported sale or transfer of the Shares or Common Share Equivalents in violation of applicable securities laws or the provisions of this Agreement shall be void ab initio and of no force or effect. Other than sales to the public pursuant to an effective registration statement or sales to the public pursuant to Rule 144 under the Securities Act otherwise permitted hereunder, each Party will cause any proposed transferee of any Shares or Common Share Equivalents held by it to execute and deliver to the Company an Instrument of Accession signed by such transferee in the form attached hereto as Exhibit B. X.6 Notices. Any and all notices, designations, consents, offers, acceptances, or other communications provided for herein (each a "Notice") shall be given in writing by overnight courier, telegram, or telecopy which shall be addressed, or sent, to the respective addresses as follows (or such other address as the Company or any Party may specify to the Company and all other Parties by Notice): The Company: AHC I Acquisition Corp. c/o DLJ Merchant Banking Partners II, L.P. 277 Park Avenue New York, New York 10172 Attention: David Wittels Telecopy No.: 212/892-7272 DLJ Merchant Banking Partners II, L.P. 277 Park Avenue New York, New York 10172 Attention: David Wittels Telecopy No.: 212/892-7272 with a copy to: R. Scott Cohen Weil, Gotshal & Manges LLP 100 Crescent Court, Suite 1300 Dallas, Texas 75201 Telecopy No.: (214) 746-7700 Each Other Party: To such address or telecopy number of such Party as is set forth on the share transfer records of the Company at such time. All Notices shall be deemed effective and received (a) if given by telecopy, when such telecopy is transmitted to the telecopy number specified above and receipt thereof is confirmed; (b) if given by overnight courier, on the business day immediately following the day on which such Notice is delivered to a reputable overnight courier service; or (c) if given by telegram, when such Notice is delivered at the address specified above. X.7 Confidentiality. The Parties shall, and shall cause their respective officers, directors, employees, and agents and the subsidiaries of the Parties and their respective officers, directors, employees, and agents to, hold confidential and not use in any manner detrimental to the Company or any of its Subsidiaries all confidential information they may have or obtain concerning the Company or any of its Subsidiaries and their respective assets, business, operations, or prospects ("Confidential Information"); provided, however, that the foregoing shall not apply to (a) information that is or becomes generally available to the public other than as a result of a disclosure by a Party or any of its employees, agents, accountants, legal counsel, or other representatives, (b) information that is or becomes available to a Party or any of its employees, agents, accountants, legal counsel, or other representatives on a nonconfidential basis prior to its disclosure by the Company or its employees, agents, accountants, legal counsel, or other representatives, and (c) information that is required to be disclosed by a Party or any of its employees, agents, accountants, legal counsel, or other representatives as a result of any applicable law, rule, or regulation of any governmental authority or stock exchange. If any Party desires to sell Shares and in connection with such potential sale desires to disclose information regarding the Company to the potential purchaser in such sale which it is not permitted to disclose pursuant to the preceding sentence, such Party shall notify the Company of such Party's desire to disclose such information and shall identify the potential purchaser in such notification. The Company may require any such potential purchaser of Shares to enter into a confidentiality agreement with respect to Confidential Information on customary terms used in confidentiality agreements in connection with corporate acquisitions. X.8 Counterparts. This Agreement may be executed in two or more counterparts and each counterpart shall be deemed to be an original and which counterparts together shall constitute one and the same agreement of the parties hereto. X.9 Section Headings. Headings contained in this Agreement are inserted only as a matter of convenience and in no way define, limit, or extend the scope or intent of this Agreement or any provisions hereof. X.10 Choice of Law. This Agreement shall be governed by the internal laws of the State of New York without regard to the principles of conflict of laws thereof. X.11 Entire Agreement. This Agreement contains the entire understanding of the parties hereto respecting the subject matter hereof and supersedes all prior agreements, discussions and understandings with respect thereto. X.12 Cumulative Rights. The rights of the Parties and the Company under this Agreement are cumulative and in addition to all similar and other rights of the parties under other agreements. X.13 Severability. If any term, provision, covenant, or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the terms, provisions, covenants, and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired, or invalidated. X.14 Financial Information. The Company shall provide to the Parties (i) unaudited quarterly consolidated financial statements within 45 days after the end of each fiscal quarter (except for the last quarter of the Company's fiscal year) and (ii) audited annual consolidated financial statements within 90 days after the end of each fiscal year. Such financial statements shall present fairly, in all material respects, the financial position, cash flows and results of operations of the Company and its subsidiaries at the dates and for the periods indicated therein. In addition, the Company shall provide to DLJMB unaudited monthly consolidated financial statements within 20 days after the end of each calendar month. The recipients shall hold such information in confidence pursuant to Section 10.7. The Company's obligation to provide such financial information to the Minority Investors shall terminate at such time as the Company is subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act. [Remainder of page intentionally left blank.] IN WITNESS WHEREOF, the parties hereto have executed this Stockholders Agreement as of the date first above written. AHC I ACQUISITION CORP. By: ---------------------------------------- David Wittels, Vice President DLJMB FUNDING II, INC. By: ---------------------------------------- David Wittels, Attorney-in-Fact DLJ MERCHANT BANKING PARTNERS II, L.P. By: DLJ MERCHANT BANKING II, INC., Its Managing General Partner By: ----------------------------- David Wittels, Attorney-in-Fact DLJ MERCHANT BANKING PARTNERS II-A, L.P. By: DLJ MERCHANT BANKING II, INC., Its Managing General Partner By: ----------------------------- David Wittels, Attorney-in-Fact DLJ DIVERSIFIED PARTNERS, L.P. By: DLJ DIVERSIFIED PARTNERS, INC. By: ----------------------------- David Wittels, Attorney-in-Fact DLJ DIVERSIFIED PARTNERS-A, L.P. By: DLJ DIVERSIFIED PARTNERS, INC. By: ----------------------------- David Wittels, Attorney-in-Fact DLJ MILLENNIUM PARTNERS, L.P. By: DLJ MERCHANT BANKING II, INC. By: ----------------------------- David Wittels, Attorney-in-Fact DLJ MILLENNIUM PARTNERS-A, L.P. By: DLJ MERCHANT BANKING II, INC. By: ----------------------------- David Wittels, Attorney-in-Fact DLJ FIRST ESC L.P. By: DLJ LBO PLANS MANAGEMENT CORPORATION Its General Partner By: ----------------------------- David Wittels, Attorney-in-Fact DLJ OFFSHORE PARTNERS II, C.V. By: DLJ MERCHANT BANKING II, INC. Its Managing General Partner By: ----------------------------- David Wittels, Attorney-in-Fact DLJ EAB PARTNERS, L.P. By: DLJ LBO PLANS MANAGEMENT CORPORATION By: ----------------------------- David Wittels, Attorney-in-Fact UK INVESTMENT PLAN 1997 PARTNERS By: DONALDSON LUFKIN & JENRETTE, INC. By: ----------------------------- David Wittels, Attorney-in-Fact LIBERTY PARTNERS HOLDINGS 4, L.L.C. By: ----------------------------- Name: ----------------------------- Title: ----------------------------- ---------------------------------------- Roger L. Barnett ---------------------------------------- Craig Barnett ---------------------------------------- Hubert Brown ---------------------------------------- Gordon W. Jones SCRATCH & SNIFF FUNDING, INC. By: ---------------------------------------- Name: ---------------------------------------- Title: ---------------------------------------- SCHEDULE I INITIAL HOLDINGS Number of Fully-Diluted Common Shares Party Initially Held - ----- -------------- DLJ Merchant Banking Partners II, L.P DLJ Merchant Banking Partners II-A, L.P. DLJMB Funding II, Inc. DLJ Diversified Partners, L.P. DLJ Diversified Partners-A, L.P. DLJ Millennium Partners, L.P. DLJ Millennium Partners-A, L.P. DLJ First ESC L.P. DLJ Offshore Partners II, C.V. DLJ EAB Partners, L.P. UK Investment Plan 1997 Partners Liberty Partners Holdings 4, L.L.C. Roger L. Barnett Craig Barnett Gordon W. Jones Hubert Brown Scratch & Sniff Funding, Inc. EXHIBIT A to Stockholders Agreement FORM OF EXCLUSIVE FINANCIAL ADVISOR AND INVESTMENT BANKING ADVISOR EXHIBIT B to Stockholders Agreement INSTRUMENT OF ACCESSION Reference is made to that certain Stockholders Agreement dated as of _____________, 1997, a copy of which is attached hereto (as amended and in effect from time to time, the "Stockholders Agreement"), among AHC I Acquisition Corp., a Delaware corporation (the "Company"), and the persons set forth therein. The undersigned, ________________________, in order to become the owner or holder of ______________________________, hereby agrees that by the undersigned's execution hereof the undersigned is a party to the Stockholders Agreement subject to all of the applicable restrictions, conditions and obligations set forth in the Stockholders Agreement. This Instrument of Accession shall take effect and shall become a part of said Stockholders Agreement immediately upon execution. Executed as of the date set forth below under the laws of the State of New York. ---------------------------------------- Signature Address: ---------------------------------------- ---------------------------------------- ---------------------------------------- Date: ---------------------------------------- ACCEPTED: AHC I Acquisition Corp. By: - ---------------------------------- Name: - ---------------------------------- Title: - ---------------------------------- Date: - ---------------------------------- EX-10.7 12 CREDIT AGREEMENT =============================================================================== CREDIT AGREEMENT DATED AS OF APRIL 30, 1996 Between ARCADE, INC. as Borrower and HELLER FINANCIAL, INC. as Lender =============================================================================== TABLE OF CONTENTS -----------------
SECTION 1 AMOUNTS AND TERMS OF LOANS............................................1 1.1 Loans...........................................................................................1 1.2 Interest and Related Fees ......................................................................3 1.3 Other Fees and Expenses ........................................................................6 1.4 Payments........................................................................................7 1.5 Prepayments.....................................................................................7 1.6 Term of the Agreement...........................................................................8 SECTION 2 AFFIRMATIVE COVENANTS..............................................8 2.1 Compliance With Laws ...........................................................................8 2.2 Maintenance of Properties; Insurance ...........................................................9 2.3 Inspection; Lender Meeting ....................................................................10 2.4 Corporate Existence, Etc. .....................................................................10 2.5 Further Assurances ............................................................................10 SECTION 3 NEGATIVE COVENANTS...............................................11 3.1 Indebtedness ..................................................................................11 3.2 Liens and Related Matters......................................................................12 3.3 Investments; Joint Ventures ...................................................................14 3.4 Contingent Obligations ........................................................................15 3.5 Restricted Junior Payments ....................................................................17 3.6 Restriction on Fundamental Changes ............................................................18 3.7 Disposal of Assets or Subsidiary Stock ........................................................19 3.8 Transactions with Affiliates ..................................................................19 3.9 Management Fees and Compensation ..............................................................20 3.10 Conduct of Business ...........................................................................20 3.11 Changes Relating to Subordinated Indebtedness .................................................20 3.12 Press Release; Public Offering Materials ......................................................20 3.13 Subsidiaries ..................................................................................21 SECTION 4 FINANCIAL COVENANTS/REPORTING.........................................21 4.1 Intentionally Omitted .........................................................................21 4.2 Intentionally Omitted .........................................................................21 4.3 EBIDAT ........................................................................................21 4.4 Fixed Charge Coverage .........................................................................21 4.5 Total Indebtedness to Operating Cash Flow Ratio................................................21 4.6 Financial Statements and Other Reports ........................................................21 4.7 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement ...............................................................25 SECTION 5 REPRESENTATIONS AND WARRANTIES ........................................25 5.1 Disclosure ....................................................................................25 5.2 No Material Adverse Effect ....................................................................25 5.3 No Default ....................................................................................26 5.4 Organization,Powers,Capitalization and Good Standing...........................................26 5.5 Financial Statements ..........................................................................27 5.6 Intellectual Property .........................................................................27 5.7 Investigations, Audits, Etc. ..................................................................27 5.8 Employee Matters ..............................................................................27 5.9 Solvency ......................................................................................28 SECTION 6 DEFAULT, RIGHTS AND REMEDIES..........................................28 6.1 Event of Default ..............................................................................28 6.2 Suspension of Commitments .....................................................................32 6.3 Acceleration ..................................................................................33 6.4 Performance by Agent ..........................................................................33 SECTION 7 CONDITIONS TO LOANS ..............................................33 7.1 Conditions to Initial Loans ...................................................................33 7.2 Conditions to All Loans .......................................................................34 SECTION 8 ASSIGNMENT AND PARTICIPATION .........................................34 8.1 Assignment and Participation ..................................................................34 SECTION 9 MISCELLANEOUS .................................................35 9.1 Indemnities ...................................................................................35 9.2 Amendments and Waivers ........................................................................35 9.3 Notices .......................................................................................35 9.4 Failure of Indulgence Not Waiver; Remedies Cumulative ....................................................................................36 9.5 Marshalling, Payments Set Aside ...............................................................36 9.6 Severability ..................................................................................37 9.7 Headings ......................................................................................37 9.8 Applicable Law ................................................................................37 9.9 Successors and Assigns ........................................................................37 9.10 No Fiduciary Relationship .....................................................................37 9.11 Construction ..................................................................................37 9.12 Confidentiality ...............................................................................37 9.13 Waiver of Jury Trial ..........................................................................38 9.14 Survival of Warranties and Certain Agreements .................................................38 9.15 Entire Agreement ..............................................................................39 SECTION 10 DEFINITIONS ..................................................39 10.1 Certain Defined Terms .........................................................................39 10.2 Other Definitional Provisions .................................................................44
INDEX OF DEFINED TERMS Defined Term Defined in Section ------------ ------------------ Additional Seller Notes [section]10.1 Additional Senior Term Loan [section]3.1 Affiliate [section]10.1 Agreement [section]10.1 Asset Disposition [section]10.1 Bankruptcy Code [section]10.1 Base Rate [section]1.2(A)(1) Base Rate Loans [section]1.2(A)(1) Borrower Preamble Borrowing Base [section]1.1(B) Borrowing Base Certificate [section]1.1(B) Business Day [section]10.1 Closing Date [section]10.1 Collateral [section]10.1 Contingent Obligation [section]3.4 Default [section]10.1 Event of Default [section]6.1 Expiry Date [section]10.1 Funding Date [section]7.2 GAAP [section]10.1 Heller Preamble Holdings [section]10.1 Indebtedness [section]10.1 Interest Period [section]1.2(A)(2) Lender Guarantee [section]1.1(C) Liberty [section]10.1 LIBOR Rate [section]1.2(A)(2) LIBOR Rate Breakage Fee [section]1.3(C) LIBOR Rate Loans [section]1.2(A)(2) Lien [section]10.1 Loan(s) [section]1.1(A) Loan Documents [section]10.1 Loan Party [section]10.1 Material Adverse Effect [section]10.1 Maximum Revolving Loan Balance [section]1.1(B) Note(s) [section]10.1 Obligations [section]10.1 Permitted Encumbrances [section]3.2(A) Person [section]10.1 Refinanced Subordinated Indebtedness [section]3.1(G) Related Transactions [section]10.1 Related Transactions Documents [section]10.1 Responsible Officer [section]10.1 Restricted Junior Payments [section]3.5 Revolving Loan Commitment [section]1.1(A) Revolving Loans [section]1.1(A) SBA [section]10.1 Security Documents [section]10.1 Seller Notes [section]10.1 Senior Term Loan [section]10.1 Senior Term Loan Agreement [section]10.1 Senior Term Loan Documents [section]10.1 Senior Term Loan Notes [section]10.1 Subordinated Indebtedness [section]10.1 Subordinated Loan Documents [section]10.1 Subsidiary [section]10.1 CREDIT AGREEMENT ---------------- This CREDIT AGREEMENT is dated as of April 30, 1996 and entered into by and between ARCADE, INC., a Tennessee corporation ("BORROWER"), with its principal place of business at 1815 E. Main Street, Chattanooga, Tennessee 37404 and HELLER FINANCIAL, INC., a Delaware corporation ("HELLER"), with offices at 500 West Monroe Street, Chicago, Illinois 60661. R E C I T A L S: WHEREAS, Borrower and its Subsidiaries (as hereinafter defined in Section 10) desire that Heller extend a certain revolving credit facility to Borrower to fund the repayment of certain indebtedness of Borrower, to provide working capital financing for Borrower and to provide funds for other general corporate purposes of Borrower including the making of Investments (as hereinafter defined in subsection 3.3) permitted hereunder; and WHEREAS, Borrower desires to secure all of its Obligations (as hereinafter defined in Section 10) under the Loan Documents (as hereinafter defined in Section 10) by granting to Heller a security interest in and lien upon certain of its personal and real property. NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Borrower and Heller agree as follows: SECTION 1 AMOUNTS AND TERMS OF LOANS 1.1 Loans. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of Borrower contained herein: (A) Revolving Loan. Heller agrees to lend from the Closing Date to the Expiry Date amounts up to a maximum of $15,000,000 (the "REVOLVING LOAN COMMITMENT" or "COMMITMENT"). Advances or amounts outstanding under the Revolving Loan Commitment will be called "REVOLVING LOANS" or "LOANS". Revolving Loans may be repaid and reborrowed. The "MAXIMUM REVOLVING LOAN BALANCE" will be the lowest of: (1) the "BORROWING BASE" (as calculated on Exhibit 4.6(F), the "BORROWING BASE CERTIFICATE"); (2) the Revolving Loan Commitment less any outstanding Lender Guarantees; (3) the sum of the then outstanding principal balances of the Senior Term Loan, Additional Senior Term Loan, Subordinated Indebtedness held by SBA and, subject to the provisions of subsection 3.1(G), Refinanced Subordinated Indebtedness, less any outstanding Lender Guarantees; and (4) sixty-six and two thirds percent (66-2/3%) of the sum of (i) the then outstanding principal balances of the Senior Term Loan, Additional Senior Term Loan, Subordinated Indebtedness held by SBA and, subject to the provisions of subsection 3.1(G), Refinanced Subordinated Indebtedness, plus (ii) $12,890,000, representing an amount equal to the original cash equity investment, directly or indirectly, by VILARC Capital, SBA and Liberty in Borrower, plus (iii) additional cash equity invested by Vilarc Capital, SBA, Liberty or any other Person in Borrower, directly or indirectly, after the date hereof, less (iv) any outstanding Lender Guarantees. If at any time the Revolving Loans exceed the Maximum Revolving Loan Balance, Revolving Loans must be repaid immediately in an amount sufficient to eliminate any excess. Heller may make Revolving Loans bearing interest with reference to the Base Rate in any amount with one (1) Business Day prior notice required for amounts greater than $5,000,000. For amounts less than $5,000,000, telephonic notice must be provided by noon CST on the date of the borrowing. All LIBOR Rate Loans require two (2) Business Days' notice. All Loans requested telephonically must be confirmed in writing within one Business Day. (B) Lender Guarantees and Letters of Credit. At Borrower's request, Heller will provide Lender Guarantees up to an aggregate amount of $1,000,000 outstanding at any time. "LENDER GUARANTEE" means a letter of credit issued by Heller or a guarantee by Heller to induce a bank, reasonably acceptable to Heller, to issue a letter of credit, or any payment made by Heller pursuant to any letter of credit subject to a Lender Guarantee which has not been reimbursed by Borrower or charged as a Revolving Loan. In determining the amount of outstanding Lender Guarantees, the maximum amount of any Heller guarantee to a bank issuing letters of credit on behalf of Borrower will be considered outstanding unless such bank reports daily activity to Heller showing actual outstanding letters of credit subject to Heller's guarantee. Lender Guarantees will only be provided for letters of credit which expire within one (1) year after date of issuance and at least thirty (30) days prior to the date set forth in clause (c) of the definition of the term "EXPIRY DATE." Borrower shall give Heller five (5) Business Days prior written notice for a letter of credit. Five (5) Business Days prior written notice is required for the issuance of a letter of credit by a bank, provided that such five (5) Business Day period may not commence until Heller and the bank that will be issuing such letter of credit have entered into a Service and Letter of Credit Guaranty Agreement or any similar agreement, in form and substance satisfactory to Heller, which agreement will govern Heller's guaranty of all letters of credit to be issued by such bank for the benefit of Borrower. Borrower is irrevocably and immediately responsible to Heller for reimbursement of any amount paid by Heller under any Lender Guarantee except to the extent such payments were made as a result of Heller's gross negligence or willful misconduct. Subject to the provisions of the last paragraph of subsection 1.4, this reimbursement shall occur by the making of a Revolving Loan without prior notice to Borrower. The Borrower shall (i) maintain an operating account at the issuing bank or (ii) be directly charged by the issuing bank for settlement of letters of credit and any related fees. 1.2 Interest and Related Fees. (A) Interest. From the date the Loans are made and the other Obligations become due and payable in accordance with the terms of this Agreement and the other Loan Documents, the Obligations shall bear interest at the sum of the Base Rate plus one percent (1.0%) per annum and/or, with respect to any LIBOR Rate Loan, the sum of the LIBOR Rate plus two and three quarters percent (2.75%) per annum. "BASE RATE" means a variable rate of interest per annum equal to the rate of interest from time to time published by the Board of Governors of the Federal Reserve System in Federal Reserve statistical release H.15 (519) entitled "SELECTED INTEREST RATES" as the Bank prime loan rate. Base Rate also includes rates published in any successor publications of the Federal Reserve System reporting the Bank prime loan rate or its equivalent. The statistical release generally sets forth a Bank prime loan rate for each business day. The applicable Bank prime loan rate for any date not set forth shall be the rate set forth for the last preceding date. In the event the Board of Governors of the Federal Reserve System ceases to publish a Bank Prime loan rate or equivalent, the term "BASE RATE" shall mean a variable rate of interest per annum equal to the highest of the "PRIME RATE," "REFERENCE RATE," "BASE RATE" or other similar rate as determined by Heller announced from time to time by any of Bankers Trust Company, The Chase Manhattan Bank, National Association and Chemical Bank (with the understanding that any such rate may merely be a reference rate and may not necessarily represent the lowest or best rate actually charged to any customer by such bank). "BASE RATE LOANS" means Loans bearing interest at rates determined by reference to the Base Rate. "LIBOR RATE" means, for each Interest Period, a rate equal to: (a) the rate of interest reasonably determined by Heller at which deposits in U.S. dollars for the relevant Interest Period are offered based on information presented on the Reuters Screen LIBO Page as of 11:00 a.m. (London time) on the day which is two (2) Business Days prior to the first day of such Interest Period, provided that if at least two such offered rates appear on the Reuters Screen LIBO Page in respect of such Interest Period, the arithmetic mean of all such rates will be the rate used, provided, further, that if fewer than two offered rates appear or if Reuters ceases to provide LIBOR quotations, such rate shall be the rate of interest at which deposits in U.S. dollars are offered for the relevant Interest Period by any of Bankers Trust Company, The Chase Manhattan Bank, National Association or Chemical Bank to prime banks in the London interbank market, divided by (b) a number equal to 1.0 minus the aggregate (but without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on the day which is two (2) Business Days prior to the beginning of such Interest Period (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other governmental authority having jurisdiction with respect thereto, as now and from time to time in effect) for Eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) which are required to be maintained by a member bank of the Federal Reserve System; such rate to be rounded upward to the next whole multiple of one-sixteenth of one percent (.0625%). "LIBOR RATE LOANS" means Loans bearing interest at rates determined by reference to the LIBOR Rate. LIBOR Rate Loans may be obtained for a one, two, three, or six month period (each being an "Interest Period") provided that: (a) the interest is calculated from the date the Loan is made, (b) if the Interest Period expires on a day that is not a Business Day, then it will expire on the next Business Day, (c) no Interest Period shall extend beyond the date set forth in clause (c) of the definition of the term "EXPIRY DATE." If the introduction of or the interpretation of any law, rule, or regulation would increase the reserve requirement and as a result there would be an increase in the cost of making or maintaining a LIBOR Rate Loan, then Heller shall submit a certificate demonstrating the impact of the increased cost and require payment thereof within ten (10) days from the Borrower. There are no limitations on the number of times such certificate may be submitted. (B) Commitment Fee. From the Closing Date, Borrower shall pay a fee in an amount equal to (1) the Revolving Loan Commitment less the average daily balance of the Revolving Loan less the average daily amount of outstanding Lender Guarantees during the preceding month, multiplied by (2) one half of one percent (0.5%) per annum. Such fee is payable monthly in arrears on the first day of the subsequent month. (C) Lender Guarantee Fee. From the Closing Date, Borrower shall pay a fee for each Lender Guarantee from the date of issuance of the Lender Guarantee to the date of termination thereof. The fee is equal to the average daily outstanding amount of the Lender Guarantee multiplied by two and three quarters percent (2.75%) per annum, such fees payable monthly in arrears on the first day of each subsequent month. Borrower shall also reimburse Heller for any and all fees and expenses paid to the issuer of any letter of credit that are in any way related to a Lender Guarantee. (D) Computation of Interest and Related Fees. Interest on all Loans and any other Obligations and the related fees set forth in this subsection 1.2 shall be calculated daily on the basis of a three hundred sixty (360) day year for the actual number of days elapsed in the period during which it accrues. The date of funding a Base Rate Loan, the first day of an Interest Period with respect to a LIBOR Rate Loan and the date of conversion of a LIBOR Rate Loan to a Base Rate Loan shall be included in the calculation. The date of payment of a Base Rate Loan, the last day of an Interest Period with respect to a LIBOR Rate Loan and the date of conversion of a Base Rate Loan to a LIBOR Rate Loan shall be excluded in the calculation. Interest on all Base Rate Loans is payable in arrears on the first day of each month and on the Expiry Date, whether by acceleration or otherwise. Interest on LIBOR Rate Loans shall be payable on the last day of the applicable Interest Period, unless the period is greater than ninety (90) days, in which case interest will be payable on the ninetieth (90th) day of the Interest Period and the last day of the Interest Period. In addition, interest on LIBOR Rate Loans is due on the Expiry Date, whether by acceleration or otherwise. (E) Default Rate of Interest. At the election of Heller, after the occurrence of an Event of Default and for so long as it continues, the Loans and other Obligations which are then due and payable shall bear interest at a rate that is one percent (1%) in excess of the rates otherwise payable under this Agreement. Furthermore, during any period in which any Event of Default exists, and is continuing, as the then current Interest Periods for LIBOR Rate Loans expire such Loans shall be converted into Base Rate Loans and the LIBOR Rate election will not be available to the Borrower until all Events of Default are cured or waived. (F) Excess Interest. Under no circumstances will the rate of interest chargeable be in excess of the maximum amount permitted by law. If excess interest is charged and paid in error, then the excess amount will be promptly refunded. (G) LIBOR Rate Election. All Loans made on the Closing Date shall be Base Rate Loans and remain so for ten (10) Business Days. Thereafter, Borrower may request that Revolving Loans to be made be LIBOR Rate Loans and that portions of outstanding Loans be converted to LIBOR Rate Loans. Any such request, which will be made by submitting a LIBOR Rate Loan request, in the form of Exhibit 1.2(G), to Heller, shall pertain to Loans in an aggregate minimum amount of $500,000 and integral multiples of $10,000 in excess thereof. Once given, a LIBOR Rate Loan request shall be irrevocable and Borrower shall be bound thereby. Upon the expiration of an Interest Period, in the absence of a new LIBOR Rate Loan request submitted to Heller not less than two (2) Business Days prior to the end of such Interest Period, the LIBOR Rate Loan then maturing shall be automatically converted to a Base Rate Loan. There may be no more than eight (8) LIBOR Rate Loans outstanding at any one time. 1.3 Other Fees and Expenses. (A) LIBOR Breakage Fee. Upon any payment or prepayment of a LIBOR Rate Loan on any day that is not the last day of the Interest Period applicable to that Loan (regardless of the source of such prepayment and whether voluntary or otherwise), or, if for any reason (other than a default by Heller) a borrowing of a LIBOR Rate Loan does not occur on a date specified in a request for an advance of a LIBOR Rate Loan or in a LIBOR Rate Loan Request, Borrower shall pay Heller, upon Heller's written request therefor (which request shall set forth in reasonable detail the computation of the amount requested) an amount equal to the reasonable losses (including, without limitation, any such loss sustained by Heller in connection with the reemployment of funds) that Heller sustains as a result of such payment, prepayment or failure to borrow ("LIBOR RATE BREAKAGE FEE"). (B) Expenses and Attorneys Fees. Borrower agrees to promptly pay all reasonable fees, costs and expenses (including those of attorneys) incurred by Heller in connection with the examination, review, due diligence investigation, documentation, negotiation and closing of the transactions contemplated herein and in connection with any amendments, modifications, and waivers with respect to the Loan Documents. Borrower agrees to pay all reasonable fees, costs and expenses incurred by Heller in connection with any action to enforce any Loan Document or to collect any payments due from Borrower. The reasonable fees, costs and expenses of attorneys may include allocated costs of internal counsel unless objected to by Borrower, in which event any such work proposed to be performed by internal counsel may be performed by external counsel at Borrower's expense. All fees, costs and expenses for which Borrower is responsible under this subsection 1.3(B) shall be deemed part of the Obligations when incurred, payable within thirty (30) days after demand therefor if no Event of Default exists or, if an Event of Default exists, immediately upon demand, and shall be secured by the Collateral. (C) Facility Fee. Borrower shall pay to Heller a nonrefundable facilities fee of $37,500 per annum, in advance, with the first payment due on the Closing Date. 1.4 Payments. All payments by Borrower of the Obligations shall be made in same day funds and delivered to Heller by wire transfer to the following account or such other place as Heller may from time to time designate. ABA No. 0710-0001-3 Account Number 55-00540 The First National Bank of Chicago One First National Plaza Chicago, IL 60670 Reference: Heller Corporate Finance Group for the benefit of ARCADE Borrower shall receive credit for such funds if received by 1:00 p.m. CST on such day. In the absence of timely notice and receipt, such funds shall be deemed to have been paid on the next Business Day. Whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day, the payment may be made on the next succeeding Business Day and such extension of time shall be included in the computation of the amount of interest and fees due hereunder. Borrower hereby authorizes Heller to make a Revolving Loan for the payment of interest, facility fees pursuant to subsection 1.3(C), commitment fees and Lender Guarantee fees payable pursuant to subsections 1.2(B) and 1.2(C), LIBOR Rate Breakage Fees and Lender Guarantee payments. Heller agrees to use its best efforts to provide to Borrower notice prior to so making a Revolving Loan; provided, however, the failure to provide such notice shall not affect or impair the authorization granted pursuant to the preceding sentence. Prior to an Event of Default, other fees, costs and expenses (including those of attorneys) reimbursable to Heller pursuant to subsection 1.3(B) or elsewhere in any Loan Document may be debited to the Revolving Loan account after thirty (30) days notice to Borrower. During the continuance of an Event of Default, no notice is required. 1.5 Term of the Agreement. The Agreement shall be effective until the earlier of (a) the date on which the Loans are paid in full and all other Obligations (other than contingent Obligations not then due and payable) have been satisfied and Heller has no further obligation to lend hereunder and (b) the Expiry Date. Upon the termination of the effectiveness of this Agreement, any unpaid Obligations shall be immediately due and payable without notice or demand by Heller. Notwithstanding any type of termination, until all Obligations (other than contingent Obligations not then due and payable) have been fully paid and satisfied, Heller shall be entitled to retain the security interests in all Collateral granted under the Security Documents. 1.6 Borrower's Loan Account. Heller will maintain loan account records for (a) all Loans, interest charges and payments thereof, (b) all Lender Guarantees, (c) the charging and payment of all fees, costs and expenses and (d) all other debits and credits pursuant to this Agreement. The balance in the loan accounts shall be presumptive evidence of the amounts due and owing to Heller absent manifest error, provided that any failure to so record shall not limit or affect the Borrower's obligation to pay. Within five (5) days of the first of each month, Heller shall provide a statement for each loan account setting forth the principal of each account and interest due thereon. Borrower must deliver a written objection within thirty (30) days after the end of each of its fiscal years or the statements delivered with respect to each month during each such fiscal year will be presumed as binding evidence of the obligation absent manifest error. After the occurrence and during the continuance of an Event of Default, Borrower irrevocably waives the right to direct the application of any and all payments and Borrower hereby irrevocably agrees that Heller shall have the continuing exclusive right to apply and reapply payments in any manner it deems appropriate. SECTION 2 AFFIRMATIVE COVENANTS Borrower covenants and agrees that so long as the Revolving Loan Commitment is in effect and until payment in full of all Obligations (excluding contingent Obligations not then due and payable) and termination of all Lender Guarantees, unless Heller shall otherwise give its prior written consent, Borrower shall perform and comply with, shall cause each of its Subsidiaries to perform and comply with, and shall use its best efforts to cause Holdings to perform and comply with, all covenants in this Section 2 applicable to such Person. 2.1 Compliance With Laws. (A) Borrower will comply with and will cause each of its Subsidiaries to comply with (i) the requirements of all applicable laws, rules, regulations and orders of any governmental authority (including , without limitation, laws, rules regulations and orders relating to taxes, employer and employee contributions, securities, employee retirement and welfare benefits, environmental protection matters and employee health and safety) as now in effect and which may be imposed in the future in all jurisdictions in which Borrower or its Subsidiaries are now doing business or may hereafter be doing business, and (ii) the obligations, covenants and conditions contained in any Contractual Obligations of Borrower and the Loan Parties, other than (1) those laws, rules, regulations, orders and Contractual Obligations the noncompliance with which would not have, either individually or in the aggregate, a Material Adverse Effect; or (2) those laws, rules, regulations, orders and Contractual obligations being contested in good faith by appropriate proceedings diligently prosecuted provided such contest would not have, either individually or in the aggregate, a Material Adverse Effect; "CONTRACTUAL OBLIGATIONS" as applied to any Person, means any indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject including, without limitation, the Related Transaction Documents. (B) Borrower will maintain or obtain and will cause each of its Subsidiaries to maintain or obtain, all licenses and permits now held or hereafter required by Borrower and its Subsidiaries, if the loss, suspension, revocation or failure to obtain or renew, would have a Material Adverse Effect or unless being contested in good faith by appropriate proceedings diligently prosecuted, provided such contest would not have, either individually or in the aggregate, a Material Adverse Effect. This subsection 2.1 shall not preclude the Borrower or any Subsidiary from contesting any taxes or other payments, if they are being diligently contested in good faith and if appropriate expense provisions have been recorded in conformity with GAAP. (C) Borrower represents and warrants that as of the date hereof, it (i) is in compliance and each of its Subsidiaries is in compliance with the requirements of all applicable laws, rules, regulations and orders of any governmental authority as now in effect, and Contractual Obligations, the non-compliance with which would have, either individually or in the aggregate, a Material Adverse Effect, and (ii) maintains and each of its Subsidiaries maintains, all licenses and permits required to be maintained by Borrower and its Subsidiaries except (x) where the failure to maintain would not have a Material Adverse Effect or (y) where being contested in good faith by appropriate proceeding diligently prosecuted, provided such contest does not have, either individually or in the aggregate, a Material Adverse Effect. 2.2 Maintenance of Properties; Insurance. (A) Borrower will maintain or cause to be maintained in good repair, working order and condition (ordinary wear and tear excepted) all material properties used in the business of Borrower and its Subsidiaries and will make or cause to be made all appropriate repairs, renewals and replacements thereof. (B) Borrower will maintain or cause to be maintained, with financially sound and reputable insurers, public liability, property damage and, to the extent available on commercially reasonable terms, business interruption insurance with respect to its business and properties and the business and properties of its Subsidiaries against loss or damage of the kinds customarily carried or maintained by corporations of established reputation engaged in similar businesses and located in similar locations, and taking into account the outstanding Indebtedness of Borrower and its Subsidiaries, and will deliver evidence thereof to Heller. (C) Borrower represents and warrants that it and each of its Subsidiaries currently maintains all material properties as set forth above and, maintains all insurance described above. 2.3 Inspection; Lender Meeting. Upon reasonable notice to the Chairman of Borrower and at Heller's expense (unless an Event of Default exists, in which event the same shall be at Borrower's expense), Borrower shall with reasonable frequency (and in any event on no less than one occasion per calendar year) permit a reasonable number of authorized representatives of Heller to examine and make copies of and abstracts from the records and books of account of, and to visit and inspect the properties of, Borrower and its Subsidiaries, and to discuss the affairs, finances and accounts of Borrower and its Subsidiaries with a Responsible Officer and independent accountants of Borrower and its Subsidiaries; provided that if an Event of Default exists, Borrower shall permit Heller and its authorized representatives to examine and make copies of and abstracts from the records and books of account of, to visit and inspect the properties of, and to discuss the affairs, finances and accounts of Borrower and its Subsidiaries with a Responsible Officer and independent accountants of Borrower or its Subsidiaries without observing the procedures set forth above. Heller's delivery of an executed copy of this Agreement to Borrower's independent public accounts (to which Borrower hereby consents) shall constitute Borrower's consent to its independent public accountants to engage in such discussions. 2.4 Corporate Existence, Etc. Except as otherwise permitted by subsection 3.6, Borrower will, and will cause each of its Subsidiaries to, at all times preserve and keep in full force and effect its corporate existence and all rights and franchises material to its business. 2.5 Further Assurances. (A) Borrower shall and shall cause each of its Subsidiaries other than Scent Seal, Inc. to, from time to time, execute such guaranties, financing statements, documents, security agreements and pledge agreements as Heller at any time may reasonably request to evidence, perfect or otherwise implement the security for repayment of the Obligations provided for in the Loan Documents. (B) At Heller's request, Borrower shall cause any Subsidiaries (other than Scent Seal, Inc.) of Borrower promptly to guaranty the Obligations and to grant to Heller, a security interest in the real, personal and mixed property of such Subsidiary to secure the Obligations. The documentation for such guaranty or security shall be substantially similar to the Loan Documents executed concurrently herewith with such modifications as are reasonably requested by Heller. SECTION 3 NEGATIVE COVENANTS Borrower covenants and agrees that so long as the Revolving Loan Commitment is in effect and until payment in full of all Obligations (excluding contingent Obligations not then due and payable) and termination of all Lender Guarantees, unless Heller shall otherwise give its prior written consent, Borrower shall comply with, shall cause each of its Subsidiaries to comply with and shall use its best efforts to cause Holdings to comply with, all covenants in this Section 3 applicable to such Person. 3.1 Indebtedness. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to create, incur, assume, guaranty, or otherwise become or remain directly or indirectly liable with respect to any Indebtedness except: (A) the Obligations; (B) intercompany Indebtedness among Borrower and its Subsidiaries; provided that if Borrower is the obligor, the obligations of Borrower shall be subordinated in right of payment to the Obligations from and after such time as any portion of the Obligations shall become due and payable (whether at stated maturity, by acceleration or otherwise); (C) Subordinated Indebtedness evidenced by the Subordinated Loan Documents; (D) Indebtedness secured by purchase money Liens, Indebtedness incurred with respect to capital leases and Indebtedness evidenced by the Additional Seller Notes, not to exceed $7,500,000 in the aggregate; (E) Indebtedness evidenced by the Seller Notes; (F) Term Indebtedness evidenced by the Senior Term Note plus additional term Indebtedness (the "Additional Senior Term Loan") not to exceed $5,000,000 provided (1) at the time of incurrence thereof, no Default or Event of Default shall exist and be continuing or shall arise from the incurrence thereof; and (2) the Additional Senior Term Loan is (a) provided by SBA; (b) on substantially the same terms and conditions as the "Conditional Senior Term Loan" (as defined in the Senior Term Loan Agreement); and (c) is subject to the terms and conditions of the Intercreditor Agreement. Borrower shall not be permitted to incur any revolving loan Indebtedness pursuant to the Senior Term Loan Documents; and (G) Subordinated Indebtedness incurred to refinance Subordinated Indebtedness held by SBA provided all of the following conditions are satisfied ("Refinanced Subordinated Indebtedness"): (i) The Subordinated Indebtedness is on terms and conditions reasonably acceptable to Heller; (ii) the Person providing such Subordinated Indebtedness is reasonably acceptable to Heller; (iii) the Subordinated Indebtedness is subordinated to the Obligations, the Senior Term Loan and Additional Senior Term Loan on terms and conditions acceptable to Heller; (iv) Heller and SBA shall have entered into amendments to the Intercreditor Agreement on terms and conditions acceptable to Heller including, without limitation, amendments to or elimination of Heller standstill provisions and amendments to payment blockage provisions; and (v) at the time of such refinancing, no Default or Event of Default shall exist and be continuing or arise as a result thereof. 3.2 Liens and Related Matters. (A) No Liens. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to create, incur, assume or permit to exist any Lien on or with respect to any property or asset (including any document or instrument with respect to goods or accounts receivable) of Borrower or any of its Subsidiaries, whether now owned or hereafter acquired, or any income or profits therefrom, except Permitted Encumbrances. "PERMITTED ENCUMBRANCES" means the following: (1) Liens for taxes, assessments or other governmental charges not yet due and payable or which are being contested in good faith by appropriate proceedings diligently prosecuted and if appropriate expense provisions have been recorded in conformity with GAAP; (2) statutory Liens of landlords, carriers, warehousemen, mechanics, materialmen and other similar liens imposed by law, which are incurred in the ordinary course of business for sums not more than thirty (30) days delinquent or which are being contested in good faith; provided that a reserve or other appropriate provision shall have been made therefor and the aggregate amount of such Liens is less than $1,000,000; (3) Liens (other than any Lien imposed by the Employee Retirement Income Security Act of 1974 or any rule or regulation promulgated thereunder) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety, stay, customs and appeal bonds, bids, leases, government contracts, trade contracts, performance and return of money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (4) deposits, in an aggregate amount not to exceed $500,000, made in the ordinary course of business to secure liability to insurance carriers; (5) Liens for purchase money obligations; provided that: (a) the Indebtedness secured by any such Lien is permitted under subsection 3.1; and (b) any such Lien encumbers only the asset so purchased; (6) any attachment or judgment Lien not constituting an Event of Default under subsection 6.1(I); (7) leases or subleases granted to others not interfering in any material respect with the business of Borrower or any of its Subsidiaries; (8) easements, rights of way, restrictions, and other similar charges or encumbrances not interfering in any material respect with the ordinary conduct of the business of Borrower or any of its Subsidiaries; (9) any interest or title of a lessor or sublessor under any lease; (10) Liens arising from filing financing statements regarding leases not prohibited by this Agreement; (11) Liens in favor of Heller; (12) subject to the terms and provisions of the Intercreditor Agreement, Liens securing the Senior Term Loan, Additional Senior Term Loan and Subordinated Notes, which Liens are set forth on Schedule 3.2(A)(12) hereto; (13) Liens securing the Seller Notes and solely encumbering the trademark "Scent Seal", all right, title and interest of Borrower in the License Agreement dated June 9, 1995 between Borrower and Thermedics, Inc., all other license or use agreements of Borrower in connection with the trademark "Scent Seal" and all proceeds of the foregoing; (14) Liens granted to the issuer/seller of reverse repurchase agreements provided such Liens encumber only the securities subject to such reverse repurchase agreement; and (15) Liens in favor of NationsBanc Leasing Corporation created pursuant to that certain Security Agreement dated September 21, 1995 encumbering the equipment described therein. (B) No Negative Pledges. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to enter into or assume any agreement (other than the Loan Documents, Senior Term Loan Documents and Subordinated Loan Documents) prohibiting the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired. (C) No Restrictions on Subsidiary Distributions to Borrower. Except as provided herein, in the Senior Term Loan Documents and in the Subordinated Loan Documents, Borrower will not and will not permit any of its Subsidiaries directly or indirectly to create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any such Subsidiary to: (1) pay dividends or make any other distribution on any of such Subsidiary's capital stock owned by Borrower or any Subsidiary of Borrower; (2) pay any Indebtedness owed to Borrower or any other Subsidiary; (3) make loans or advances to Borrower or any other Subsidiary; or (4) transfer any of its property or assets to Borrower or any other Subsidiary. 3.3 Investments; Joint Ventures. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to make or own any Investment in any Person except: (A) Borrower and its Subsidiaries may make and own Investments in Cash Equivalents; (B) Borrower and its Subsidiaries may make intercompany loans to the extent permitted under subsection 3.1; (C) Borrower and its Subsidiaries may make loans and advances to employees for moving, entertainment, travel and other similar expenses in the ordinary course of business not to exceed $500,000 in the aggregate at any time outstanding; and (D) Borrower and its Subsidiaries may make acquisitions (including acquisitions of other businesses or business units or product lines and patents, licenses or other individual assets of another Person) and may make Investments in joint ventures; provided (1) that at the time of such Investment, no Default or Event of Default shall exist and be continuing or arise as a result thereof (including, without limitation, subsection 3.10) and (2) after giving effect to such Investment, outstanding Revolving Loans do not exceed Maximum Revolving Loan Balance. "INVESTMENT" means amounts paid or agreed to be paid by Borrower or any of its Subsidiaries for stock, securities, liabilities or assets of, or loaned, advanced or contributed to, other Persons. The term Investment shall not include any increase or decrease in the assets of any Person derived from the earnings or losses thereof or any assets purchased or licensed in the ordinary course of business, but shall include the acquisition of a company, business or product line by Borrower or any of its Subsidiaries. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment. "CASH EQUIVALENTS" means: (i) direct obligations of the United States of America or any state thereof ; (ii) prime commercial paper; (iii) certificates of deposit issued by any commercial bank having capital and surplus in excess of $100,000,000; (iv) money market funds of nationally recognized institutions investing solely in obligations described in clauses (i), (ii) and (iii) above; and (v) overnight reverse repurchase agreements from any commercial bank having capital and surplus in excess of $100,000,000. 3.4 Contingent Obligations. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to create or become or be liable with respect to any Contingent Obligation except those: (A) resulting from endorsement of negotiable instruments for collection in the ordinary course of business; (B) arising under the Security Documents; (C) existing on the Closing Date and described in Schedule 3.4 annexed hereto; (D) arising under indemnity agreements to title insurers to cause such title insurers to issue to Heller mortgagee title insurance policies; (E) arising with respect to customary indemnification and purchase price adjustment obligations incurred in connection with Asset Dispositions; (F) incurred in the ordinary course of business with respect to surety and appeal bonds, return-of-money bonds and other similar obligations not exceeding at any time outstanding $100,000 in aggregate liability; (G) incurred in the ordinary course of business with respect to performance bonds not exceeding at any time outstanding $3,000,000 in aggregate liability; (H) incurred with respect to Indebtedness permitted by subsection 3.1; (I) foreign exchange contracts and currency swap agreements, the notional amount of which does not exceed $10,000,000 (U.S. Dollars) in the aggregate at any time; and (J) not permitted by clauses (A) through (I) above, so long as any such Contingent Obligations, in the aggregate at any time outstanding, do not exceed $750,000. "CONTINGENT OBLIGATION", as applied to any Person, means any direct or indirect liability, contingent or otherwise, of that Person: (i) with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto; (ii) with respect to any letter of credit issued for the account of that Person (other than any letter of credit with respect to which a Lender Guarantee has been issued by Heller) or as to which that Person is otherwise liable for reimbursement of drawings; or (iii) under any foreign exchange contract, currency swap agreement, interest rate swap agreement or other similar agreement or arrangement designed to alter the risks of that Person arising from fluctuations in currency values or interest rates. Contingent Obligations shall include (a) the direct or indirect guaranty, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of another, (b) the obligation to make take-or-pay or similar payments if required regardless of nonperformance by any other party or parties to an agreement, and (c) any liability of such Person for the obligations of another through any agreement to purchase, repurchase or otherwise acquire such obligation or any property constituting security therefor, to provide funds for the payment or discharge of such obligation or to maintain the solvency, financial condition or any balance sheet item or level of income of another. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported or, if not a fixed and determined amount, the maximum amount so guaranteed. 3.5 Restricted Junior Payments. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to declare, order, pay, make or set apart any sum for any Restricted Junior Payment except: (A) Borrower may make payments and distributions to Holdings to permit Holdings to pay federal and state income taxes then due and owing, franchise taxes and other similar licensing expenses incurred in the ordinary course of business; provided, however, Borrower's contribution to taxes as a result of the filing of a consolidated return by Holdings shall not be greater, nor the receipt of tax benefits less, then they would have been had Borrower not filed a consolidated return with Holdings; (B) Subsidiaries of Borrower may make Restricted Junior Payments to Borrower; (C) Borrower may make required payments of principal and interest with respect to the Senior Term Loan, Additional Senior Term Loan and Subordinated Indebtedness held by SBA, as required in accordance with the terms thereof but only to the extent permitted in the Intercreditor Agreement; provided, however, Borrower may make optional prepayments with respect to the Senior Term Loan, Additional Senior Term Loan and Subordinated Indebtedness held by SBA if (1) at the time of such prepayment, required payments of principal and interest are permitted to be paid pursuant to the Intercreditor Agreement and (2) after giving effect to such prepayment, the Maximum Revolving Loan Balance exceeds the sum of outstanding principal balance of the Revolving Loans plus outstanding Lender Guarantees, by not less than $5,000,000; provided, further, however, Borrower may refinance the Subordinated Indebtedness held by SBA with Refinanced Subordinated Indebtedness in accordance with subsection 3.1(G); (D) Borrower may make required payments of principal and interest with respect to the Indebtedness evidenced by the Seller Notes provided at the time of such payment and after giving effect thereto, no Event of Default under subsection 6.1(A) or 6.1(C) (as it relates to a failure to perform or comply with subsections 4.3, 4.4 or 4.5 hereof) exists or would arise as a result thereof; (E) Borrower may make dividend payments to Holdings solely to permit Holdings to make dividend payments on account of preferred stock of Holdings held by SBA provided at the time of such payment and after giving effect thereto, no Default or Event of Default under subsection 6.1(A) or 6.1(C) (as it relates to a failure to perform or comply with subsections 4.3, 4.4 or 4.5 hereof) exists or would arise as a result thereof; (F) Borrower may make payments and distributions to Holdings, not to exceed $100,000 in the aggregate in any fiscal year, to permit Holdings to pay board of director fees and expenses and other out-of-pocket expenses; (G) Borrower and its Subsidiaries may make required payments with respect to the Additional Seller Notes provided at the time of such payment and after giving effect thereto, no Default or Event of Default exists or would arise as a result thereof; and (H) Borrower may make required payments of interest with respect to the Refinanced Subordinated Indebtedness as required in accordance with the terms thereof but only to the extent permitted in the subordination agreement entered into with respect thereto. "RESTRICTED JUNIOR PAYMENT" means: (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock of Borrower or any of its Subsidiaries now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to the holders of that class; (ii) any redemption, conversion, exchange, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of stock of Borrower or any of its Subsidiaries now or hereafter outstanding; (iii) any payment or prepayment of principal of, premium, if any, redemption, conversion, exchange, purchase, retirement, defeasance, sinking fund or similar payment with respect to, any Subordinated Indebtedness, the Additional Senior Term Loan, the Senior Term Loan, Seller Notes or Additional Seller Notes; and (iv) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of Borrower or any of its Subsidiaries now or hereafter outstanding. 3.6 Restriction on Fundamental Changes. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to: (a) amend, modify or waive any term or provision of its articles of incorporation or by-laws unless required by law other than such immaterial amendments or modifications which do not and will not adversely affect Heller, the ability of Heller to enforce its rights and remedies under the Loan Documents or to realize upon the Collateral or which otherwise would have a Material Adverse Effect; (b) enter into any transaction of merger or consolidation except any Subsidiary of Borrower may be merged with or into Borrower (provided that Borrower is the surviving entity) or any other Subsidiary of Borrower; or (c) liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution). 3.7 Disposal of Assets or Subsidiary Stock. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to: convey, sell, lease, sublease, transfer or otherwise dispose of, or grant any Person an option to acquire, in one transaction or a series of transactions any of its property, business or assets, or the capital stock of or other equity interests in any of its Subsidiaries, whether now owned or hereafter acquired except for (a) bona fide sales of Inventory to customers for fair value in the ordinary course of business and dispositions of obsolete equipment not used or useful in the business and (b) Asset Dispositions if all of the following conditions are met: (i) the market value of assets sold or otherwise disposed of in any single transaction or series of related transactions does not exceed $5,000,000 and the aggregate market value of assets sold or otherwise disposed of in any fiscal year of Borrower does not exceed $5,000,000; (ii) the consideration received is at least equal to the fair market value of such assets; (iii) after giving effect to the sale or other disposition of the assets included within the Asset Disposition and the repayment of Indebtedness with the proceeds thereof, Borrower is in compliance on a pro forma basis with the covenants set forth in Section 4 recomputed for the most recently ended month for which information is available and is in compliance with all other terms and conditions contained in this Agreement; and (iv) no Default or Event of Default shall result from such sale or other disposition. 3.8 Transactions with Affiliates. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to enter into or permit to exist any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any Affiliate or with any director, officer or employee of any Loan Party (excluding the payment of compensation, bonuses and other incentive compensation in the ordinary course of business to officers and other employees in the ordinary course of business for actual services rendered), except (a) payment for services rendered by VILARC, Inc. in the ordinary course of business provided such payment is approved by Liberty, (b) as set forth on Schedule 3.8 or (c) transactions in the ordinary course of and pursuant to the reasonable requirements of the business of Borrower or any of its Subsidiaries and upon fair and reasonable terms which are fully disclosed to Heller and are no less favorable to Borrower or such Subsidiary than would be obtained in a comparable arm's length transaction with a Person that is not an Affiliate. Notwithstanding the foregoing, no payments may be made with respect to item 2 set forth on Schedule 3.8 in excess of the amount set forth on Schedule 3.8 or upon the occurrence and during the continuation of a Default or Event of Default under subsection 6.1(A) or 6.1(C) (as it relates to a failure to perform or comply with subsection 4.3, 4.4 or 4.5). 3.9 Management Fees and Compensation. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to pay any management, consulting or similar fees to any Affiliate or to any director, officer or employee of any Loan Party (excluding the payment of compensation, bonuses and other incentive compensation in the ordinary course of business to officers and other employees in the ordinary course of business for actual services rendered) except (a) payment for services rendered by VILARC, Inc. in the ordinary course of business provided such payment is approved by Liberty or (b) as set forth on Schedule 3.9. Notwithstanding the foregoing, no payments may be made with respect to item 1 set forth on Schedule 3.9 in excess of the amount set forth on Schedule 3.9 or upon the occurrence and during the continuation of a Default or Event of Default under subsection 6.1(A) or 6.1(C) (as it relates to a failure to perform or comply with subsection 4.3, 4.4 or 4.5). 3.10 Conduct of Business. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to engage in any business other than businesses of the type described on Schedule 3.10, unless otherwise agreed to by Heller, which consent shall not be unreasonably withheld. 3.11 Changes Relating to Indebtedness. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to change or amend the terms of any Subordinated Indebtedness, the Additional Senior Term Loan, the Senior Term Loan, Seller Notes or Additional Seller Notes if the effect of such amendment is to: (a) increase the principal amount of the Indebtedness (other than the incurrence of the Additional Senior Term Loan under the conditions specified in subsection 3.1) or the interest rate on such Indebtedness; (b) shorten the dates upon which payments of principal or interest are due on such Indebtedness; (c) change in any manner adverse to the Borrower, or add, any event of default or any covenant with respect to such Indebtedness; (d) change the redemption or prepayment provisions of such Indebtedness; (e) change the subordination provisions thereof (or the subordination terms of any guaranty thereof), including, without limitation, subordinating such Indebtedness to other Indebtedness; (f) shorten the maturity date or otherwise to alter the repayment terms in a manner adverse to Borrower; or (g) change or amend any other term if such change or amendment would materially increase the obligations of the obligor or confer additional material rights on the holder of such Indebtedness in a manner adverse to Borrower, any of its Subsidiaries or Heller. 3.12 Press Release; Public Offering Materials. Neither Borrower nor Heller will, or will permit any of its Subsidiaries to, disclose the name of the other party in any press release, any marketing or promotional material or in any prospectus, proxy statement or other materials filed with any governmental entity relating to a public offering of the capital stock of any Loan Party without the other party's prior written consent which shall not be unreasonably withheld but in no event shall the name Victor Barnett be used by Heller in such material. 3.13 Subsidiaries. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to establish, create or acquire any new Subsidiary without at least five (5) days' prior written notice to Heller. SECTION 4 FINANCIAL COVENANTS/REPORTING Borrower covenants and agrees that so long as the Revolving Loan Commitment remains in effect and until payment in full of all Obligations (excluding contingent Obligations not then due and payable) and termination of all Lender Guarantees, unless Heller shall otherwise give its prior written consent, Borrower shall comply with, shall cause each of its Subsidiaries to comply with and shall use its best efforts to cause Holdings to comply with, all covenants in this Section 4 applicable to such Person. 4.1 Intentionally Omitted. 4.2 Intentionally Omitted. 4.3 EBIDAT. Borrower shall not permit EBIDAT for the twelve (12) month period ending on the last day of each month to be less than $8,000,000. "EBIDAT" will be calculated as illustrated on Exhibit 4.6(C). 4.4 Fixed Charge Coverage. Borrower shall not permit Fixed Charge Coverage for the twelve (12) month period ending on the last day of each month to be less than 1.0. "FIXED CHARGE COVERAGE" will be calculated as illustrated on Exhibit 4.6(C). 4.5 Total Indebtedness to Operating Cash Flow Ratio. Borrower shall not permit the ratio of Total Indebtedness calculated as of the last day of each month to Operating Cash Flow for the twelve (12) month period ending on such day to be greater than 6.0. "TOTAL INDEBTEDNESS" and "OPERATING CASH FLOW" will be calculated as illustrated as Exhibit 4.6(C). 4.6 Financial Statements and Other Reports. Borrower will maintain, and cause each of its Subsidiaries to maintain, a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP (it being understood that monthly financial statements (a) are not required to have footnote disclosures, (b) are subject to normal year-end adjustments for recurring accruals and (c) show depreciation, amortization and management fees as deductions from operating income rather than deductions in computing operating income). Borrower will deliver to Heller each of the financial statements and other reports described below. (A) Monthly Financials. As soon as available and in any event within thirty (30) days after the end of each month, Borrower will deliver (1) the consolidated balance sheet of Borrower, as at the end of such month and the related consolidated statements of income and cash flow for such month and for the period from the beginning of the then current fiscal year of Borrower to the end of such month and (2) a schedule of the outstanding Indebtedness for borrowed money of Borrower and its Subsidiaries describing in reasonable detail each such debt issue or loan outstanding and the principal amount and amount of accrued and unpaid interest with respect to each such debt issue or loan. (B) Year-End Financials. As soon as available and in any event within ninety (90) days after the end of each fiscal year of Borrower, Borrower will deliver (1) the consolidated balance sheet of Borrower as at the end of such year and the related consolidated statements of income, stockholders' equity and cash flow for such fiscal year, (2) a schedule of the outstanding Indebtedness for borrowed money of Borrower and its Subsidiaries describing in reasonable detail each such debt issue or loan outstanding and the principal amount and amount of accrued and unpaid interest with respect to each such debt issue or loan and (3) a report with respect to the financial statements from a "big six" independent certified public accounting firm selected by Borrower, which report shall be prepared in accordance with Statement of Auditing Standards No. 58 (the "STATEMENT") entitled "REPORTS ON AUDITED FINANCIAL STATEMENTS" and such report shall be "UNQUALIFIED" (as such term is defined in such Statement). (C) Borrower Compliance Certificate. Together with each delivery of financial statements of Borrower and its Subsidiaries pursuant to subsections 4.6(A) and 4.6(B) above, Borrower will deliver a fully and properly completed Compliance Certificate (in substantially the same form as Exhibit 4.6(C)) signed by a Responsible Officer of Borrower. (D) Indebtedness Notices. Borrower shall promptly deliver copies of all notices given or received by Borrower with respect to any non-compliance with any term or condition related to any Indebtedness, and shall notify Heller promptly after a responsible officer of Borrower obtains knowledge thereof of any potential or actual event of default with respect to any Indebtedness. (E) Accountants' Reports. Promptly upon receipt thereof, Borrower will deliver copies of all significant reports submitted by Borrower's firm of certified public accountants in connection with each annual audit or review and, if an Event of Default exists at the time of submission, each interim or special audit or review, of any type of the financial statements or related internal control systems of Borrower made by such accountants, including any comment letter submitted by such accountants to management in connection with their services. (F) Borrowing Base Certificate. As soon as available and in any event within thirty (30) days after the end of each month, and from time to time upon the request of Heller, Borrower will deliver to Heller a Borrowing Base Certificate (in substantially the same form as Exhibit 4.6(F)) as at the last day of such period. (G) Intentionally Omitted. (H) Appraisals. From time to time, if obtaining appraisals is necessary in order to comply with applicable laws or regulations, Heller will obtain appraisal reports in form and substance and from appraisers satisfactory to Heller stating the then current fair market values of all or any portion of the real estate owned by Borrower or any of its Subsidiaries. Such appraisals will be obtained at Heller's expense unless an Event of Default exists, in which event such appraisals will be at Borrower's expense. (I) Annual Budget. As soon as available and in any event no later than the last day of Borrower's fiscal year, Borrower will deliver an annual operating budget prepared on a monthly basis and an annual capital budget, for Borrower and its Subsidiaries for the succeeding fiscal year and, within 30 days after any monthly period in which there is a material adverse deviation from the annual budgets, a certificate from Borrower's chief financial officer or chief operating officer explaining the deviation and what action Borrower has taken, is taking and proposes to take with respect thereto. (J) SEC Filings and Press Releases. Promptly upon their becoming available, Borrower will deliver copies of (1) all financial statements, reports, notices and proxy statements sent or made available by Holdings, Borrower or any of their respective Subsidiaries to their security holders, (2) all regular and periodic reports and all registration statements and prospectuses, if any, filed by Holdings, Borrower or any of their respective Subsidiaries with any securities exchange or with the Securities and Exchange Commission or any governmental or private regulatory authority, and (3) all press releases and other statements made available by Holdings, Borrower or any of their respective Subsidiaries to the public concerning developments in the business of any such Person. (K) Events of Default, Etc. Promptly upon a Responsible Officer obtaining knowledge of any of the following events or conditions, Borrower shall deliver copies of all notices given or received by Borrower with respect to any such event or condition and a certificate of Borrower's chief operating officer specifying the nature and period of existence of such event or condition and what action Borrower has taken, is taking and proposes to take with respect thereto: (1) any condition or event that constitutes an Event of Default or Default; (2) any notice that any Person has given to Borrower or any of its Subsidiaries or any other action taken with respect to a material claimed default or event or condition of the type referred to in subsection 6.1(B); or (3) any event or condition that would result in any Material Adverse Effect. (L) Litigation. Promptly upon a Responsible Officer of Borrower obtaining knowledge of (1) the institution of any action, suit, proceeding, governmental investigation or arbitration against or affecting any Loan Party or any property of any Loan Party not previously disclosed by Borrower to Heller or (2) any material adverse development in any action, suit, proceeding, governmental investigation or arbitration at any time pending against or affecting any Loan Party or any property of any Loan Party which, in each case, would have a Material Adverse Effect, Borrower will promptly give notice thereof to Heller and provide such other information as may be reasonably available to them to enable Heller and its counsel to evaluate such matter. (M) Notice of Corporate Changes. Borrower shall provide written notice to Heller of (1) all jurisdictions in which a Loan Party becomes qualified after the Closing Date to transact business, (2) any material change after the Closing Date in the authorized and issued capital stock or other equity interests of any Loan Party or any of their respective Subsidiaries or any other material amendment to their charter, by-laws or other organization documents and (3) any Subsidiary created or acquired by any Loan Party after the Closing Date, such notice, in each case, to identify the applicable jurisdictions, capital structures or Subsidiaries, as applicable. (N) Other Information. With reasonable promptness, Borrower will deliver such other information and data with respect to any Loan Party or any Subsidiary of any Loan Party as from time to time may be reasonably requested by Heller. 4.7 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement. For purposes of this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to such terms in conformity with GAAP. Financial statements furnished to Heller pursuant to subsection 4.6 shall be prepared in accordance with GAAP as in effect at the time of such preparation except monthly financial statements (a) lack footnote disclosures, (b) are subject to normal year-end adjustments for recurring accruals and (c) show depreciation, amortization and management fees as deductions from operating income rather than deductions in computing operating income. No "ACCOUNTING CHANGES" (as defined below) shall affect financial covenants, standards or terms in this Agreement; provided, that Borrower shall prepare footnotes to each Compliance Certificate and the financial statements required to be delivered hereunder that show the differences between the financial statements delivered (which reflect such Accounting Changes) and the basis for calculating financial covenant compliance (without reflecting such Accounting Changes). "ACCOUNTING CHANGES" means: (i) changes in accounting principles required by GAAP and implemented by Borrower; and (ii) changes in accounting principles recommended by Borrower's certified public accountants and implemented by Borrower. SECTION 5 REPRESENTATIONS AND WARRANTIES In order to induce Heller to enter into this Agreement, to make Loans and to issue Lender Guarantees, Borrower represents and warrants to Heller that the following statements are and, after giving effect to the funding of Loans on the Closing Date, will be true, correct and complete: 5.1 Disclosure. No representation or warranty of Borrower, any of its Subsidiaries or any other Loan Party contained in this Agreement, the financial statements referred to in subsection 5.5, the other Loan Documents or any other document, certificate or written statement furnished to Heller by or on behalf of any such Person for use in connection with the Loan Documents contains, as of the date made, any untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. 5.2 No Material Adverse Effect. As of the Closing Date, there have been no events or changes in facts or circumstances affecting any Loan Party since February 29, 1996, which individually or in the aggregate have had or would have a Material Adverse Effect and that have not been disclosed herein or in the attached Schedules. 5.3 No Default. The execution, delivery and performance of the Loan Documents do not and will not violate, conflict with, result in a breach of, or constitute a default (with due notice or lapse of time or both) under any contract of any Loan Party except if such violations, conflicts, breaches or defaults have either been waived on or before the Closing Date and are disclosed on Schedule 5.3 or would not have, either individually or in the aggregate, a Material Adverse Effect. 5.4 Organization, Powers, Capitalization and Good Standing. (A) Organization and Powers. Each of the Loan Parties is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation (which jurisdiction is set forth on Schedule 5.4(A)). Each of the Loan Parties has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted, to enter into each Loan Document to which it is a party and to carry out the transactions contemplated hereby. (B) Capitalization. The authorized capital stock of each of the Loan Parties is as set forth on Schedule 5.4(B). All issued and outstanding shares of capital stock of each of the Loan Parties, are duly authorized and validly issued, fully paid, nonassessable, free and clear of all Liens other than those in favor of SBA, and such shares were issued in compliance with all applicable state and federal laws concerning the issuance of securities. The capital stock of each of the Loan Parties, is owned by the stockholders and in the amounts set forth on Schedule 5.4(B). No shares of the capital stock of any Loan Party, other than those described above, are issued and outstanding. Except as set forth on Schedule 5.4(B), there are no preemptive or other outstanding rights, options, warrants, conversion rights or similar agreements or understandings for the purchase or acquisition from any Loan Party, of any shares of capital stock or other securities of any such entity. (C) Binding Obligation. This Agreement and the other Related Transactions Documents are the legally valid and binding obligations of the applicable Loan Parties, each enforceable against the Loan Parties in accordance with their respective terms. (D) Qualification. Each of the Loan Parties is duly qualified and in good standing wherever necessary to carry on its business and operations, except in jurisdictions in which the failure to be qualified and in good standing would not have a Material Adverse Effect. All jurisdictions in which each Loan Party is qualified to do business are set forth on Schedule 5.4(D). 5.5 Financial Statements. All financial statements concerning Borrower and its Subsidiaries furnished by Borrower and its Subsidiaries to Heller pursuant to this Agreement, including those listed below, have been prepared in accordance with GAAP consistently applied (except as noted herein or disclosed therein), and all financial statements delivered by Borrower to Heller present fairly in all material respects the financial condition of the corporations covered thereby as at the dates thereof and the results of their operations for the periods then ended: (A) The consolidated balance sheets at June 30, 1995 and the related statement of income of Holdings and its Subsidiaries, for the fiscal year then ended, certified by Coopers & Lybrand. (B) The consolidated balance sheet at February 29, 1996 and the related statement of income of Borrower and its Subsidiaries for the eight (8) months then ended . 5.6 Intellectual Property. Borrower and each of its Subsidiaries owns, is licensed to use or otherwise has the right to use, all patents, trademarks, trade names, copyrights, technology, know-how and processes used in or necessary for the conduct of its business as currently conducted that are material to the condition (financial or other), business or operations of Borrower or its Subsidiaries (collectively called "INTELLECTUAL PROPERTY") and all such Intellectual Property is identified on Schedule 5.6 and fully protected and/or duly and properly registered, filed or issued in the appropriate office and jurisdictions for such registrations, filing or issuances. Except as disclosed in Schedule 5.6, the use of such Intellectual Property by Borrower and its Subsidiaries does not and has not been alleged by any Person to infringe on the rights of any Person. 5.7 Investigations, Audits, Etc. Except as set forth on Schedule 5.7, to Borrower's knowledge, neither Borrower nor any of its subsidiaries is the subject of any review or audit by the Internal Revenue Service or any governmental investigation concerning the violation or possible violation of any law. 5.8 Employee Matters. Except as set forth on Schedule 5.8, (a) no Loan Party nor any of their respective employees is subject to any collective bargaining agreement, (b) the majority of all hourly employees of Borrower (but not its Subsidiaries) are unionized and (c) as of the Closing Date, there are no strikes, slowdowns, work stoppages or controversies pending or, to the best knowledge of Borrower after due inquiry, threatened between any Loan Party and its respective employees, other than employee grievances and contract negotiations regarding a new collective bargaining agreement at or prior to the end of any existing collective bargaining agreement, all of which are arising in the ordinary course of business which would not have, either individually or in the aggregate, a Material Adverse Effect. 5.9 Solvency. As of and from and after the date of this Agreement and after giving effect to the consummation of the transactions contemplated by this Agreement and the funding of the initial advance of the Loan, Borrower: (a) owns and will own, in the reasonable opinion of Borrower, assets the fair saleable value on a going concern basis of which are (i) greater than the total amount of liabilities (including contingent liabilities) of Borrower and (ii) greater than the amount that will be required to pay the probable liabilities of Borrower's then existing debts as they become absolute and matured considering all financing alternatives and potential asset sales reasonably available to Borrower; (b) has capital that is not unreasonably small in relation to its business as presently conducted or any contemplated or undertaken transaction; and (c) does not intend to incur and does not believe that it will incur debts beyond its ability to pay such debts as they become due. SECTION 6 DEFAULT, RIGHTS AND REMEDIES 6.1 Event of Default. "EVENT OF DEFAULT" shall mean the occurrence of any one or more of the following: (A) Payment. Failure to pay the Revolving Loan when due, or to repay Revolving Loans to reduce their balance to the Maximum Revolving Loan Balance or to reimburse Heller for any payment made by Heller under or in respect of any Lender Guarantee when due or failure to pay, within five (5) days after the due date, any interest on any Loan or any other amount due under this Agreement or any of the other Loan Documents; or (B) Default in Other Agreements. (1) Failure of Holdings, Borrower or any of its Subsidiaries to pay when due or within any applicable grace period any principal or interest on Indebtedness (other than the Loans, Subordinated Indebtedness held by SBA, Senior Term Loan or Additional Senior Term Loan,) or any Contingent Obligations, or breach or default of Holdings, Borrower or any of its Subsidiaries, or the occurrence of a default, with respect to any Indebtedness (other than the Loans, Subordinated Indebtedness held by SBA, Senior Term Loan or Additional Senior Term Loan,) or any Contingent Obligations, if the effect of such failure to pay, default or breach is to cause or to permit the holder or holders then to cause, Indebtedness and/or Contingent Obligations having an aggregate principal amount in excess of $1,000,000 to become or be declared due prior to their stated maturity, unless such failure to pay, default or breach is cured or irrevocably waived in writing by the holder of holders thereof; or (2) Failure of Holdings, Borrower or any of its Subsidiaries to pay when due or within any applicable grace period any principal or interest with respect to Subordinated Indebtedness held by SBA, Senior Term Loan or Additional Senior Term Loan, or breach or default of Holdings, Borrower or any of its Subsidiaries, or the occurrence of a default, with respect to Subordinated Indebtedness held by SBA, Senior Term Loan or Additional Senior Term Loan, if the effect of such failure to pay, default or breach is to cause SBA to declare such Indebtedness due prior to its stated maturity; or (C) Breach of Certain Provisions. (1) Failure of Borrower to perform or comply with any term or condition contained in that portion of subsection 2.2 relating to Borrower's obligation to maintain insurance, Section 3 or Section 4 (other than subsection 4.5); or (2) failure of Borrower to perform or comply with any term or condition contained in subsection 4.5 which continues for sixty (60) days after the last day of the twelve (12) month period referred to therein; or (D) Breach of Warranty. Any written representation, warranty or certification made by any Loan Party in any Loan Document or in any statement or certificate at any time given by such Person in writing pursuant or in connection with any Loan Document is false in any material respect on the date made; or (E) Other Defaults Under Loan Documents. Borrower or any other Loan Party defaults in the performance of or compliance with any term contained in this Agreement or the other Loan Documents and such default is not remedied or waived within thirty (30) days after receipt by Borrower of notice from Heller of such default (other than occurrences described in other provisions of this subsection 6.1 for which a different grace or cure period is specified or which constitute immediate Events of Default); provided, however, if such default is susceptible of cure but not within thirty (30) days after notice, no Event of Default shall be deemed to have occurred under this clause (E) if Borrower shall have commenced and is diligently prosecuting such cure and such cure is effected within one hundred eighty (180) days after receipt by Borrower of such notice from Heller; or (F) Involuntary Bankruptcy; Appointment of Receiver, Etc. (1) A court enters a decree or order for relief with respect to Holdings, Borrower or any of its Subsidiaries in an involuntary case under the Bankruptcy Code, which decree or order is not stayed or other similar relief is not granted under any applicable federal or state law; or (2) the continuance of any of the following events for sixty (60) days unless dismissed, bonded or discharged: (a) an involuntary case is commenced against Holdings, Borrower or any of its Subsidiaries, under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect; or (b) a decree or order of a court for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Holdings, Borrower or any of its Subsidiaries, or over all or a substantial part of its property, is entered; or (c) an interim receiver, trustee or other custodian is appointed without the consent of Holdings, Borrower or any of its Subsidiaries, for all or a substantial part of the property of Holdings, Borrower or any such Subsidiary; or (G) Voluntary Bankruptcy; Appointment of Receiver, Etc. (1) An order for relief is entered with respect to Holdings, Borrower or any of its Subsidiaries or Holdings, Borrower or any of its Subsidiaries commences a voluntary case under the Bankruptcy Code, or consents to the entry of an order for relief in an involuntary case or to the conversion of an involuntary case to a voluntary case under any such law or consents to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or (2) Holdings, Borrower or any of its Subsidiaries makes any assignment for the benefit of creditors; or (3) the Board of Directors of Holdings, Borrower or any of its Subsidiaries adopts any resolution or otherwise authorizes action to approve any of the actions referred to in this subsection 6.1(G); or (H) Intentionally Omitted. (I) Judgment and Attachments. Any money judgment, writ or warrant of attachment, or similar process involving an amount in the aggregate at any time in excess of $2,500,000 (not adequately covered by insurance as to which the insurance company has acknowledged coverage) is entered or filed against Holdings, Borrower or any of its Subsidiaries or any of their respective assets and remains undischarged, unvacated, unbonded or unstayed for a period of thirty (30) days or in any event later than five (5) Business Days prior to the date of any proposed sale thereunder; or (J) Dissolution. Any order, judgment or decree is entered against Holdings, Borrower or any of its Subsidiaries decreeing the dissolution or split up of Holdings, Borrower or that Subsidiary and such order remains undischarged or unstayed for a period in excess of fifteen (15) days; or (K) Intentionally Omitted. (L) Injunction. Holdings, Borrower or any of its Subsidiaries is enjoined, restrained or in any way prevented by the order of any court or any administrative or regulatory agency from conducting all or any material part of its business and such order continues for more than forty-five (45) days if the same would have a Material Adverse Effect; or (M) ERISA; Pension Plans. (1) Any Loan Party fails to make full payment when due of all amounts which, under the provisions of any employee benefit plans or any applicable provisions of the Internal Revenue Code as amended from time to time ("IRC"), any Loan Party is required to pay as contributions thereto and such failure results in a Material Adverse Effect; or (2) an accumulated funding deficiency in excess of $500,000 occurs or exists, whether or not waived, with respect to any employee benefit plans, for which Borrower is liable; or (3) any employee benefit plans lose their status as a qualified plan under the IRC which results in a Material Adverse Effect; or (N) EPA. Failure to: obtain or maintain any operating licenses or permits required by environmental authorities; begin, continue or complete any remediation activities as required by any environmental authorities; store or dispose of any hazardous materials in accordance with applicable environmental laws and regulations; or comply with any other environmental laws, if any such failure would have a Material Adverse Effect; or (O) Invalidity of Loan Documents. Any of the Loan Documents for any reason, other than a partial or full release in accordance with the terms thereof, ceases to be in full force and effect or is declared to be null and void, or any Loan Party denies that it has any further liability under any Loan Documents to which it is party, or gives notice to such effect; or (P) Damage, Casualty. Any material damage to, or loss, theft or destruction of, any Collateral, whether or not insured, or any embargo, condemnation, act of God or public enemy, or other casualty which causes, for more than fifteen (15) consecutive days, the cessation or substantial curtailment of revenue producing activities at any facility of Borrower or any of its Subsidiaries if any such event or circumstance would have a Material Adverse Effect; or (Q) Strike. Any strike, lockout or labor dispute which causes, for more than sixty (60) consecutive days, the cessation or substantial curtailment of revenue producing activities at any facility of Borrower or any of its Subsidiaries if any such event or circumstance would have a Material Adverse Effect; or (R) Failure of Security. (1) SBA does not have or ceases to have a valid and perfected first priority security interest (or, in the event Heller has a first priority security interest, a second priority security interest) in the Collateral (subject to Permitted Encumbrances) pursuant to the Senior Term Loan Documents; or (2) Heller does not have or ceases to have a valid and perfected first or second priority security interest in the Collateral (subject to Permitted Encumbrances), in each case in clause (2), for any reason other than the failure of Heller to take any action within its control; or (S) Business Activities. Holdings engages in any type of business activity other than the ownership of stock of Borrower and performance of its obligations under the Loan Documents to which it is a party; or (T) Change in Control. (1) SBA, Liberty and VILARC Capital, collectively, cease to beneficially own and control, directly or indirectly, at least fifty-one percent (51%) of the issued and outstanding shares of each class of capital stock of Holdings entitled (without regard to the occurrence of any contingency) to vote for the election of a majority of the members of the boards of directors of Holdings; or (2) any of SBA, Liberty and VILARC Capital ceases to beneficially own and control at least sixty-six and two-thirds percent (66-2/3%) of the aggregate number of shares of Holdings capital stock owned by it on the Closing Date; or (3) Holdings ceases to directly own and control one hundred percent (100%) of the issued and outstanding capital stock of Borrower; or (U) Ownership of Indebtedness. SBA ceases to hold one hundred percent (100%) of the outstanding Senior Term Loan, Subordinated Indebtedness evidenced by the Subordinated Notes (unless the same is refinanced as permitted pursuant to subsection 3.1(G)) and, if applicable, the Additional Senior Term Loan; or (V) Liberty as Agent. Liberty Partners, L.P. ceases to act as agent and attorney-in-fact for SBA in connection with the Subordinated Indebtedness held by SBA, Additional Senior Term Loan or Senior Term Loan. 6.2 Suspension of Commitments. Upon the occurrence and during the continuance of any Default or Event of Default, Heller, without notice or demand, may immediately cease making additional Loans and issuing Lender Guarantees and the Revolving Loan Commitment shall be suspended; provided that, in the case of a Default, if the subject condition or event is waived or removed by Heller or cured by Borrower within any applicable grace or cure period, the Revolving Loan Commitment shall be reinstated, effective upon such waiver, cure or removal. Heller, in its sole discretion, may alternatively suspend only a portion of the Revolving Loan Commitment. Notwithstanding the foregoing, in the event all conditions to the obligation of Heller to make Loans set forth in Section 7 hereof have been satisfied but Heller does not make the Loan, Heller shall not be entitled to declare a Default or an Event of Default as a result of Borrower being unable to perform any of its covenants, liabilities or obligations hereunder or under the other Loan Documents as a direct result of Heller's failure to make a Loan. 6.3 Acceleration. Upon the occurrence of any Event of Default described in the foregoing subsections 6.1(F) or 6.1(G), the unpaid principal amount of and accrued interest and fees on the Revolving Loan, payments under the Lender Guarantees and all other Obligations shall automatically become immediately due and payable, without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other requirements of any kind, all of which are hereby expressly waived by Borrower, and the Revolving Loan Commitment shall thereupon terminate. Upon the occurrence and during the continuance of any other Event of Default, Heller may by written notice to Borrower (a) declare all or any portion of the Loans and all or some of the other Obligations to be, and the same shall forthwith become, immediately due and payable together with accrued interest thereon, and the Revolving Loan Commitment shall thereupon terminate and (b) demand that Borrower immediately deposit with Heller an amount equal to the Lender Guarantees to enable Heller to make payments under the Lender Guarantees when required and such amount shall become immediately due and payable. 6.4 Performance by Heller. If Borrower shall fail to perform any covenant, duty or agreement contained in any of the Loan Documents, Heller may perform or attempt to perform such covenant, duty or agreement on behalf of Borrower after the expiration of any cure or grace periods set forth herein. In such event, Heller shall give to Borrower written notice of the action promptly thereafter and Borrower shall, at the request of Heller, promptly pay any amount reasonably expended by Heller in such performance or attempted performance to Heller, together with interest thereon at the rate of interest in effect upon the occurrence of an Event of Default as specified in subsection 1.2(D) from the date of such expenditure until paid. Notwithstanding the foregoing, it is expressly agreed that Heller shall not have any liability or responsibility for the performance of any obligation of Borrower under this Agreement or any other Loan Document. SECTION 7 CONDITIONS TO LOANS The obligations of Heller to make Loans and to issue Lender Guarantees are subject to satisfaction of all of the applicable conditions set forth below. 7.1 Conditions to Initial Loans. The obligations of Heller to make the initial Loans and to issue any Lender Guarantees on the Closing Date are, in addition to the conditions precedent specified in subsection 7.2, subject to the delivery of all documents listed on Schedule 7.1, all in form and substance satisfactory to Heller. 7.2 Conditions to All Loans. The obligations of Heller to make Loans or the obligation of Heller to issue Lender Guarantees on any date ("FUNDING DATE") are subject to the further conditions precedent set forth below. (A) Heller shall have received, in accordance with the provisions of subsection 1.1, a notice requesting an advance of a Revolving Loan or issuance of a Lender Guarantee. (B) The representations and warranties contained in Section 5 of this Agreement and elsewhere herein and in the other Loan Documents shall be (and each request by Borrower for a Loan [a request for continuation of a LIBOR Rate Loan as a LIBOR Rate Loan, conversion of a Base Rate Loan to a LIBOR Rate Loan and conversion of a LIBOR Rate Loan to a Base Rate Loan shall not constitute a request by Borrower for a Loan] or a Lender Guarantee shall constitute a representation and warranty by Borrower that such representations and warranties are) true, correct and complete in all material respects on and as of that Funding Date to the same extent as though made on and as of that date, except for any representation or warranty limited by its terms to a specific date and taking into account any amendments to the Schedules as a result of any disclosures made in writing by Borrower to Heller after the Closing Date. (C) No event shall have occurred and be continuing or would result from the consummation of the borrowing contemplated (or notice requesting issuance of a Lender Guarantee) that would constitute an Event of Default or a Default. (D) No order, judgment or decree of any court, arbitrator or governmental authority shall purport to enjoin or restrain Heller from making any Loans or issuing any Lender Guarantees. SECTION 8 ASSIGNMENT AND PARTICIPATION 8.1 Assignment and Participation. Heller has no present intention of assigning or selling participations in all or any part of the Loans or the Revolving Loan Commitment; provided, upon not less than seventy-five (75) days prior notice to Borrower, Heller may assign its rights and delegate its obligations under this Agreement and further may assign, or sell participations in, all or any part of its Loans or its Revolving Loan Commitment with the prior written consent of Borrower, which consent shall not be unreasonably withheld or delayed; provided, however, Borrower's consent shall not be required for any assignment or participation required by any governmental or regulatory agency or authority. Notwithstanding the provisions of subsection 1.3(B), if Heller chooses to assign or sell participations in a portion of the Loans or the Revolving Loan Commitment, absent a request by Borrower to increase the aggregate Revolving Loan Commitment beyond $20,000,000, then Heller and the Borrower are responsible for their respective costs. SECTION 9 MISCELLANEOUS 9.1 Indemnities. Borrower agrees to indemnify, pay, and hold Heller, its officers, directors, employees, agents, and attorneys (the "INDEMNITEES") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits and claims (collectively, "LOSSES") of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against the Indemnitee as a result of Heller being a party to this Agreement; provided that Borrower shall have no obligation to an Indemnitee hereunder with respect to liabilities arising from the gross negligence or willful misconduct of that Indemnitee as determined by a court of competent jurisdiction or for Losses to the extent imposed, incurred by or asserted against Heller as a result of a breach or default by SBA or Heller under the Intercreditor Agreement. This Section and Agreement shall survive the termination of this Agreement. 9.2 Amendments and Waivers. No amendment, modification, or termination, or waiver of any provision of this Agreement or any Loan Documents, shall be effective unless the same shall be in writing and signed by Heller. 9.3 Notices. Any notice or other communication required shall be in writing, shall be executed by an authorized signatory of a party addressed to the respective party as set forth below and may be personally served, telecopied (except that only notices relating to requests to borrow may be given by telecopy unless otherwise agreed by a Responsible Officer), sent by overnight courier service or U.S. certified or registered mail, return receipt requested and shall be deemed to have been given: (a) if delivered in person, when delivered; (b) if delivered by telecopy, on the date of transmission if transmitted on a Business Day before 4:00 p.m. CST, or, if not, on the next succeeding Business Day; (c) if delivered by overnight courier, two (2) days after delivery to courier properly addressed, or (d) if delivered by U.S. mail, four (4) Business Days after deposit with postage prepaid and properly addressed. Notices shall be addressed as follows: If to Borrower: c/o Victor Barnett 895 Park Avenue New York, New York 10021 Telecopy: (212) 288-0230 with a copy to: Arcade, Inc. P. O. Box 3196 1815 E. Main Street Chattanooga, Tennessee 37404 ATTN: Chief Operating Officer Telecopy: (423) 697-7126 with a copy to: Liberty Partners 1177 Avenue of the Americas New York, New York 10036 ATTN: Michael J. Kluger Telecopy: (212) 354-0336 with a copy to: Sonnenschein Nath & Rosenthal 8000 Sears Tower Chicago, Illinois 60606 ATTN: Susan K. Reiter, Esq. Telecopy: (312) 876-7934 If to Heller: HELLER FINANCIAL, INC. 500 West Monroe Street Chicago, Illinois 60661 ATTN: Marcia Perkins Portfolio Manager Portfolio Organization Corporate Finance Group Telecopy: (312) 441-7367 With a copy to: HELLER FINANCIAL, INC. 500 West Monroe Street Chicago, Illinois 60661 ATTN: Legal Department Portfolio Organization Corporate Finance Group Telecopy: (312) 441-7367 9.4 Failure of Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of Heller to exercise, or any partial exercise of, any power, right, or privilege hereunder or under any other Loan Documents shall impair such power, right, or privilege or be construed to be a waiver of any Default or Event of Default. All rights and remedies existing hereunder or under any other Loan Document are cumulative to and not exclusive of any rights or remedies otherwise available. 9.5 Marshalling, Payments Set Aside. Heller shall not be under any obligation to marshall any assets in payment of any or all of the Obligations. To the extent that the Borrower makes a payment(s) or Heller enforces its Liens or exercises its right of set-off, and such payment(s) or the proceeds of such enforcement or set off is subsequently invalidated, declared to be fraudulent or preferential, set aside, or required to be repaid by anyone, then to the extent of such recovery, the Obligations or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor, shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or set off had not occurred. 9.6 Severability. The invalidity, illegality, or unenforceability in any jurisdiction of any provision under the Loan Documents shall not affect or impair the remaining provisions in the Loan Documents. 9.7 Headings. Section and subsection headings are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purposes or be given substantive effect. 9.8 Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES. 9.9 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns except that Borrower may not assign its rights or obligations hereunder. 9.10 No Fiduciary Relationship. No provision in the Loan Documents and no course of dealing between the parties shall be deemed to create any fiduciary duty by Heller to Borrower. 9.11 Construction. Heller and Borrower acknowledge that each of them has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review the Loan Documents with its legal counsel and that the Loan Documents shall be constructed as if jointly drafted by Heller and Borrower. 9.12 Confidentiality. Heller agrees to take and to cause its Affiliates, employees and agents to take, normal and reasonable precautions and exercise due care to maintain the confidentiality of all information provided to it by the Borrower, and neither Heller nor any of its Affiliates, employees or agents shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents; except to the extent such information (i) was or becomes generally available to the public other than as a result of disclosure by Heller, or (ii) was or becomes available on a non-confidential basis from a source other than the Borrower, Liberty or Persons known to Heller to be the Borrower's agents, lawyers or independent auditors, provided that such source is not bound by a confidentiality agreement with the Borrower known to Heller; provided, however, that Heller may disclose such information (A) at the request or pursuant to any requirement of any governmental authority to which Heller is subject or in connection with an examination of Heller by any such authority; (B) pursuant to subpoena or other court process; (C) when required to do so in accordance with the provisions of any applicable requirement of law; (D) to the extent reasonably required in connection with any litigation or proceeding to which Heller or its Affiliates may be party; (E) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document; (F) to Heller's independent auditors and other professional advisors; and (G) to any financial institution or institutional investor purchasing a participation or to which any Loans and Commitments are assigned, actual or potential, provided that such participant or assignee, actual or potential, agrees in writing to keep such information confidential to the same extent required of Heller hereunder. 9.13 Waiver of Jury Trial. BORROWER AND HELLER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS, OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION AND THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. BORROWER AND HELLER ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF LENDERS. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. BORROWER AND HELLER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. BORROWER AND HELLER FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THE LOAN DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS, OR THE LENDER GUARANTEES. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 9.14 Survival of Warranties and Certain Agreements. All agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement, the making of the Loans, issuances of Lender Guarantees and the execution and delivery of the Notes. Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Borrower set forth in subsections 1.3(B) and 9.1 shall survive the payment of the Loans and the termination of this Agreement. 9.15 Entire Agreement. This Agreement, the Notes and the other Loan Documents referred to herein embody the final, entire agreement among the parties hereto and supersede any and all prior commitments, agreements, representations, understandings, whether oral or written, relating to the subject matter hereof and may not be contradicted or varied by evidence of prior, contemporaneous or subsequent oral agreements or discussions of the parties hereto. SECTION 10 DEFINITIONS 10.1 Certain Defined Terms. The terms defined below are used in this Agreement as so defined. Terms defined in the preamble and recitals to this Agreement are used in this Agreement as so defined. "ADDITIONAL SELLER NOTES" means one or more promissory notes of Borrower or any of its Subsidiaries representing all or a part of the deferred purchase price of a business, business unit or product line acquired by Borrower or any of its Subsidiaries from the obligee of such note. "AFFILIATE" means any Person (other than Heller): (a) directly or indirectly controlling, controlled by, or under common control with, Borrower; (b) directly or indirectly owning or holding five percent (5%) or more of any equity interest in Borrower; or (c) five percent (5%) or more of whose voting stock or other equity interest is directly or indirectly owned or held by Borrower. For purposes of this definition, "CONTROL" (including with correlative meanings, the terms "CONTROLLING", "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") means the possession directly or indirectly of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities or by contract or otherwise. "AGREEMENT" means this Credit Agreement (including all schedules, exhibits, annexes and appendices hereto). "ASSET DISPOSITION" means the disposition whether by sale, lease, transfer, loss, damage, destruction, condemnation or otherwise of any of the following: (a) any of the stock of any of Borrower's Subsidiaries or (b) any or all of the assets of Borrower or any of its Subsidiaries other than sales of inventory in the ordinary course of business. "BANKRUPTCY CODE" means Title 11 of the United States Code entitled "BANKRUPTCY", as amended from time to time or any applicable bankruptcy, insolvency or other similar law now or hereafter in effect and all rules and regulations promulgated thereunder. "BUSINESS DAY" means (a) for all purposes other than as covered by clause (b) below, any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the Commonwealth of Pennsylvania or the State of Illinois, or is a day on which banking institutions located in any such states are closed, and (b) with respect to all notices, determinations, fundings and payments in connection with Loans bearing interest at the LIBOR Rate, any day that is a Business Day described in clause (a) above and that is also a day for trading by and between banks in Dollar deposits in the applicable interbank LIBOR market. "CLOSING DATE" means _______ __, 1996. "COLLATERAL" means, collectively: (a) all capital stock and other property, if any, pledged pursuant to the Security Documents; (b) all "COLLATERAL" as defined in the Security Documents; (c) all real property mortgaged pursuant to the Security Documents; and (d) any property or interest provided in addition to or in substitution for any of the foregoing. "DEFAULT" means a condition or event that, after notice or lapse of time or both, would constitute an Event of Default if that condition or event were not cured or removed within any applicable grace or cure period. "EXPIRY DATE" means the earlier of (a) the suspension (subject to reinstatement) of the Revolving Loan Commitment pursuant to subsection 6.2, (b) the acceleration of the Obligations pursuant to subsection 6.3 or (c) November 30, 1998, as such date may be extended by mutual agreement of Heller and Borrower. "GAAP" means generally accepted accounting principles as set forth in statements from Auditing Standards No. 69 entitled "THE MEANING OF 'PRESENT FAIRLY IN CONFORMANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE INDEPENDENT AUDITORS REPORTS'" issued by the Auditing Standards Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board that are applicable to the circumstances as of the date of determination. "HOLDINGS" means Arcade Holding Corporation, a Delaware corporation. "INDEBTEDNESS", as applied to any Person, means: (a) all indebtedness for borrowed money; (b) that portion of obligations with respect to capital leases that is properly classified as a liability on a balance sheet in conformity with GAAP; (c) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money; (d) any obligation owed for all or any part of the deferred purchase price of property or services if the purchase price is due more than six (6) months from the date the obligation is incurred or is evidenced by a note or similar written instrument; and (e) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is nonrecourse to the credit of that Person. "INTERCREDITOR AGREEMENT" means that certain Intercreditor Agreement of even date herewith among Heller, SBA, Borrower and Holdings. "LIBERTY" means Liberty Partners Holdings 4, LLC. "LIEN" means any lien, levy, assessment, mortgage, pledge, security interest, charge or encumbrance of any kind, whether voluntary or involuntary, (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest). "LOAN DOCUMENTS" means this Agreement, the Notes, the Security Documents and all other instruments, documents and agreements executed by or on behalf of any Loan Party and delivered concurrently herewith or at any time hereafter to or for the benefit of Heller in connection with the Loans and other transactions contemplated by this Agreement, all as amended, supplemented or modified from time to time, but excluding all Senior Term Loan Documents and Subordinated Loan Documents but including that certain side letter of even date herewith by Heller to Borrower with respect to eligible accounts, which side letter will be delivered by Heller to Borrower on the Closing Date. "LOAN PARTY" means, collectively, Holdings, Borrower, Borrower's Subsidiaries and any other Person (other than Heller or SBA) which is or becomes a party to any Loan Document. "MATERIAL ADVERSE EFFECT" means (a) a material adverse effect upon the business, operations, properties, assets or financial condition of the Loan Parties taken as a whole or (b) the material impairment of the ability of any Loan Party to perform its obligations under any Loan Document to which it is a party or of Heller to enforce any Loan Document or collect any of the Obligations. In determining whether any individual event would result in a Material Adverse Effect, notwithstanding that such event does not of itself have such effect, a Material Adverse Effect shall be deemed to have occurred if the cumulative effect of such event and all other then existing events would result in a Material Adverse Effect. "NOTE" or "NOTES" means one or more of the notes of Borrower substantially in the form of Exhibit 10.1(A), or any combination thereof. "OBLIGATIONS" means all obligations, liabilities and indebtedness of every nature of each Loan Party from time to time owed to Heller under the Loan Documents including the principal amount of all debts, claims and indebtedness, accrued and unpaid interest and all fees, costs and expenses, whether primary, secondary, direct, contingent, fixed or otherwise, heretofore, now and/or from time to time hereafter owing, due or payable whether before or after the filing of a proceeding under the Bankruptcy Code by or against Borrower or its Subsidiaries. "PERSON" means and includes natural persons, corporations, limited liability companies, limited partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof and their respective permitted successors and assigns (or in the case of a governmental person, the successor functional equivalent of such Person). "RELATED TRANSACTIONS" means the execution and delivery of the Related Transactions Documents, the funding of all Loans on the Closing Date, the repayment of the any Indebtedness identified on Schedule 10.1(A) which is to be paid in full on the Closing Date, and the payment of all fees, costs and expenses associated with all of the foregoing. "RELATED TRANSACTIONS DOCUMENTS" means the Loan Documents, the Senior Term Loan Documents, the Subordinated Loan Documents, and all other agreements, instruments and documents executed or delivered in connection with the Related Transactions. "RESPONSIBLE OFFICER" means the Chairman, President or Chief Operating Officer of Borrower. "SBA" means State Board of Administration of Florida. "SECURITY DOCUMENTS" means all instruments, documents and agreements executed by or on behalf of any Loan Party to guaranty or provide collateral security with respect to the Obligations including, without limitation, any security agreement or pledge agreement, any guaranty of the Obligations, any mortgage, and all instruments, documents and agreements executed pursuant to the terms of the foregoing. "SELLER NOTES" means that certain Promissory Note dated as of June 9, 1995 in the original principal amount of $1,877,000 and that certain Conditional Promissory Note dated as of June 9, 1995 in the original principal amount of $1,750,000, each made by Borrower to Elaine Trebek-Kares. "SENIOR TERM LOAN" means that certain term loan in the original principal amount of $21,400,000 evidenced by the Senior Term Note. "SENIOR TERM LOAN AGREEMENT" means that certain Senior Loan Agreement dated as of November 4, 1993 between Borrower and SBA, as amended by Amendment No. 1 to Senior Loan Agreement of even date herewith and as subsequently amended as permitted herein. "SENIOR TERM LOAN DOCUMENTS" means the Senior Term Loan Agreement, Senior Term Note, and all other documents, instruments and agreements executed in connection therewith, as any of the same may be subsequently amended as permitted herein. "SENIOR TERM NOTE" means that certain Senior Term Note dated as of April 30, 1996 in the original principal amount of $16,411,000, made by Borrower to SBA, which Senior Term Note consolidates and restates that certain Senior Term Note dated November 5, 1993 in the original principal amount of $21,400,000, and those certain Conditional Senior Term Notes dated August 2, 1994 and June 30, 1995 in the original aggregate principal amounts of $4,000,000, each made by Borrower to SBA, as it may subsequently be amended as permitted herein. "SUBORDINATED INDEBTEDNESS" means the Indebtedness evidenced by the Subordinated Notes, the Refinanced Subordinated Indebtedness and all other Indebtedness of Borrower or any of its Subsidiaries which is subordinated in right of payment to the Obligations. "SUBORDINATED LOAN DOCUMENTS" means that certain Subordinated Loan Agreement dated November 4, 1993, as amended by Amendment No. 1 to Subordinated Loan Agreement of even date herewith, each between Borrower and SBA, Subordinated Notes and all documents, instruments and agreements executed in connection therewith, as any of the same may be subsequently amended as permitted herein. "SUBORDINATED NOTES" means, jointly and severally, that certain Subordinated Promissory Note I dated November 5, 1993 in the original principal amount of $23,000,000, that certain Subordinated Promissory Note II dated November 5, 1993 in the original principal amount of $7,000,000, and those certain notes executed and delivered by Borrower to SBA pursuant to Section 2.03(a) of the Subordinated Loan Agreement dated November 4, 1993, as amended, each made by Borrower to SBA. as hereafter amended as permitted herein. "SUBSIDIARY" means, with respect to any Person, any corporation, partnership, association or other business entity of which more than fifty percent (50%) of the total voting power of shares of stock (or equivalent ownership or controlling interest) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidi aries of that Person or a combination thereof. 10.2 Other Definitional Provisions. References to "SECTIONS", "SUBSECTIONS", "EXHIBITS" and "SCHEDULES" shall be to Sections, subsections, Exhibits and Schedules, respectively, of this Agreement unless otherwise specifically provided. Any of the terms defined in subsection 10.1 may, unless the context otherwise requires, be used in the singular or the plural depending on the reference. In this Agreement, "HEREOF," "HEREIN," "HERETO," "HEREUNDER" and the like mean and refer to this Agreement as a whole and not merely to the specific section, paragraph or clause in which the respective word appears; words importing any gender include the other gender; references to "WRITING" include printing, typing, lithography and other means of reproducing words in a tangible visible form; the words "INCLUDING," "INCLUDES" and "INCLUDE" shall be deemed to be followed by the words "WITHOUT LIMITATION"; references to agreements and other contractual instruments shall be deemed to include subsequent amendments, assignments, and other modifications thereto, but only to the extent such amendments, assignments and other modifications are not prohibited by the terms of this Agreement or any other Loan Document; references to Persons include their respective permitted successors and assigns or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons; and all references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. Witness the due execution hereof by the respective duly authorized officers of the undersigned as of the date first written above. HELLER FINANCIAL, INC. By:_____________________________ Title: ______ Vice President ARCADE, INC. By_____________________________ Title__________________________ LIST OF EXHIBITS AND SCHEDULES Exhibits - -------- Exhibit 1.2(G) - LIBOR Rate Loan Request Exhibit 4.6(C) - Compliance Certificate Exhibit 4.6(F) - Borrowing Base Certificate Exhibit 10.1(A) - Notes Schedules - --------- Schedule 3.2(A)(12)- Liens Schedule 3.4 - Contingent Obligations Schedule 3.8 - Affiliate Transactions Schedule 3.9 - Management Fees and Compensation Schedule 3.10 - Business Description Schedule 5.3 - Violations, Conflicts, Breaches and Defaults Schedule 5.4(A) - Jurisdictions of Organization Schedule 5.4(B) - Capitalization Schedule 5.4(D) - Foreign Qualifications Schedule 5.6 - Intellectual Property Schedule 5.7 - Investigations and Audits Schedule 5.8 - Employee Matters Schedule 7.1 - List of Closing Documents Subschedule A-12 - Litigation Subschedule A-13 - Employee Benefit Plans Subschedule A-14 - Closing Fees Subschedule A-15 - Investments Subschedule A-16 - Derivatives Schedule 10.1(A) - Indebtedness to be Repaid FIRST AMENDMENT TO CREDIT AGREEMENT, ASSUMPTION AND MASTER REAFFIRMATION THIS FIRST AMENDMENT TO CREDIT AGREEMENT, ASSUMPTION AND MASTER REAFFIRMATION (this Amendment ) is entered into as of December 12, 1997, by and among ARCADE HOLDING CORPORATION, a Delaware corporation ( Holdings ), ARCADE, INC., a Tennessee corporation (the Borrower ), and HELLER FINANCIAL, INC., a Delaware corporation ( Heller ). W I T N E S S E T H: WHEREAS, Borrower and Heller have entered into that certain Credit Agreement dated as of April 30, 1996 (as the same may be amended, modified, restated or otherwise supplemented from time to time, the Credit Agreement ); and WHEREAS, pursuant to that certain Stock Purchase Agreement dated as of November 14, 1997 (the Stock Purchase Agreement ) by and among AHC I Acquisition Corp., a Delaware corporation ( Acquisition Corp. ), Holdings and the parties identified therein as Sellers , as amended by that certain First Amendment to Stock Purchase Agreement dated as of December 2, 1997, Acquisition Corp. has agreed to purchase, or cause a wholly-owned subsidiary to purchase, from Sellers, and Sellers have agreed to sell to Acquisition Corp. or such wholly-owned subsidiary, all of the outstanding equity securities of Holdings (the Acquisition ); and WHEREAS, Acquisition Corp. has designated and expects to cause AHC I Merger Corp., a Delaware corporation ( Merger Co.), a wholly owned subsidiary of Acquisition Corp., to purchase such outstanding equity securities; and WHEREAS, simultaneously with the Acquisition, it is contemplated that (a) Merger Co. shall merge with and into Holdings and (b) Borrower shall merge with and into Holdings, in each instance, with Holdings as the surviving corporation and to be renamed Arcade Marketing, Inc., which surviving corporation shall be a Delaware corporation (together, the Mergers ); and WHEREAS, the parties to the Credit Agreement desire to amend the Credit Agreement to, among other things, increase the Revolving Loan Commitment, all on the terms and subject to the conditions set forth herein; and WHEREAS, the Loan Parties have previously executed and delivered to Heller various Loan Documents; and WHEREAS, each of the Loan Parties will derive both direct and indirect benefits from the Loans and other financial accommodations made pursuant to the Credit Agreement. NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: R E C I T A L S: 1. Definitions; Recitals. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Credit Agreement. The foregoing recitals are hereby incorporated herein by this reference thereto. 2. Amendments. The Credit Agreement is amended as set forth below: (a) SUBSECTION 1.1(A). The first paragraph of subsection 1.1(A) of the Credit Agreement is deleted in its entirety and the following substituted therefor: (A) Revolving Loan. Heller agrees to lend from the Closing Date to the Expiry Date amounts up to a maximum of $20,000,000 (the Revolving LOAN COMMITMENT or Commitment ). Advances or amounts outstanding under the Revolving Loan Commitment will be called REVOLVING LOANS or LOANS . Revolving Loans may be repaid and reborrowed. The MAXIMUM REVOLVING LOAN BALANCE will be the lower of: (1) the BORROWING BASE (as calculated on Exhibit 4.6(F), the BORROWING BASE CERTIFICATE ); and (2) the Revolving Loan Commitment less any outstanding Lender Guarantees. (b) SUBSECTION 1.2(A). Subsection 1.2(A) is amended as follows: (i) the first sentence of that subsection is hereby deleted and the following substituted therefor: (A) Interest. From the date the Loans are made and the other Obligations become due and payable in accordance with the terms of this Agreement and the other Loan Documents, the Obligations shall bear interest at the sum of the Base Rate plus three quarters of one percent (0.75%) per annum and/or, with respect to any LIBOR Rate Loan, the sum of the LIBOR Rate plus two and one-half percent (2.50%) per annum. (ii) the phrase Ache Chase Manhattan Bank, National Association and Chemical Bank in each of the first and second paragraphs are deleted and the phrase The Chase Manhattan Bank and Citibank, N.A. is substituted therefor. (c) SUBSECTION 1.2(C). Subsection 1.2(C) is hereby amended by deleting the phrase Two and three quarters percent (2.75%) and substituting the phrase Two and one-half percent (2.50%) therefor. (d) SUBSECTION 1.3(C). Subsection 1.3(C) is deleted in its entirety. (e) INTENTIONALLY OMITTED. (f) SUBSECTION 3.1. Subsection 3.1 is deleted in its entirety and the following substituted therefor: 3.1 Indebtedness. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to create, incur, assume, guaranty, or otherwise become or remain directly or indirectly liable with respect to any Indebtedness except: (A) the Obligations; (B) intercompany Indebtedness among Borrower and its Subsidiaries; provided that if Borrower is the obligor, the obligations of Borrower shall be subordinated in right of payment to the Obligations from and after such time as any portion of the Obligations shall become due and payable (whether at stated maturity, by acceleration or otherwise); (C) to the extent permitted under the Bridge Notes documentation or Refinanced Bridge Indebtedness documentation, as applicable, Indebtedness secured by purchase money Liens, Indebtedness incurred with respect to capital leases and Indebtedness evidenced by the Additional Seller Notes, not to exceed $7,500,000 in the aggregate; (D) Indebtedness evidenced by the Bridge Notes; (E) Indebtedness of Borrower incurred to refinance the Bridge Notes and the PIK Note ( Refinanced BRIDGE INDEBTEDNESS ) provided all of the following conditions are satisfied: (i) the maximum Refinanced Bridge Indebtedness shall not exceed, in the aggregate at any time outstanding, the lesser of (i) the sum of (A) the outstanding principal amount of and accrued interest and accreted discount on the Bridge Notes and PIK Note being refinanced and (B) reasonable and customary fees, expenses and underwriting discounts incurred in connection with such refinancing and (ii) $165,000,000, and shall be unsecured; (ii) the Person providing such Indebtedness (or, in the case of Indebtedness to be provided by means of a public offering or an offering made pursuant to Rule 144A under the Securities Act of 1933, as amended, the lead manager in respect of such offering) is Donaldson Lufkin & Jeanrette Securities Corporation or another Person reasonably acceptable to Heller and such Refinanced Bridge Indebtedness is on market terms and conditions; and (iii) after giving effect to such incurrence, Borrower is in compliance on a proforma basis with the covenants set forth in subsections 4.3, 4.4 and 4.5, recomputed for the most recent month for which financial statements have been delivered; (F) Indebtedness evidenced by the Seller Notes; and (G) to the extent permitted under the Bridge Notes documentation or Refinanced Bridge Indebtedness documentation, as applicable, unsecured Indebtedness not permitted under clauses (A) through (F) above in an aggregate principal amount not to exceed $3,000,000 in the aggregate at any time outstanding. (g) SUBSECTION 3.2(A). Subsection 3.2(A) is amended by deleting clause (A)(12) of that subsection. (h) SUBSECTION 3.2(B). Subsection 3.2(B) is amended by deleting the phrase Senior Term Loan Documents and Subordinated Loan Documents and substituting therefor the phrase Ache Securities Purchase Agreement in respect of the Bridge Notes, any indenture, instrument or other document entered into in connection with the Indebtedness permitted under subsections 3.1(E) and (F) and, solely with respect to the assets financed with Indebtedness permitted under subsection 3.1(C), agreements, instruments and other documents entered into in respect of such Indebtedness (i) SUBSECTION 3.4. Subsection 3.4 is amended by adding the phrase ; provided, however, in no event may Subsidiaries of Borrower guaranty the obligations of Borrower with respect to Indebtedness permitted pursuant to subsection 3.1(D) or 3.1(E) unless Heller shall have received a first priority pledge of one hundred percent (100%) of the issued and outstanding capital stock of such Subsidiaries and such Subsidiaries shall have guaranteed the Obligations and granted security interests in their real, personal and mixed property in accordance with subsection 2.5 (including Scent Seal, Inc., if Scent Seal, Inc. guarantees the obligations of Borrower with respect to Indebtedness permitted pursuant to subsection 3.1(D) or 3.1(E)) at the end of clause (H) thereof. (j) SUBSECTION 3.5. Subsection 3.5 is amended by (i) deleting clauses (C), (D) and (E) thereof; (ii) deleting Clause (H) and substituting the following therefor: (H) Borrower may make distributions to Holdings solely to permit Holdings to redeem from officers, directors and employees of Holdings, the Borrower or Subsidiaries of the Borrower (or their heirs or estates) shares of Holdings capital stock provided all of the following conditions are satisfied: (i) no Default or Event of Default has occurred and is continuing or would arise as a result of such distribution or redemption; (ii) after giving effect to such distribution and redemption, Borrower is in compliance on a pro forma basis with the covenants set forth in subsections 4.3, 4.4 and 4.5, recomputed for the most recent month for which financial statements have been delivered; (iii) the aggregate distributions permitted (x) in any fiscal year of Borrower shall not exceed $500,000 and (y) during the term of this Agreement shall not exceed $1,500,000; and (iv) after giving effect to such redemption, the Maximum Revolving Loan Balance exceeds the aggregate outstanding principal balance of Revolving Loans by not less than $3,000,000; and (I) Provided no Default or Event of Default has occurred and is continuing, Borrower may make distributions to Holdings solely to permit Holdings to pay, without duplication of any amounts paid by Borrower, the management or advisory fee described in subsection 3.8(a) and (iii) deleting the phrase , Seller Notes on the thirteenth line of the definition of Restricted Junior Payment contained therein. (k) SUBSECTION 3.8. Subsection 3.8 is amended by (i) deleting clauses (a) and (b) of such subsection and substituting the following therefor: (a) without duplication of amounts which may be paid by Holdings, payment of a management or advisory fee to DLJ not to exceed, in the aggregate, $250,000 per year, payable quarterly in arrears on the first day of each quarter, commencing April 1, 1998, (b) to make any Restricted Junior Payments permitted under subsection 3.5, (c) to enter into and perform their respective obligations under arrangements with DLJ and its affiliates for underwriting, investment banking and advisory services on standard and customary terms and conditions which are disclosed in writing to Heller, or (d) as set forth in Schedule 3.8. ; and (ii) deleting the last sentence thereof and substituting the following: Notwithstanding the foregoing, no payments may be made with respect to the management or advisory fee described in clause (a) above upon the occurrence and during the continuation of a Default or an Event of Default. (l) SUBSECTION 3.9. Subsection 3.9 is amended by deleting clause (a) thereof and the last sentence thereof. (m) SUBSECTION 3.11 Subsection 3.11 is amended by adding the phrase, Indebtedness evidenced by the Bridge Notes, the Refinanced Bridge Indebtedness immediately after the phrase Subordinated Indebtedness on the third line thereof. (n) SUBSECTION 4.3. Subsection 4.3 is deleted in its entirety and the following substituted therefor: 4.3 EBIDAT. (a) Borrower shall not permit EBIDAT for any period set forth below to be less than the amount set forth below for such period: Period Amount January 1, 1998 through March 31, 1998 $ 5,600,000 January 1, 1998 through June 30, 1998 $11,200,000 January 1, 1998 through September 30, 1998 $16,800,000 January 1, 1998 through December 31, 1998 $22,400,000 (b) Borrower shall not permit EBIDAT for the twelve (12) month period ending on the last day of any month, commencing January 31, 1999, during the periods set forth below to be less than the amount set forth below for such period: Period Amount January 1, 1999 through June 30, 1999 $23,200,000 July 1, 1999 through December 31, 1999 $25,500,000 January 1, 2000 through June 30, 2000 $27,800,000 July 1, 2000 through December 31, 2000 $28,800,000 January 1, 2001 through June 30, 2001 $29,800,000 July 1, 2001 through June 30, 2002 $32,000,000 July 1, 2002 and thereafter $34,300,000 EBIDAT will be calculated as illustrated on Exhibit 4.6(C). (o) SUBSECTION 4.4. Subsection 4.4 is deleted in its entirety and the following substituted therefor: 4.4 Fixed Charge Coverage. (a) Borrower shall not permit Fixed Charge Coverage for any period set forth below to be less than the amount set forth below for such period: Period Coverage January 1, 1998 through March 31, 1998 1.0 January 1, 1998 through June 30, 1998 1.0 January 1, 1998 through September 30, 1998 1.0 January 1, 1998 through December 31, 1998 1.0 (b) Borrower shall not permit Fixed Charge Coverage for the twelve (12) month period ending on the last day of each month, commencing January 31, 1999, to be less than (i) for periods ending on or prior to June 30, 1999, 1.05, (ii) for periods ending from July 1, 1999 through June 30, 2002, 1.10 and (iii) thereafter, 1.15. FIXED CHARGE COVERAGE will be calculated as illustrated on Exhibit 4.6(C). (p) SUBSECTION 4.5. Subsection 4.5 is deleted in its entirety and the following substituted therefor: 4.5 Total Indebtedness to Operating Cash Flow Ratio. (a) Borrower shall not permit the ratio of Total Indebtedness calculated as of the last day of any period set forth below to an amount equal to (x) (i) in the case of the period January 1, 1998 through March 31,1998, EBIDAT for such period multiplied by four, (ii) in the case of the period January 1, 1998 through June 30, 1998, EBIDAT for such period multiplied by two and (iii) in the case of the period January 1, 1998 through September 30, 1998, EBIDAT for such period multiplied by 4/3 less (y) in each case, Unfinanced Capital Expenditures and Other Capitalized Costs (other than Capital Expenditures and fees and expenses capitalized with respect to the Related Transactions) for the period of four fiscal quarters ended on the last day of such period, to be greater than the amount set forth below for such period: Period Ratio January 1, 1998 through March 31, 1998 9.0 January 1, 1998 through June 30, 1998 9.0 January 1, 1998 through September 30, 1998 9.0 January 1, 1998 through December 31, 1998 9.0 (b) Borrower shall not permit the ratio of Total Indebtedness calculated as of the last day of any month during the periods set forth below to Operating Cash Flow for the twelve (12) month period ending on such day to be greater than the amount set forth below for such period: Period Ratio January 1, 1999 through June 30, 1999 8.75 July 1, 1999 through December 31, 1999 7.9 January 1, 2000 through June 30, 2000 7.2 July 1, 2000 through December 31, 2000 6.9 January 1, 2001 through June 30, 2001 6.7 July 1, 2001 through June 30, 2002 6.20 July 1, 2002 and thereafter 5.75 TOTAL INDEBTEDNESS, OPERATING CASH FLOW, UNFINANCED CAPITAL EXPENDITURES AND OTHER CAPITALIZED COSTS will be calculated as illustrated as Exhibit 4.6(C). (q) SUBSECTION 5.4. Subsection 5.4(B) is amended by adding the following sentence at the end thereof, to the extent this representation applies to Holdings, such representation shall only apply to Holdings as of the date of the consummation of the Mergers, provided, however, Borrower agrees to provide to Heller from time to time, upon written request therefor, an updated capitalization schedule. (r) SUBSECTION 6.1. Subsection 6.1 is amended as follows: (i) subclause (2) of clause (B) of Subsection 6.1 is deleted in its entirety; (ii) Clause (C) of Subsection 6.1 is deleted in its entirety and the following substituted therefor: (C) Breach of Certain Provisions. Failure of Borrower to perform or comply with any term or condition contained in that portion of subsection 2.2 relating to Borrower = s obligation to maintain insurance, Section 3 or Section 4; or (iii) Clause (R) of Subsection 6.1 is deleted in its entirety and the following substituted therefor: (R) Failure of Security. Heller does not have or ceases to have a valid and perfected first priority security interest in the Collateral (subject to Permitted Encumbrances) or any substantial portion thereof, in each case, for any reason other than the failure of Heller to take any action within its control; or (iv) Clause (S) of Subsection 6.1 is amended by (i) replacing the word Loan with the phrase Related Transactions on the third line thereof and (ii) adding the following at the end of such clause: unless Heller shall have received a first priority pledge of one hundred percent (100%) of the issued and outstanding capital stock of Borrower (v) Clause (T) of Subsection 6.1 is deleted in its entirety and the following substituted therefor: (T) Change in Control. (1) (i) prior to the acquisition, if any, by Hoak Communications Partners, L. P. ( Hoak ) (or any Person controlled by Hoak) of capital stock of Holdings, DLJ ceases to beneficially own and control, directly and indirectly, at least fifty-one percent (51%) of the issued and outstanding shares of each class of capital stock of Holdings entitled (without regard to the occurrence of any contingency) to vote for the election of a majority of the members of the board of directors of Holdings determined on a fully diluted basis (assuming the full exercise of all securities exercisable convertible or exchangeable for or into capital stock of Holdings) or (ii) subsequent to the acquisition, if any, by Hoak (or any Person controlled by Hoak) of capital stock of Holdings, DLJ and Hoak (or any Person controlled by Hoak), together, cease to beneficially own and control, directly and indirectly, at least fifty-one percent (51%) of the issued and outstanding shares of each class of capital stock of Holdings entitled (without regard to the occurrence of any contingency) to vote for the election of a majority of the members of the board of directors of Holdings determined on a fully diluted basis (assuming the full exercise of all securities exercisable convertible or exchangeable for or into capital stock of Holdings); or (2) Holdings ceases to directly own and control, free and clear of all Liens other than Liens in favor of Heller, one hundred percent (100%) of the issued and outstanding capital stock of Borrower; or (vi) Clause (U) of Subsection 6.1 is deleted in its entirety. (vii) Clause (V) of Subsection 6.1 is deleted in its entirety. (s) SUBSECTION 9.1. Subsection 9.1 is hereby amended by deleting the phrase or for Losses to the extent imposed, incurred by or asserted against Heller as a result of a breach or default by SBA or Heller under the Intercreditor Agreement . (t) SUBSECTION 9.2. Subsection 9.3 is amended by (i) deleting the parenthetical clause in the fourth, fifth and sixth lines of the first paragraph and (ii) deleting the second paragraph and substituting the following therefor: Notices shall be addressed as follows: If to Borrower: Arcade Marketing, Inc. P. O. Box 3156 1815 E. Main Street Chattanooga, Tennessee 37404 ATTN: Chief Operating Officer Telecopy: (423) 697-7126 With a copy to: DLJ Merchant Banking II, Inc. 277 Park Avenue, 19th Floor New York, New York 10172 ATTN: David Wittels Telecopy: (212) 892-7272 With a copy to: Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 ATTN: Lawrence E. Wieman Telecopy: (212) 450-4800 If to Heller: HELLER FINANCIAL, INC. 500 West Monroe Street Chicago, Illinois 60661 ATTN:Account Manager Corporate Finance Group Telecopy: (312) 441-7367 With a copy to: HELLER FINANCIAL, INC. 500 West Monroe Street Chicago, Illinois 60661 ATTN: Legal Department Corporate Finance Group Telecopy: (312) 441-7367 (u) SUBSECTION 9.12. Subsection 9.12 is amended by substituting the phrase DLJ for the word Liberty on the eleventh line thereof. (v) SUBSECTION 10.1. (i) Subsection 10.1 is amended by substituting the following definitions in lieu of the current version of such definitions: EXPIRY DATE means the earlier of (a) the suspension (subject to reinstatement) of the Revolving Loan Commitment pursuant to subsection 6.2, (b) the acceleration of the Obligations pursuant to subsection 6.3 or (c) December 31, 2002, as such date may be extended by mutual agreement of Heller and Borrower. HOLDINGS means AHC I Acquisition Corp., a Delaware corporation. RELATED TRANSACTIONS means the execution and delivery of the Related Transactions Documents, the funding of all Loans on the Closing Date, the Acquisition, the Mergers, the repayment of any Indebtedness identified on Schedule 10.1(A) which is to be paid in full on the Closing Date, and the payment of all fees, costs and expenses associated with all of the foregoing. RELATED TRANSACTION DOCUMENTS means (i) the Loan Documents and the Stock Purchase Agreement; (ii) until such time as the Bridge Notes shall have been refinanced in full, the Bridge Notes and the Securities Purchase Agreement; (iii) until such time as the PIK Notes shall have been refinanced in full, the PIK Notes and (iv) until such time as such agreements, instruments or documents shall have expired or been terminated by their express terms or by mutual agreement of the parties thereto, all other agreements, instruments and documents executed or delivered in connection with the Related Transactions. SUBORDINATED INDEBTEDNESS means all Indebtedness of Borrower or any of its Subsidiaries which is subordinated in right of payment to the Obligations. (ii) Subsection 10.1 and the relevant provisions of the Credit Agreement and other Loan Documents are further amended by deleting the following definitions and all references to such terms throughout the Credit Agreement and other Loan Documents, including, without limitation, subsections 3.2, 3.11, 6.1 and 10.1 of the Credit Agreement: ADDITIONAL SENIOR TERM LOAN INTERCREDITOR AGREEMENT LIBERTY REFINANCED SUBORDINATED INDEBTEDNESS SBA SENIOR TERM LOAN SENIOR TERM LOAN AGREEMENT SENIOR TERM LOAN DOCUMENTS SENIOR TERM NOTE SUBORDINATED LOAN DOCUMENTS SUBORDINATED NOTES (iii) Subsection 10.1 is further amended by adding the following definitions: BRIDGE NOTES means those certain Senior Increasing Rate Notes dated December 15, 1997 in the original aggregate principal amount not to exceed $125,000,000, issued by AHC I Merger Corp., a Delaware corporation, to Scratch & Sniff Funding, Inc., which notes were, or will be, issued pursuant to the Securities Purchase Agreement, a true, correct and complete copy of which has been delivered to Heller. DLJ means DLJ Merchant Banking II, Inc. and its affiliates. PIK NOTE means that certain Floating Rate Exchangeable PIK Note Due 2009 dated December 15, 1997 in the original principal amount of $30,000,000, issued by Holdings to DLJ, a true, correct and complete copy of which has been delivered to Heller. REFINANCED BRIDGE INDEBTEDNESS has the meaning set forth in clause (E) of Subsection 3.1. SECURITIES PURCHASE AGREEMENT means that certain Securities Purchase Agreement dated as of December 15, 1997 by and among Holdings, AHC I Merger Corp. and Scratch & Sniff Funding, Inc. (aa) Schedule 3.2(A)(12) is deleted. (bb) Schedule 3.8 attached to the Credit Agreement is amended by deleting item 2 therein and adding the items set forth on Schedule 3.8 hereto. (cc) Schedule 3.9 attached to Credit Agreement is deleted in its entirety and Schedule 3.9 attached hereto is substituted therefor. (dd) Schedule 4.6(C) attached to the Credit Agreement is deleted in its entirety and Exhibit 4.6(C) attached hereto is substituted therefor. (ee) Exhibit 4.6(F) attached to the Credit Agreement is deleted in its entirety and Exhibit 4.6(F) attached hereto is substituted therefor. 3. Assumption. Arcade Holding Corporation, a Delaware corporation, (which corporation shall be renamed Arcade Marketing, Inc., simultaneously with the effectiveness of the Merger) hereby assumes and agrees to keep, pay and perform all of the Obligations of Arcade, Inc., a Tennessee corporation, under the Credit Agreement and other Loan Documents. All references in the Credit Agreement and other Loan Documents to Arcade, Inc., a Tennessee corporation, shall be deemed to be references to Arcade Marketing, Inc., a Delaware corporation (the successor by merger of Arcade, Inc., a Tennessee corporation with and into Arcade Holding Corporation, a Delaware corporation), and Arcade Marketing Inc., a Delaware corporation, shall be deemed to be the Borrower, Pledgor or Debtor , as applicable, under the Loan Documents. Without limiting the generality of the foregoing, Arcade Holding Corporation, a Delaware corporation, hereby grants to Heller, a continuing security interest in and to all of its right, title and interest in the Collateral (as defined in the Security Agreement dated as of April 30, 1996) as security for the Obligations, as amended hereby. 4. Reaffirmation. Each of the Loan Parties as debtors, grantors, pledgors, guarantors, assignors, or in other similar capacities in which such Loan Parties grant liens or security interests in their properties or otherwise act as accommodation parties or guarantors, as the case may be, hereby ratifies and reaffirms all of its payment and performance obligations, contingent or otherwise, under each of the Loan Documents to which it is a party and, to the extent such Loan Party granted liens on or security interests in any of its properties pursuant to any such Loan Document as security for or otherwise guaranteed Obligations under or with respect to the Loan Documents, each hereby ratifies and reaffirms such guarantee and grant of security interests and liens and confirms and agrees that such security interests and liens hereafter secure all of the Obligations as amended hereby. Each of the Loan Parties hereby consents to this Amendment and acknowledges that each of the Loan Documents remains in full force and effect and is hereby ratified and reaffirmed. The execution of this Amendment shall not operate as a waiver of any right, power or remedy of Heller, constitute a waiver of any provision of any of the Loan Documents or serve to effect a novation of the Obligations. 5. Representations and Warranties. Arcade, Inc., a Tennessee corporation and Arcade Holding Corporation, a Delaware corporation, hereby represent and warrant to Heller as follows: (a) After giving effect to the Acquisition and Merger, the authorized capital stock of each of the Loan Parties is as set forth on Schedule 5.4(B) attached hereto (which schedule is hereby substituted for Schedule 5.4(B) attached to the Credit Agreement). All issued and outstanding shares of capital stock of each of the Loan Parties are duly authorized and validly issued, fully paid, non-assessable, free and clear of all Liens (other than, with respect to capital stock of Holdings, transfer restrictions contained in the Stockholders Agreement dated December 12, 1997 among Holdings and the stockholders of Holdings party thereto and Liens granted by management stockholders to Holdings to secure loans made by Holdings to such stockholders to enable them to purchase Holdings capital stock), and such shares were issued in compliance with all applicable state and federal laws concerning the issuance of securities. The issued and outstanding capital stock of each of the Loan Parties is owned by the stockholders and in the amounts set forth in Schedule 5.4(B) attached hereto. No shares of the capital stock of any Loan Party, other than those described above, are issued and outstanding. Except as set forth in Schedule 5.4(B), there are no pre-emptive or other outstanding rights, options, warrants, conversion rights or similar agreements or understandings for the purchase or acquisition from any Loan Party, of any shares of capital stock or other securities of any such entity. (b) Each of the Loan Parties has all requisite power and authority to enter into each Loan Document and Related Transaction Document to which it is a party and to carry out the transactions contemplated thereby. The execution, delivery and performance by each Loan Party of each Loan Document and Related Transaction Documents to which it is a party has been duly authorized by all necessary action. Each Related Transaction Document has been duly executed and delivered by the applicable Loan Parties and constitutes the legally valid and binding obligations of the applicable Loan Parties, each enforceable against the Loan Parties in accordance with their respective terms. The execution, delivery and performance of the Related Transaction Documents and the consummation of the related transactions does not violate any law, ordinance, rule, regulation, order or other legal requirement of any governmental authority. (c) The representations and warranties of Arcade Holding Corporation set forth in the Stock Purchase Agreement are true and correct in all material respects as of the date hereof and such representations and warranties are hereby incorporated herein by this reference with the same affect as those set forth in their entirety herein. 6. Conditions. This Amendment shall not become effective unless and until all of the following conditions have been satisfied: (a) Borrower shall have delivered to Heller an amended and substituted revolving note in the amount of $20,000,000 duly executed by Borrower (whereupon Heller shall return to Borrower the revolving note previously executed and delivered to Heller) and the other documents identified in the Closing Agenda, a copy of which is attached, all of which shall be in form and substance satisfactory to Heller; (b) Borrower shall have paid to Heller, individually, a non-refundable closing fee of $300,000; and (c) the Acquisition shall have closed in accordance with the terms of the Stock Purchase Agreement and the Mergers shall have been consummated in accordance with applicable law. 7. Consent. Provided the conditions set forth in Section 6 hereof have been satisfied, Heller hereby consents to the Acquisition and the Mergers and agrees that the consummation thereof shall not constitute a breach or default under subsections 3.6, 3.7 and 3.8. 1 8. No Amendment. Except as amended hereby, the Credit Agreement and other Loan Documents remain unmodified and in full force and effect. All references in the Loan Documents to the Credit Agreement shall be deemed to be references to the Credit Agreement as amended hereby. All references to the Revolving Note shall refer to the amended and substituted revolving note to be delivered to Heller pursuant to Section 6 above. All references to the Obligations shall refer to the Obligations as amended hereby. 9. Counterparts. This Amendment may be executed by one or more of the parties to this Amendment in any number of separate counterparts, each of which when so executed, shall be deemed an original and all said counterparts when taken together shall be deemed to constitute but one and the same instrument. [Remainder of this page intentionally left blank.] IN WITNESS WHEREOF, the parties have executed this Amendment as of the date set forth above. HELLER FINANCIAL, INC., a Delaware corporation By: _____________________________ Title: Vice President ARCADE, INC., a Tennessee corporation By: _____________________________ Title: ARCADE HOLDING CORPORATION, a Delaware corporation By: _____________________________ Title: EX-10.9 13 ASSET PURCHASE AGREEMENT EXHIBIT 10.9 ------------------------------------------------------------------------ ASSET PURCHASE AGREEMENT by and between ARCADE MARKETING, INC. AND MINNESOTA MINING AND MANUFACTURING COMPANY ------------------------------------- Dated as of May 28, 1998 ------------------------------------- ------------------------------------------------------------------------ ASSET PURCHASE AGREEMENT TABLE OF CONTENTS
PAGE ---- ARTICLE I............................................................................................... 1 SECTION 1.1. Sale and Purchase of Assets............................................................. 2 SECTION 1.2. Excluded Assets......................................................................... 2 SECTION 1.3. Assignment of Contracts and Rights...................................................... 3 ARTICLE II.............................................................................................. 4 SECTION 2.1. Assumed Liabilities..................................................................... 4 SECTION 2.2. Excluded Liabilities.................................................................... 4 ARTICLE III............................................................................................. 4 SECTION 3.1. Purchase Price.......................................................................... 4 SECTION 3.2. Allocation of Purchase Price............................................................ 5 ARTICLE IV.............................................................................................. 5 SECTION 4.1. Closing................................................................................. 5 SECTION 4.2. Closing Deliveries of Seller............................................................ 5 SECTION 4.3. Closing Deliveries of Buyer............................................................. 6 SECTION 4.4. Transfer Taxes.......................................................................... 7 ARTICLE V............................................................................................... 7 SECTION 5.1. Organization and Good Standing......................................................... 7 SECTION 5.2. Authority.............................................................................. 7 SECTION 5.3. No Breach.............................................................................. 8 SECTION 5.4. Taxes.................................................................................. 8 SECTION 5.5. Assets................................................................................. 8 SECTION 5.6. Assigned Contracts..................................................................... 9 SECTION 5.7. Governmental Approvals................................................................. 9 SECTION 5.8. Compliance With Applicable Law......................................................... 9 SECTION 5.9. Employees; Employee Plans.............................................................. 9 SECTION 5.10. Approvals..............................................................................10 SECTION 5.11. Financial Information..................................................................10 SECTION 5.12. Changes in Circumstances...............................................................10 SECTION 5.13. Licenses; the Marks....................................................................11 SECTION 5.14. Legal Proceedings......................................................................11 SECTION 5.15. Brokers, Finders and Agents............................................................11 SECTION 5.16. Books and Records......................................................................12 SECTION 5.17. Disclosure.............................................................................12 SECTION 5.18. Legal Representation...................................................................12 SECTION 5.19. Insurance..............................................................................12 SECTION 5.20. Third Parties..........................................................................12 ARTICLE VI...............................................................................................12 SECTION 6.1. Organization and Good Standing..........................................................12 SECTION 6.2. Authority...............................................................................12 SECTION 6.3. No Breach...............................................................................13 SECTION 6.4. Governmental Approvals..................................................................13 SECTION 6.5. Knowledge and Experience................................................................13 SECTION 6.6. Legal Representation....................................................................13 SECTION 6.7. Insurance...............................................................................13 SECTION 6.8. Brokers, Finders and Agents.............................................................14 ARTICLE VII..............................................................................................14 SECTION 7.1. Conduct of Business Prior to Closing....................................................14 SECTION 7.2. Mutual Cooperation; Further Assurances..................................................14 SECTION 7.3. Access to Information...................................................................14 SECTION 7.4. Exclusivity.............................................................................15 SECTION 7.5. Non-Competition.........................................................................15 SECTION 7.6. Offer of Employment.....................................................................17 SECTION 7.7. Claims..................................................................................17 ARTICLE VIII.............................................................................................18 SECTION 8.1. Conditions to Each Party's Obligations..................................................18 SECTION 8.2. Conditions to Obligations of Buyer......................................................18 SECTION 8.3. Conditions to Obligation of Seller......................................................19 ARTICLE IX...............................................................................................20 SECTION 9.1. Termination.............................................................................20 SECTION 9.2. Procedures and Effect of Termination....................................................20 ARTICLE X................................................................................................20 SECTION 10.1. Survival................................................................................20 ARTICLE XI...............................................................................................21 SECTION 11.1. Indemnification by Seller...............................................................21 SECTION 11.2. Indemnification by Buyer................................................................22 SECTION 11.3. Notice of Circumstances.................................................................22 ARTICLE XII..............................................................................................23 SECTION 12.1. Good Faith Settlement...................................................................23 SECTION 12.2. Arbitration.............................................................................23 ARTICLE XIII.............................................................................................24 SECTION 13.1. Confidentiality.........................................................................24 SECTION 13.2. Use of Confidential Information.........................................................25 SECTION 13.3. Protection of Confidential Information..................................................25 ARTICLE XIV..............................................................................................26 SECTION 14.1. Assignment..............................................................................26 SECTION 14.2. Parties in Interest.....................................................................26 SECTION 14.3. Amendment.............................................................................26 SECTION 14.4. Waiver................................................................................26 SECTION 14.5. Fees and Expenses.....................................................................26 SECTION 14.6. Notices...............................................................................27 SECTION 14.7. Brokers...............................................................................28 SECTION 14.8. Certain Definitions...................................................................28 SECTION 14.9. Captions..............................................................................30 SECTION 14.10. Entire Agreement......................................................................30 SECTION 14.11. Specific Performance..................................................................30 SECTION 14.12. Severability..........................................................................31 SECTION 14.13. Waiver of Jury Trial..................................................................31 SECTION 14.14. Representatives.......................................................................31 SECTION 14.15. Public Announcement...................................................................31 SECTION 14.16. Exhibits and Schedules................................................................31 SECTION 14.17. Governing Law.........................................................................31 SECTION 14.18. Counterparts..........................................................................31
SCHEDULES Schedule 1.1(a) - Fixed Assets Schedule 1.1(c) - Assigned Contracts Schedule 1.1(d) - Marks Schedule 1.2(g) - Excluded Assets Schedule 2.2 - Assumed Liabilities Schedule 3.2 - Allocation of Purchase Price Schedule 5.3 - Breaches of Contracts Schedule 5.5 - Assets Schedule 5.9(a) - Employees Schedule 5.10 - Approvals Schedule 5.11 - Financial Information Schedule 5.1 2 - Changes in Circumstances Schedule 5.1 4 - Legal Proceedings Schedule 5.20 - Certain Third Party Agreements EXHIBITS Exhibit A - Bill of Sale Exhibit B - Assignment and Assumption Agreement Exhibit C - Marks Assignment Agreement ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT dated as of May 28, 1998 by and between Arcade Marketing, Inc., a Delaware corporation ("Buyer"), and Minnesota Mining and Manufacturing Company, a Delaware corporation ("Seller"). W I T N E S S E T H : WHEREAS, Seller is in the business of promotional sampling products, which is comprised of (i) the manufacture and sale of fragrance samplers and/or slurry for advertising or promotion of any product or service without restriction and (ii) the manufacture and sale of fragrance microcapsule slurry or products incorporating fragrance microcapsule slurry (e.g. "scratch and sniff" stickers) for delivery of fragrances other than for (a) agricultural applications, (b) pharmaceutical applications, (c) mining applications (d) where the fragrance is a marker to indicate the presence or absence of a component in an industrial application, or (e) as a component in a manufacturing process where the final consumer product does not contain microcapsules (the "Business"); provided however, that the Business shall not include (x) repositionable notes incorporating non-proprietary fragrance microcapsule slurry and (y) the manufacture and sale of fragrance microcapsules which are to be used as ingredients in products in a format other than coated on the surface of a sheet material; WHEREAS, Seller desires to sell, and Buyer desires to purchase the Acquired Assets of the Business described above; and WHEREAS, Seller additionally operates businesses utilizing technology such as coating and encapsulation technologies, and wishes to continue to operate these other non-competitive businesses. NOW, THEREFORE, in consideration of the premises and of the mutual agreements hereinafter contained, the parties hereto do hereby agree as follows: ARTICLE I SALE AND PURCHASE OF ASSETS; EXCLUDED ASSETS SECTION 1.1. Sale and Purchase of Assets. Subject to the terms and conditions set forth herein, and in reliance upon the representations and warranties contained herein, Seller will sell, assign, convey, transfer and deliver to Buyer, and Buyer will purchase and acquire from Seller free and clear of all Liens, all of Seller's right, title and interest in and to the assets, rights and interests of Seller relating primarily to the Business, other than the Excluded Assets, as the same shall exist as of the Closing Date, including, without limitation, the following: (a) Fixed Assets. All production and other machinery, equipment, (including encapsulation equipment, computers, manuals, parts, fixtures, plant and office equipment) and other fixed assets owned by Seller and relating primarily to the Business, including without limitation those fixed assets set forth on Schedule 1.1(a), together with any Claims of Seller arising out of the maintenance or service contracts relating thereto or the breach of any express or implied warranty by the manufacturers or sellers of any such assets or any component part thereof (collectively, the "Fixed Assets"); (b) Business Records. Subject to Section 1.2(c), all books and records, including without limitation all customer lists and files, material and services vendor files, quotation files, invoices, forms, accounts, books of account, correspondence, production records, technical, manufacturing and procedural manuals, marketing materials, studies, reports or summaries relating to compliance with any Laws or Assigned Contract, electronically stored or other computerized information, and other books and records relating primarily to the Business (collectively, the "Business Records"); (c) Contracts. Subject to Section 1.3 hereof, all rights, benefits, claims and interests of Seller in, to or under all leases, contracts and commitments to which Seller is a party relating primarily to the Business, including without limitation all unfilled purchase and sales orders and all maintenance and service contracts covering any of the Fixed Assets and all non-compete and confidentiality agreements between Seller and any of its suppliers and customers, in each case as set forth on Schedule 1.1(c) (collectively, "Assigned Contracts"); (d) Marks. All of Seller's right, title and interest in and to the trademarks, trade names and service marks listed on Schedule 1.1(d) (which shall not include those items in Section 1.2(e)) and the related logos, symbols and copyrights (the "Marks"); and (e) Licenses. Licenses from the Seller in favor of the Buyer regarding the Intellectual Property (the "Licenses"). The assets to be sold, assigned, conveyed, transferred and delivered to Buyer by Seller pursuant to this Agreement are hereinafter collectively referred to as the "Acquired Assets." SECTION 1.2. Excluded Assets. Anything in Section 1.1 to the contrary notwithstanding, the following assets relating primarily to the Business (collectively, the "Excluded Assets") will be retained by Seller, and Buyer will not purchase or acquire (and is not obligated to purchase or to acquire) any interest therein: (a) Accounts Receivable. All accounts receivable which relate to sales invoiced prior to the Closing Date; 2 (b) Inventory. All items held for sale or lease or to be furnished under service contracts, work-in-process, finished items, supplies, packing and shipping materials relating to the Business; (c) Human Resources and Financial Records. All books and records relating to human resources and finances of the Business (except as set forth in Section 1.1(b)); (d) Cash and Cash Equivalents. All cash, cash equivalents and marketable securities; (e) Trade Name and Trade Name Restrictions. The right to use the trade names and trademarks "3M" or any 3M corporate logo; (f) Certain Contracts. Each and every lease, contract or commitment listed on Schedule 1.1(c) hereof which Buyer has, prior to the Closing Date, notified Seller that it does not wish to assume; or (g) Other Assets. Those assets listed on Schedule 1.2(g). SECTION 1.3. Assignment of Contracts and Rights. (a) Anything in this Agreement to the contrary notwithstanding, this Agreement shall not constitute an agreement to assign any Acquired Asset or any claim or right or any benefit arising thereunder or resulting therefrom if an attempted assignment thereof, without the consent of a third party thereto, would constitute a breach or other contravention thereof or in any way adversely affect the rights of Buyer or Seller thereunder. Seller and Buyer will make a good faith effort (but without any payment of money by Seller or Buyer) to obtain the consent of the other parties to any such Acquired Asset or any claim or right of any benefit arising thereunder for the assignment thereof to Buyer as Buyer may request. If such consent is not obtained, or if an attempted assignment thereof would be ineffective or would adversely affect the rights of Seller thereunder so that Buyer would not in fact receive all such rights, Seller and Buyer will cooperate in a mutually agreeable arrangement under which Buyer would obtain the benefits and assume the obligations thereunder in accordance with this Agreement, including sub-contracting, sub-licensing, or sub-leasing to Buyer, or under which Seller would enforce for the benefit of Buyer, with Buyer assuming Seller's obligations, any and all rights of Seller against a third party thereto. Seller will promptly pay to Buyer when received all monies received by Seller under any Acquired Asset or any claim or right or any benefit arising thereunder, except to the extent the same represents an Excluded Asset. In such event, Seller and Buyer shall, to the extent the benefits therefrom and obligations thereunder have not been provided by alternate arrangements satisfactory to Buyer and Seller, negotiate in good faith an adjustment in the consideration paid by Buyer for the Acquired Assets. 3 (b) Prior to the Closing Date, Buyer shall have the right, in its sole discretion, to notify Seller of any of the leases, contracts or commitments listed on Schedule 1.1(c) hereto which it does not wish to assume. Such notice (the "Non-Assumption Notice") shall be in writing, and shall be delivered to Seller prior to the Closing Date. The leases, contracts and commitments listed in any Non-Assumption Notice shall be retained by Seller (and any and all liabilities thereunder shall constitute "Retained Liabilities" for the purposes of this Agreement) and Buyer shall have no liability to Seller arising out of based upon or resulting from the non-assumption of such leases, contracts and commitments. ARTICLE II ASSUMPTION OF LIABILITIES SECTION 2.1. Assumed Liabilities. Subject to the terms and conditions set forth herein, and in reliance upon the representations and warranties contained herein, at the Closing, in consideration for the sale, assignment, conveyance, transfer and delivery of the Acquired Assets to Buyer, Seller will assign, convey and transfer to Buyer, and Buyer will unconditionally assume and undertake to pay, perform and discharge, in a timely manner and in accordance with the terms thereof, the liabilities identified on Schedule 2.1 to the extent such liabilities relate to the Business and are incurred and become due at any time following the Closing Date (the "Assumed Liabilities"), and no others. Without limiting the generality of the foregoing, Buyer hereby agrees to assume, undertake and perform all obligations of Seller under the Assigned Contracts to the extent such obligations arise or are to be performed after the Closing Date. SECTION 2.2. Excluded Liabilities. Anything contained herein to the contrary notwithstanding, it is expressly understood and agreed that the Buyer has not assumed, undertaken to pay, perform or discharge and shall not be liable for any Claim against Seller arising on or before Closing, unless such Claim against Seller is expressly assumed by Buyer under Section 2.1 (the "Excluded Liabilities"). ARTICLE III PURCHASE PRICE SECTION 3.1. Purchase Price. Subject to the terms and conditions set forth herein, in consideration for the sale, assignment, conveyance, transfer and delivery of the Acquired Assets and the non compete agreement in Section 7.5 Buyer will at the Closing, (i) pay to Seller by wire transfer of immediately available funds to Seller's bank account at ABA 091000019, 3M General Account 0030-103, Norwest Bank, Minneapolis, Minnesota, an amount equal to $7.25 million (the "Purchase Price") and (ii) assume the Assumed Liabilities. 4 SECTION 3.2. Allocation of Purchase Price. The parties agree to allocate the Purchase Price (and all other capitalizable costs) among the Acquired Assets and the non-compete agreement in Section 7.5 for all purposes (including financial accounting and tax purposes) in accordance with the allocation set forth in Schedule 3.2. Except to the extent otherwise required by applicable law, Seller and Buyer shall make all tax returns, reports, forms, declarations, claims and other statements in a manner consistent with Schedule 3.2 and shall not make any inconsistent statement or adjustment on any returns or during the course of any Internal Revenue Service or other tax audit. ARTICLE IV CLOSING SECTION 4.1. Closing. The Closing of the purchase and sale of the Acquired Assets (the "Closing") will take place at the offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P., 590 Madison Avenue, 20th Floor, New York, New York 10022 at 10:00 a.m., Eastern time, at such date and time as Seller and Buyer may agree. The date of the Closing is referred to herein as the "Closing Date". SECTION 4.2. Closing Deliveries of Seller. At the Closing, Seller will deliver or cause to be delivered to Buyer: (a) A copy of the resolutions of the Operations Committee of the Board of Directors of Seller authorizing and approving this Agreement and the transactions and other agreements contemplated hereby, certified by a duly authorized officer of Seller to be true, correct, complete and in full force and effect and unmodified as of the Closing Date; (b) The Licenses duly executed by Seller; (c) A transition services agreement executed by Seller; (d) A Bill of Sale duly executed by Seller transferring the Acquired Assets to Buyer, substantially in the form of Exhibit A; (e) An Assignment and Assumption Agreement duly executed by Seller, substantially in the form of Exhibit B; (f) An Assignment and Assumption Agreement relating to the Marks duly executed by Seller substantially in the form of Exhibit C; (g) An incumbency certificate of the appropriate officer of Seller; (h) Releases, if any, including without limitation termination statements under the Uniform Commercial Code of any financing statements filed against 5 any Acquired Assets, evidencing discharge, removal and termination of all Liens to which any of the Acquired Assets are subject, which releases shall be effective at or prior to the Closing; (i) A certificate of a duly authorized officer of Seller confirming the accuracy of the matters referred to in Sections 8.2(a), (b) and (c); (j) True, correct and complete copies of each of the Assigned Contracts; and (k) Such other duly executed deeds, bills of sale, endorsements, assignments, affidavits and other good and sufficient instruments of transfer, in form and substance reasonably satisfactory to Buyer and its counsel, as are necessary or reasonably requested by Buyer to effectuate the transactions contemplated hereby. SECTION 4.3. Closing Deliveries of Buyer. At the Closing, Buyer will deliver or cause to be delivered to Seller: (a) A copy of the resolutions of the Board of Directors of Buyer authorizing and approving this Agreement and all other transactions and agreements contemplated hereby certified by a duly authorized officer of Buyer to be true, correct, complete and in full force and effect and unmodified as of the Closing Date; (b) The Licenses duly executed by Buyer; (c) A transition services agreement executed by Buyer; (d) An Assignment and Assumption Agreement duly executed by Buyer substantially in the form of Exhibit B; (e) An Assignment and Assumption Agreement relating to the Marks duly executed by Buyer substantially in the form of Exhibit C. (e) An incumbency certificate of the appropriate officer of Buyer; (f) A certificate of a duly authorized officer of Buyer confirming the accuracy of the matters referred to in Sections 8.3(a) and (b), (g) The Non-Assumption Notice, if any, and; (h) Such other duly executed endorsements, assignments, affidavits, assumptions and other good and sufficient instruments of transfer, in form and substance reasonably satisfactory to Seller and its counsel, as are necessary or reasonably requested by Seller to effectuate the transactions contemplated hereby. 6 SECTION 4.4. Transfer Taxes. All applicable sales and transfer taxes (including taxes, if any, imposed upon the transfer of personal property) and filing, recording, registration, stamp, documentary and other taxes and fees ("Transfer Taxes") that are payable in connection with this Agreement, the transactions contemplated by this Agreement or the documents giving effect to such transactions, shall be paid by Seller, provided that said Transfer Taxes shall not exceed Fifty Thousand Dollars ($50,000.00) and Buyer shall pay all Transfer Taxes in excess of Fifty Thousand Dollars ($50,000.00), provided that said Transfer Taxes shall not exceed, in the aggregate, One Hundred Thousand Dollars ($100,000.00). If the Transfer Taxes exceed One Hundred Thousand Dollars ($100,000.00), the amount in excess of One Hundred Thousand Dollars ($100,000) shall be shared and paid equally by Buyer and Seller. ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Buyer as follows: SECTION 5.1. Organization and Good Standing. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with all requisite corporate power and authority to operate the Business, to own or lease the Acquired Assets, to carry on the Business as now being conducted and to enter into and to perform this Agreement and the other agreements and instruments contemplated by this Agreement (the "Related Agreements"). SECTION 5.2. Authority. Seller has all requisite corporate power and authority to execute and deliver this Agreement and the Related Agreements. The execution, delivery and performance of this Agreement and the Related Agreements by Seller and the consummation by Seller of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of Seller. This Agreement and the Related Agreements have been duly executed and delivered by Seller and constitute the valid and binding obligation of Seller enforceable against Seller in accordance with their terms, except as such enforceability may be limited at any time by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforcement of creditors' rights in general and by general principles of equity. SECTION 5.3. No Breach. The execution and delivery of this Agreement and the Related Agreements by Seller and the performance thereof by Seller do not, and the consummation of the transactions contemplated hereby and thereby and compliance with the provisions hereof and thereof will not, with or without the giving of notice or the lapse of time, or both, conflict with, or result in a breach or violation of or a default under, or result in the imposition of any Liens or give rise to a right of amendment, termination, cancellation or acceleration of any obligation or to a loss of a benefit under (i) the Articles of Incorporation or By-laws of Seller, or (ii) except as set forth in 7 Schedule 5.3, any contract, agreement, note, bond, mortgage, indenture, lease, license, franchise, permit, concession, instrument, obligation, commitment, covenant, understanding or arrangement which relates to the Business and to which Seller is a party or by which any of the Acquired Assets may be affected, or (iii) any order, ruling, decree, judgment, arbitration award, statute, law, ordinance, rule, regulation or stipulation which relates to the Business and to which Seller or the Acquired Assets are subject. SECTION 5.4. Taxes. Seller has filed all Tax returns that it is required to file with respect to the Business, and has paid all Taxes shown thereon as owing, except where failure to file Tax returns or pay Taxes would not result in a lien upon any of the assets or incurring any liability therefore. No Liens for Taxes exist with respect to any of the Acquired Assets, except for the statutory Liens for Taxes not yet due or payable. SECTION 5.5. Assets. The assets listed on Schedule 5.5 are the only assets, properties, rights and interests used by Seller in connection with the Business. None of the Acquired Assets necessary to operate the Business as presently conducted by Seller has any material defects or is in need of maintenance or repair, except for ordinary, routine maintenance and repairs which are not in excess of the ordinary costs therefor. At Closing, Seller will deliver to Buyer, good and exclusive title to the Acquired Assets, free and clear of all Liens of any kind or nature whatsoever, except for (a) those Liens created by this Agreement, (b) those Liens set forth on Schedule 5.5 and (c) current governmental charges or levies which are a Lien but not yet due and payable. SECTION 5.6. Assigned Contracts. Schedule 1.1(c) sets forth a true, accurate and complete list of all contracts, agreements, understandings, leases and commitments relating to the Business. None of the Assigned Contracts has been modified, altered, terminated or revoked, and each is in full force and effect. No breach or default on the part of Seller has occurred or, with notice or lapse of time or both, will occur, under any of the Assigned Contracts. To the best knowledge of Seller, each other party to each Assigned Contracts is in compliance with the terms of any applicable Assigned Contracts, and no breach or default on the part of any such other party has occurred or, with notice or lapse of time or both, will occur thereunder. This Section 5.6 does not apply to any agreement relating to non-competition or confidentiality between Seller and any employee not listed in Schedule 5.9(a). SECTION 5.7. Governmental Approvals. No approval, order or authorization of, or filing or registration with, allowance by, or consent of or notification to any Governmental Authority, is required to be obtained or made by Seller in connection with the execution and delivery by Seller of this Agreement, the performance of obligations of Seller hereunder or the consummation by Seller of the transactions contemplated hereby or for preventing the termination of any material right, privilege or contract of Seller included among the Acquired Assets, except where the absence of which could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. 8 SECTION 5.8. Compliance With Applicable Law. Seller is in compliance with all applicable laws, ordinances and regulations of any Governmental Authority relating to the Business, including those relating to occupational health and safety and no Claims or complaints from any Governmental Authority or other parties have been asserted or received by Seller during the past five years relating to the Business, and, to the knowledge of Seller, no claims or complaints are threatened, alleging that Seller is in violation of any such law, ordinance or regulation and to the knowledge of Seller, no such proceedings are threatened, except where such noncompliance could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. SECTION 5.9 . Employees; Employee Plans. (a) Schedule 5.9(a) sets forth a true, accurate and complete list of the employees of Seller who are currently employed primarily in relation to the Business. Except as noted on Schedule 5.9(a) each such employee with access to any commercial information of the Business or the Intellectual Property has executed and delivered an enforceable agreement containing confidentiality and non-competition provisions in the forms attached as part of Schedule 5.9(a). (b) There are no controversies, including without limitation, strikes, disputes, slowdowns or work stoppages, pending, or to the Seller's best knowledge, threatened which involve any employees employed in connection with the Business. Seller is in compliance with all Laws relating to the employment of labor, including without limitation any provision thereof relating to wages, hours, collective bargaining, employee health, safety and welfare, and the payment of social security and similar taxes. Seller is not a party to any collective bargaining or union contract in connection with the Business, and to the Seller's best knowledge, there exists no current union organizational effort or proceeding by or before any Governmental Authority with respect to any of Seller's employees in connection with the Business. SECTION 5.10. Approvals. Schedule 5.10 sets forth a list of all consents which must be obtained or satisfied by Seller for the consummation of the transaction contemplated by this Agreement. Except as described on Schedule 5.10, all such consents have been, or shall by the Closing have been, made, obtained and satisfied. SECTION 5.11. Financial Information. Seller has heretofore delivered to Buyer the financial information attached hereto as Schedule 5.11 (collectively, the "Financial Information"), including income statements for the years ended December 31, 1997, December 31, 1996 and December 31, 1995 and for the quarter ended March 31, 1998 (the "Income Statements") and detailed direct factory costs for each such period. All of the Financial Information was derived from the books and records for the Business substantially in accordance with generally accepted accounting principles consistently applied and fairly presents the financial position of the Business as of dates of such Financial Information, and the results of operations of the Business for such periods and accurately reflects the items of revenue and expense purported to be reflected thereon. In addition, Schedule 5.11 sets forth all sales orders of the Business since January 1, 1998 to 9 the date of this Agreement, including the current backlog of sales orders as of the date of this Agreement. SECTION 5.12. Changes in Circumstances. Except as set forth on Schedule 5.12, from January 1, 1997 to date of this Agreement, the Business has been conducted in the ordinary and normal course and there has been no event, occurrence, development or state of circumstances or facts which has had or could reasonably be expected to have a Material Adverse Effect. Without limiting the generality of the foregoing, Seller has not with respect to the Business or the Acquired Assets: (i) transferred or otherwise disposed of any of the Acquired Assets; (ii) mortgaged, pledged or subjected to any Lien any of the Acquired Assets; (iii) acquired any Acquired Assets outside the ordinary and normal course of business; (iv) sustained any damage, loss or destruction of or to the Acquired Assets (whether or not covered by insurance); (v) modified, amended, canceled or terminated any Assigned Contracts; (vi) entered into any contract, lease or commitment on terms that are less favorable than the terms of contracts, leases or commitments entered into by Seller in the ordinary course of business and consistent with past practice. (vii) other than pursuant to the terms hereof agreed to, or obligated itself to, do anything identified in (i) through (v) above. SECTION 5.13. Licenses; Marks. (a) The Intellectual Property licensed pursuant to the Licenses constitutes all Intellectual Property necessary and/or used in the conduct of the Business as currently conducted by Seller. The representation and warranties of Seller contained in the Licenses are true and correct in accordance with their terms. (b) The Marks listed on Schedule 1.1(d) (which shall not include the items in Section 1.2(e)) constitute all of the trademarks, trade names, service marks, logos, symbols, and copyrights that are used by the Seller in relation to the Business. The Seller has good and marketable title to all the Marks, free and clear of any Lien. The Marks have not been hypothecated, assigned or licensed, in whole or in part, to any other person or entity. There is not any pending, nor, to the best of Seller's knowledge, threatened claim or litigation against Seller contesting the validity of or right to use any of the Marks. Seller has not received any notice of infringement upon or conflict with any asserted right of any third party, nor is there any basis for the foregoing. To the best 10 of Seller's knowledge, no person is, as of the date hereof, infringing in any way Seller's rights to the Marks. SECTION 5.14. Legal Proceedings. Except as set forth on Schedule 5.14, there are no material actions, suits or proceedings pending or, to the Seller's knowledge, threatened against Seller with respect to the Business, the Acquired Assets or the transactions contemplated by this Agreement, before any court or other Governmental Authority. SECTION 5.15. Brokers, Finders and Agents. Seller is not directly or indirectly obligated to anyone acting as a broker, finder, investment banker or in any other similar capacity in connection with this Agreement or the transactions contemplated hereby. SECTION 5.16. Books and Records. The books and records of Seller maintained in connection with the Business (including all computer software and data used to maintain such books and records together with the media on which such software and data are stored and all documentation relating thereto) accurately record all material transactions relating to the Business, and have been maintained consistent with good business practice. SECTION 5.17. Disclosure. Seller has made full, complete and true disclosure to Buyer and its counsel of all information responsive to Buyer's requests for information and there is no information which has not been disclosed to Buyer which could have a Material Adverse Effect on the Business or adversely effect the Buyer's willingness to consummate the transactions contemplated hereby the Buyer subsequent to the Closing. SECTION 5.18. Legal Representation. Seller has been represented by counsel (both with respect to general legal and Intellectual Property legal matters) with respect to the preparation, negotiation and execution of this Agreement. SECTION 5.19 . Insurance. Seller has or will have on the Closing Date sufficient insurance to meet all of its obligations set forth in this Agreement. SECTION 5.20. Third Parties. Schedule 5.20 lists all third parties who have supplied printing services for the Business or who have had access to the Intellectual Property since February 28, 1993 and lists any and all confidentiality or noncompetition agreements executed by such third parties and whether such agreements may be assigned to Buyer subsequent to the Closing. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BUYER SECTION 6.1. Organization and Good Standing. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 11 SECTION 6.2. Authority. Buyer has all requisite corporate power and authority to execute and deliver this Agreement, the Related Agreements and to consummate the transactions contemplated by hereby and thereby. The execution, delivery and performance of this Agreement and the Related Agreements by Buyer and the consummation by Buyer of the transactions contemplated by hereby and thereby have been duly authorized by all necessary corporate action on the part of Buyer. This Agreement and the Related Agreements have been duly executed and delivered by Buyer and constitute the valid and binding obligation of Buyer, enforceable against Buyer in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforcement of creditors' rights in general and by general principles of equity. SECTION 6.3. No Breach. The execution and delivery of this Agreement and the Related Agreements by Buyer and the performance thereof by Buyer do not and compliance with the provisions hereof and thereby will not, with or without the giving of notice or the lapse of time, or both, conflict with or result in a breach or violation of or a default under, or result in the imposition of any Liens or give rise to a right of amendment, termination, cancellation or acceleration of any obligation or to a loss of a material benefit under, (i) the Certificate of Incorporation or By-laws of Buyer, or (ii) any material contract, agreement, note, bond, mortgage, indenture, lease, license, franchise, permit, concession, instrument, obligation, commitment, covenant, understanding or arrangement to which it is a party or by which any of its assets may be affected, or (iii) any order, ruling, decree, judgment, arbitration award, statute, law ordinance, rule, regulation or stipulation to which Buyer or its properties or assets is subject, or result in the creation of any Lien upon any of its properties or assets. SECTION 6.4. Governmental Approvals. No approval, order or authorization of, or filing or registration with, allowance by, or consent of or notification to any Governmental Entity is required to be obtained or made by Buyer in connection with the execution and delivery by Buyer of this Agreement, the performance of obligations of Buyer hereunder or the consummation by Buyer of the transactions contemplated hereby, except where the absence of which could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. SECTION 6.5. Knowledge and Experience. Buyer has such knowledge and experience in the line of business of Seller so as to enable Buyer to evaluate the merits and risks of acquiring and operating the Business and making an informed decision with respect thereto. SECTION 6.6. Legal Representation. Buyer has been represented by counsel (both with respect to general legal and Intellectual Property legal matters) with respect to the preparation, negotiation and execution of this Agreement. SECTION 6.7. Insurance. Buyer has or will have on the Closing Date sufficient insurance to meet its obligations set forth in this Agreement. 12 SECTION 6.8. Brokers, Finders and Agents. Buyer is not directly or indirectly obligated to anyone acting as broker, finder or in any other similar capacity in connection with this Agreement or the transactions contemplated hereby. ARTICLE VII COVENANTS SECTION 7.1. Conduct of Business Prior to Closing. Between the date hereof and the Closing Date, except as consented to by Buyer in writing, Seller shall operate and carry on the Business in the ordinary course consistent with past practice. Consistent with the foregoing, except as consented to by Buyer in writing, Seller agrees that between the date hereof and the Closing Date it shall not engage in any practice, take any action or enter into any transaction of the nature that would require a disclosure as provided for or contemplated by Section 5.1 2 hereof. SECTION 7.2. Mutual Cooperation; Further Assurances. Upon the terms and subject to the conditions of this Agreement, Seller and Buyer shall each use their respective reasonable good faith efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable, consistent with applicable law, to satisfy the conditions set forth in Article VIII and to consummate and make effective the transactions contemplated hereby in the most expeditious manner (including, without limitation, obtaining all consents of all Governmental Authorities and other third parties as set forth on Schedule 5.10). Consistent with the foregoing, Seller and Buyer each agree from time to time following the Closing, at the reasonable request of the other and without further cost or expense to such requested party, to execute and deliver such other instruments of conveyance and transfer and take such other actions as the requesting party may reasonably request in order to more effectively consummate and make effective the transactions contemplated hereby. SECTION 7.3. Access to Information. (a) Between the date hereof and the Closing Date, Seller shall afford to Buyer and its counsel, accountants and other authorized representatives, upon reasonable notice, reasonable access during business hours to the plants and properties of the Business and to the Business Records in order that the Buyer may have full opportunity to make such inspections and investigations as it shall desire to make of the affairs of the Business, and Seller shall cause its officers and employees to furnish such additional financial and operating data and other information relating to the Business as Buyer shall from time to time request. (b) Buyer acknowledges that it has an affirmative obligation to seek out information concerning the Business and the Acquired Assets. Accordingly, in addition to the due diligence previously conducted, Buyer will evaluate and conduct a thorough due diligence of the Business and the Acquired Assets including but not limited to a review of the manufacturing documentation, product files, Intellectual Property information and regulatory information. 13 SECTION 7.4. Exclusivity. The Buyer hereby agrees that until June 30, 1998, none of the Seller or any of its affiliates, directors, officers, employees, representatives or agents shall, directly or indirectly, solicit, encourage or initiate inquiries or proposals from, or provide information to, or participate in any discussions or negotiations or otherwise cooperate with, any person or entity (other than Buyer and its affiliates, directors, officers, employees, representatives and agents) with respect to the possible sale or other transfer (regardless of form) of the Business, or any material portion thereof, including the Intellectual Property used or useful thereto, or the sale, merger, liquidation or any similar transaction with respect to Seller itself. SECTION 7.5. Non-Competition. (a) Period and Conduct. Seller understands and acknowledges that the Buyer would not have entered into this Agreement absent the provisions of this Section 7.5 and in consideration for the payments set out in Section 3.1 hereof, therefore, agrees that (i) for a period of ten (10) years commencing on the Closing Date, it will not, and will cause its affiliates not to, directly or indirectly, engage or participate in, whether for their own account or for that or any other entity or be connected as a partner, investor, stockholder, creditor, guarantor, advisor, consultant or any other capacity in any commercial activity which competes with the Business or license, authorize or otherwise grant a right to any third party to engage in any commercial activity which competes with the Business; provided that both Buyer and Seller may produce and sell products containing encapsulated fragrance coated on the surface of a sheet material ("Coated Sheet Products") for delivery of fragrances for applications other than those applications set forth in clauses (a)-(e) in the definition of the Business, which Coated Sheet Products are (i) not for advertising or promotion of a product or service or (ii) scratch and sniff stickers. (b) Territory. Seller will refrain and Seller will cause its affiliates to refrain from engaging in the activities described in this Section 7.5 during the period specified in Section 7.5(a) hereof in North America (which shall include Mexico), Europe, Asia, Australia, Colombia, Brazil, Peru and Argentina. (c) Relief. Section 7.5 will cause serious and substantial damage to Buyer, if Seller or any affiliates should in any way breach, or fail to comply with, the terms of this Section 7.5, Buyer will be entitled to a temporary restraining order, a temporary injunction and permanent injunction restraining Seller and such affiliates from any such breach or failure. Resort to the remedy specified herein will not preclude or bar the concurrent or subsequent seeking of recovery pursuant to Article XI. (d) Certain Waivers and Acknowledgments. Buyer and Seller hereby agree that the restrictions set forth in Sections 7.5(a) and Section 7.5(b) are reasonable in duration and scope, and Seller hereby waives any and all rights it may have to claim that such restrictions are in any way unreasonable or incompatible with its rights. 14 (e) Exercise of Seller's Rights. If any employee or agent of Seller listed in Schedule 5.9(a) or Schedule 5.6 violates the terms of any agreement relating to non-competition or confidentiality that such employee or agent has with Seller with respect to the Business, then Seller agrees that Buyer may file suit in Seller's name and on Seller's behalf against such employee or agent to enforce the applicable provisions of any such agreement subject to the following provisions: (i) Seller shall have no obligation or responsibility to Buyer to monitor any employee's or agent's compliance with such agreements, or to enforce such agreements, (ii) Seller shall have the right to consent to the counsel selected by Buyer, which consent shall not be unreasonably withheld, (and, at its election, Seller may obtain separate counsel of its own choosing, at its own cost), to approve all litigation before it is threatened or commenced, to approve all pleadings associated therewith before such pleadings are served or filed with the court and to approve the terms of any settlement (which approvals shall not be unreasonably withheld), (iii) Buyer shall indemnify, defend and hold Seller harmless from and against (1) any cost or expense (including reasonably attorneys fees) incurred by Seller in connection with this subsection (c), other than as otherwise provided, and (2) any cost, expense (including reasonably attorneys fees), damage, or judgment awarded against Seller arising from any claim, counterclaim or cross-claim of any nature whatsoever asserted by any employee or agent against whom Buyer seeks to enforce such agreements. Buyer shall give Seller advance written notice of all actions requiring Seller's consent or approval, such notice to be delivered to Seller's Chief Intellectual Property Counsel (3M Center, Building 220-12W-01, St. Paul, Minnesota 55144-1000), and such notice specifying with particularity the matter(s) for which Seller's consent or approval is being sought. If Seller fails to respond to such notice within three (3) business days after its receipt, Seller shall be deemed to have consented or approved such action. (f) Severability. Each subdivision of this Section 7.5 constitutes a separate and distinct provision hereof. In the event that any provision of this Section 7.5 shall be finally and judicially determined to be invalid, ineffective or unenforceable, such determination will apply only in the jurisdiction in which such adjudication is made and every other provision of this Section 7.5 will remain in full force and effect. The invalid, ineffective or unenforceable provision will, without further action by the parties, be automatically amended to effect the original purpose and intent of the invalid, ineffective or unenforceable provision (including, without limitation, reducing the duration or limiting the scope of such provision to that duration or scope which is the maximum permitted by applicable law); provided, however, that such amendment will apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. SECTION 7.6. Offer of Employment. Seller acknowledges that Buyer may offer employment to certain of the employees of the Business and Seller agrees to use commercially reasonable efforts (which efforts shall not include any requirement of Seller to expend any money or to offer or grant any financial accommodation, except for salary, benefits and other compensation now provided to the employees, which Seller hereby covenants and agrees to pay on a timely basis, consistent with past practice) to (i) take 15 promptly all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations and Seller's general corporate policies to retain the services of the employees and (ii) not to obstruct Buyer in its efforts to hire such employees of the Business as Buyer shall determine to hire (which shall not preclude Seller from offering employment to any such employees in any other of Seller's businesses). In the event that Buyer does employ any employees of the Business ("Transferred Employees"), Buyer agrees to provide coverage and benefits to such Transferred Employees under the same benefit plans and arrangements that cover its current employees and Seller will have no responsibility therefor on and after the Closing Date. Buyer will cause each of its benefit plans and arrangements to recognize all service that the Transferred Employees had completed with Seller prior to the Closing Date for all purposes for which such service was recognized by Seller's Employee Plans. In addition, Buyer will cause its benefit plans which provide medical or dental benefits to (i) waive any pre-existing conditions and actively-at-work exclusions affecting Transferred Employees and their eligible family members, and (ii) recognize any out-of-pocket medical and dental expenses incurred by Transferred Employees and their eligible family members during 1998 under Seller's Employee Plans on or before the Closing Date for purposes of satisfying applicable annual deductible, coinsurance and out-of-pocket maximum provisions. SECTION 7.7. Claims. Seller agrees that upon the execution of this Agreement it will immediately take all steps necessary to withdraw the opposition that it has filed in the European Patent Office against EP-B-0 525 530 which is owned by Thermedics, Inc., titled "Perfume Samplers and Process for Their Manufacture" which is licensed to Buyer; provided that if such patent is issued, Buyer shall grant a Seller a non-exclusive license to use such patent outside of the Business, at a royalty equal to that payable by Buyer under its license from Thermedics, Inc. Seller also agrees to cooperate with Thermedics, Inc. in the withdrawal of the opposition and not to otherwise further participate in the opposition. ARTICLE VIII CONDITIONS SECTION 8.1. Conditions to Each Party's Obligations. The respective obligations of each party to effect the transactions contemplated by this Agreement are subject to the satisfaction at or prior to the Closing Date of each of the following conditions: (a) Governmental Approvals. All filings required to be made prior to the Closing Date by Seller or Buyer with, and all consents, approvals and authorizations required to be obtained prior to the Closing Date by Seller or Buyer from, any Governmental Authority in connection with the execution, delivery and performance of this Agreement shall have been made or obtained, except where the failure to make or obtain the same would not have a Material Adverse Effect or a material adverse effect on 16 the ability of Buyer to consummate the transactions contemplated by this Agreement and could not reasonably be expected to subject Seller or Buyer or any of their respective affiliates or any directors or officers of any of the foregoing to the risk of criminal liability; and (b) No Injunctions or Restraints. No statute, law, rule, regulation, decree, judgment, temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other Governmental Authority or other legal restraint or prohibition preventing the consummation of the transactions contemplated by this Agreement shall be in effect; provided, however, that each of the parties shall have used reasonable good faith efforts to prevent the entry of any such injunction or other order and to appeal as promptly as possible any injunction or other order that may be entered. SECTION 8.2. Conditions to Obligations of Buyer. The obligations of Buyer to effect the transactions contemplated by this Agreement are subject to the satisfaction at or prior to the Closing Date of each of the following conditions: (a) Representations and Warranties. The representations and warranties of Seller set forth in this Agreement shall be true and correct in all respects as of the date of this Agreement and, except for the effect of any activities or transactions which are specifically contemplated by this Agreement, shall be true and correct in all material respects at the Closing Date with the same effect as though all such representations and warranties had been made at such time, and Seller shall have delivered to Buyer a certificate signed by an authorized executive officer of Seller confirming the foregoing as of the Closing Date; (b) Performance of Obligations of Seller. Each and all of the covenants and agreements of Seller to be performed or complied with pursuant to this Agreement prior to the Closing Date shall have been fully performed and complied with in all material respects, and Seller shall have delivered to Buyer a certificate signed by an authorized executive officer of Seller confirming the foregoing as of the Closing Date; (c) No Material Adverse Change. On or after the date of this Agreement, there shall not have occurred (or reasonably be expected to occur) any event, change or development which has had or may reasonably be expected to have a material adverse effect upon the financial condition, business, assets, prospectus, properties or operation of the Business, and Seller shall have delivered to Buyer a certificate signed by an authorized executive officer of Seller confirming the foregoing as the Closing Date; (d) Diligence. Buyer and its legal counsel shall be satisfied, in their sole discretion, with the results of the due diligence investigation conducted by Buyer; (e) Other Agreements. On the Closing Date Buyer and Seller shall have executed and delivered the Licenses and a transition services agreement on terms and conditions mutually acceptable to Buyer and Seller. 17 SECTION 8.3. Conditions to Obligation of Seller. The obligation of Seller to effect the transactions contemplated by this Agreement is subject to the satisfaction at or prior to the Closing Date of each of the following conditions: (a) Representations and Warranties. The representations and warranties of Buyer set forth in this Agreement shall be true and correct in all respects as of the date of this Agreement and, except for the effect of any activities or transactions which are specifically contemplated by this Agreement, shall be true and correct in all material respects at the Closing Date with the same effect as though all such representations and warranties had been made at such time, and Buyer shall have delivered to Seller a certificate signed by an authorized executive officer of Buyer confirming the foregoing as of the Closing Date; and (b) Performance of Obligations of Buyer. Each and all of the covenants and agreements of Buyer to be performed or complied with pursuant to this Agreement on or prior to the Closing Date shall have been fully performed and complied with in all material respects, and Buyer shall have delivered to Seller a certificate signed by an authorized executive officer of Buyer confirming the foregoing as of the Closing Date. ARTICLE IX TERMINATION SECTION 9.1. Termination. This Agreement may be terminated and the transactions contemplated by this Agreement abandoned at any time prior to the Closing Date: (a) by the mutual written agreement of Buyer and Seller; (b) by either Buyer or Seller, if the Closing Date shall not have occurred on or before June 30, 1998 except that neither Buyer, on the one hand, nor Seller, on the other hand, may so terminate this Agreement if the absence of such occurrence is due to the failure of Buyer, on the one hand, or Seller, on the other hand, to perform in all material respects each of its obligations required to be performed prior to the Closing Date. SECTION 9.2. Procedures and Effect of Termination. In the event of termination of this Agreement and abandonment of the transactions contemplated hereby by any or both of the parties pursuant to Section 10.1 hereof, written notice thereof shall forthwith be given to the other party hereto and this Agreement shall terminate and the transactions contemplated hereby shall be abandoned, without further action by either of the parties hereto. If this Agreement is terminated as provided herein: 18 (a) Upon the request therefor, each party will return all documents, work papers and other material of the other party relating to the transactions contemplated hereby, whether obtained before or after the execution hereof, to the party furnishing the same. Each party will destroy all work product containing information of the other party and provide certification of destruction from attorneys, consultants and corporate officers having access to this information; and (b) Any termination pursuant to Section 9.1 hereof shall not be deemed to be a waiver or termination of any rights or remedies otherwise available under this Agreement to any party, including any rights and remedies for breach of any provisions of this Agreement occurring prior to such termination. ARTICLE X SURVIVAL SECTION 10.1. Survival. The representations and warranties of Seller or Buyer contained in this Agreement or any agreement or certificate delivered pursuant hereto shall survive the Closing and remain in full force and effect for six (6) months from the Closing Date. Upon and following expiration of any representation or warranty hereunder, neither Seller nor Buyer shall have any liability whatsoever with respect to such representation or warranty. The covenants and agreements contained in this Agreement shall survive indefinitely. ARTICLE XI INDEMNIFICATION SECTION 11.1. Indemnification by Seller. (a) General. Seller shall indemnify, defend and hold Buyer, its affiliates and each of their employees, directors, officers and stockholders (collectively, the "Buyer Group") harmless from and against any and all loss, liability, damage or expense, including, without limitation, reasonable fees and disbursements of legal counsel (collectively "Damages") actually incurred by any member of the Buyer Group based upon, arising out of or otherwise in respect of any breach of any of Seller's representations and warranties contained in this Agreement, or the Licenses provided that, (i) the Seller shall not be liable under this Section 11.1(a) unless the aggregate amount of damages with respect to all matters referred to in this Section 11.1(a) exceeds $50,000, and then only to the extent of such excess, and (ii) Seller's maximum liability under this Section 11.1(a) shall not exceed 75% of the Purchase Price. Notwithstanding the foregoing, Damages shall not include punitive, consequential and/or indirect damages and Buyer hereby waives the right to make claims for such damages. 19 (b) Special Indemnity. Seller shall indemnify, defend and hold the Buyer Group harmless from and against any and all Damages actually incurred by any member of the Buyer Group based upon, arising out of or otherwise in respect of (i) any breach of any covenant or agreement of Seller contained in this Agreement or the Licenses, (ii) non-compliance by Seller with any bulk sales law applicable to the transfer of the Acquired Assets to Buyer, (iii) any Retained Liabilities or other liabilities arising at, prior to or subsequent to the Closing Date arising out of, based upon or resulting from any act, omission, event or condition which occurred or existed prior to the Closing in connection with the Acquired Assets or the conduct of the Business, (iv) any liabilities resulting from any act, operations, omission, event or condition relating to or arising from any of the Seller's assets or businesses other than the Acquired Assets or the Business and (v) any breach of a representation or warranty contained in this Agreement or Licenses, which breach occurs due to the intentional, willful, reckless or grossly negligent conduct of Seller. Notwithstanding the foregoing, Damages shall not include punitive, consequential and/or indirect damages and Buyer hereby waives the right to make claims for such damages. SECTION 11.2. Indemnification by Buyer. (a) General. Buyer shall indemnify, defend and hold Seller, its affiliates and each of their employees, directors, officers and stockholders (collectively, the "Seller Group") harmless from and against any and all loss, liability, damage or expense, including, without limitation, reasonable fees and disbursements of legal counsel (collectively "Damages") actually incurred by any member of the Seller Group based upon, arising out of or otherwise in respect of any breach of any of Buyer's representations and warranties contained in this Agreement or the Licenses, provided that, (i) the Buyer shall not be liable under this Section 11.2(a) unless the aggregate amount of damages with respect to all matters referred to in this Section 11.2(a) exceeds $50,000, and then only to the extent of such excess, and (ii) Buyer's maximum liability under this Section 11.2(a) shall not exceed 75% of the Purchase Price. Notwithstanding the foregoing, Damages shall not include punitive, consequential and/or indirect damages and Seller hereby waives the right to make claims for such damages. (b) Special Indemnity. Buyer shall indemnify, defend and hold the Seller Group harmless from and against any and all Damages actually incurred by any member of the Seller Group based upon, arising out of or otherwise in respect of (i) any breach of any covenant or agreement of Buyer contained in this Agreement or the Licenses, (ii) any Assumed Liabilities or other liabilities arising subsequent to the Closing Date arising out of, based upon or resulting from any act, omission, event or condition which occurred or existed subsequent to the Closing in connection with the Acquired Assets or the conduct of the Business, (iii) any liabilities resulting from any act, operations, omission, event or condition relating to or arising from any of the Buyer's assets or businesses other than the Acquired Assets or the Business and (iv) any breach of a representation or warranty contained in this Agreement or the Licenses, which breach occurs due to the intentional, willful, reckless or grossly negligent conduct of Buyer. Notwithstanding the foregoing, 20 Damages shall not include punitive, consequential and/or indirect damages and Seller hereby waives the right to make claims for such damages. SECTION 11.3. Notice of Circumstances. Promptly after receipt by any member of the Buyer Group or the Seller Group of notice of any action, proceeding, claim or potential claim or discovery by any member of the Buyer Group or the Seller Group of any facts (any of which is hereinafter individually referred to as a "Circumstance") which could give rise to a right to indemnification pursuant to any provision of this Agreement, such Person (the "Indemnified Party") shall give the party who may become obligated to provide indemnification hereunder (the "Indemnifying Party") prompt written notice describing the Circumstance in reasonable detail. If notice of a Circumstance is not given to the Indemnifying Party within a sufficient period of time or in sufficient detail to apprise the Indemnifying Party of the nature of the Circumstance (in each instance taking into account the facts and circumstances with respect to such Circumstance), the Indemnifying Party shall not be liable to the Indemnified Party to the extent that the Indemnifying Party's position is actually prejudiced as a result thereof. The Indemnifying Party shall have the right, at its option, to settle, compromise or defend, at its own expense and by its own counsel, any Circumstance involving the asserted liability of the Indemnified Party. In the event the Indemnifying Party fails to take diligent action to settle, compromise or defend such Circumstance within twenty (20) days of receiving notice of such Circumstance from the Indemnified Party, the Indemnifying Party shall forfeit its right to settle, compromise or defend such Circumstance. If any Indemnifying Party shall undertake to settle, compromise or defend any such asserted liability, it shall promptly notify the Indemnified Party of its intention to do so, and the Indemnified Party agrees to cooperate fully with the Indemnifying Party and its counsel in the settlement or compromise of, or defense against, any such asserted liability, provided that the Indemnifying Party shall not agree to any equitable relief with respect to the Indemnified Party without the written consent of the Indemnified Party. All out-of-pocket costs and expenses incurred (i) in connection with such cooperation or (ii) following a failure by the Indemnifying Party to take diligent action to settle, compromise or defend such Circumstance within twenty (20) days of notice of a Circumstance, shall be borne by the Indemnifying Party. In any event, the Indemnified Party shall have the right at its own expense to participate in the defense of such asserted liability. Under no circumstances shall the Indemnified Party settle or compromise any such asserted liability without the written consent of the Indemnifying Party. ARTICLE XII ARBITRATION SECTION 12.1. Good Faith Settlement. Each of the Buyer and Seller agree to use their best efforts to resolve amicably any dispute which arises under this Agreement or the Licenses, and will not take any action inconsistent therewith. At the option of any of the Buyer and Seller, any such dispute shall be submitted to the Vice President of 21 Seller and the Chief Financial Officer of Buyer for their consideration and resolution, and if no decision is then reached, to the Senior Executive Officer of Seller and the Chief Executive Officer of Buyer for their consideration and resolution. The resolution of any matter in accordance with this Section 12.1 shall be binding on the Buyer and Seller for all purposes. SECTION 12.2. Arbitration. All disputes between the Seller and Buyer, including, without limitation, those relating to this Agreement or the Licenses which are not resolved pursuant to Section 12.1, shall be resolved by arbitration as provided in this Section 12.2. This agreement to arbitrate shall survive the rescission or termination of this Agreement or the Licenses. All arbitration shall be conducted pursuant to the Commercial Arbitration Rules of the American Arbitration Association except as herein may be provided. The decision of the arbitrators shall be final and binding on all parties. All arbitration shall be undertaken pursuant to the Federal Arbitration Act, where applicable, and the decision of the arbitrators shall be enforceable in any court of competent jurisdiction. In any dispute where a party seeks $50,000 or more in damages, three arbitrators shall be employed. All costs attendant to the arbitration, excluding attorney's and expert's fees, shall be borne equally by the parties. Each party shall bear its own attorney's and expert's fees. The arbitrators shall not award punitive, consequential, and/or indirect damages and each party hereby waives the right to make claims for such damages with respect to the Agreement. In resolving all disputes between parties, unless an agreement specifies otherwise, the arbitrators shall apply the law of the State of New York, except as may be modified by this Agreement. The arbitrators are by this Agreement directed to conduct the arbitration hearing no later than three months from the service of the statement of claim and demand for arbitration unless good cause is shown establishing that the hearing cannot fairly and practically be so convened. Except as needed for presentation in lieu of a live appearance, depositions shall not be taken. Parties shall be entitled to conduct document discovery by requesting production of documents. Responses or objections shall be served twenty (20) days after receipt of a request. The arbitrators shall resolve any discovery disputes by such pre-hearing conferences as may be needed. All parties agree that the arbitrators and any counsel of record to the proceeding shall have the power of subpoena process as provided by law. The parties agree that either shall be entitled to pursue emergency or preliminary injunctive relief in the court of competent jurisdiction, and each party agrees that it shall consent to the stay of such judicial proceedings on the merits of both this Agreement and the related transactions pending arbitration of all underlying claims between the parties immediately following the issuance of any such emergency or injunctive relief. 22 ARTICLE XIII CONFIDENTIALITY SECTION 13.1. Confidentiality. (a) Commercial Information. Except as expressly set forth in this Article XIII Seller shall keep and shall cause its affiliates and its and their respective officers, directors, employees, agents and subcontractors (collectively, "Representatives") to keep confidential any and all commercial information (whether in oral or written form) or physical object (including, without limitation, the marketing data and business plans and projections of the Business) relating to the Business Confidential Commercial Information"), and Seller shall not disclose directly or indirectly, and shall cause its Representatives not to disclose directly or indirectly, any Confidential Commercial Information to anyone outside Seller, its affiliates and their respective Representatives, except that Confidential Commercial Information shall not include any information if such information is or hereafter becomes generally available to the trade or public other than by reason of any breach or default by the Seller, any of its affiliates or any Representative of the foregoing with respect to a confidentiality obligation under this Agreement. Based on the Seller's good faith judgment with the advice of counsel, Confidential Commercial Information may be disclosed in compliance with applicable legal requirements to a public authority, if so required; provided, however, that whenever the Seller becomes aware of any state of facts which would or might result in disclosure of Confidential Commercial Information above, it shall, promptly notify the Buyer prior to any such disclosure so that the Buyer may seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this Agreement. Notwithstanding anything contained above, the Seller shall furnish only that portion of the Confidential Commercial Information which it is advised by counsel is legally required and shall exercise reasonable efforts to obtain assurance that confidential treatment shall be accorded the Confidential Commercial Information. (b) Relief. Section 13.1 will cause serious and substantial damage to Buyer, if Seller, its affiliates or their Representatives should in any way breach or fail to comply with the terms of this Section 13.1, Buyer will be entitled to an injunction restraining Seller, its affiliates and their Representatives from any such breach or failure. Resort to the remedy specified herein will not preclude or bar the concurrent or subsequent seeking of recovery pursuant to Article XI. SECTION 13.2. Use of Confidential Commercial Information. Seller agrees that no Confidential Commercial Information shall: (i) be used in its business or the businesses of it affiliates and Representatives; 23 (ii) be assigned, licensed, sublicensed, marketed, transferred, loaned, duplicated or copied, directly or indirectly; and (iii) be used or exploited by Seller or any of its affiliates or Representatives for its or their respective benefit or for the benefit of any other relationships with customers or other business associates of Seller, its affiliates and their Representatives. SECTION 13.3. Protection of Confidential Commercial Information. Seller shall deal with Confidential Commercial Information so as to protect it from disclosure with a degree of care not less than that used by it in dealing with its own information intended to remain exclusively within its knowledge and shall take reasonable steps to minimize the risk of disclosure of Confidential Commercial Information. ARTICLE XIV GENERAL PROVISIONS SECTION 14.1. Assignment. Seller shall not convey, assign or otherwise transfer any of their rights or obligations under this Agreement (except the license under Section 4.2(d) when conveyed, assigned or otherwise transferred with the business to which it relates) without the express written consent of Buyer. Buyer may (without obtaining any consent) assign its rights, interests or obligations under this Agreement. Any conveyance, assignment or transfer requiring the express written consent of Buyer which is made without such consent shall be void. No assignment of this Agreement shall relieve the assigning party of its obligations hereunder. SECTION 14.2. Parties in Interest. This Agreement is binding upon and is for the benefit of the parties hereto and their respective successors and permitted assigns. This Agreement is not made for the benefit of any person, firm, corporation or other entity not a party hereto, and no person, firm, corporation or other entity other than the parties hereto or their respective successors and permitted assigns shall acquire or have any right, remedy or claim under or by virtue of this Agreement. SECTION 14.3. Amendment. This Agreement cannot be amended or modified except by a written agreement executed by the parties hereto. SECTION 14.4. Waiver. At any time prior to the Closing Date, Buyer may extend the time for the performance of or waive compliance with any of the obligations or other acts of Seller contained herein or waive any inaccuracies in the representations and warranties of Seller contained herein or in any document delivered pursuant hereto, and Seller may extend the time for the performance of or waive compliance with any of the obligations or other acts of Buyer contained herein or waive any inaccuracies in the representations and warranties of Buyer contained herein or in any document delivered pursuant hereto. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party to be bound thereby. The failure of any party to 24 this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights. SECTION 14.5. Fees and Expenses. Except as otherwise provided in this Section 14.5, each of the parties hereto agrees to pay, without right of reimbursement from the other, the costs incurred by it incident to the performance of its obligations hereunder, including, without limitation, the fees and disbursements of counsel, accountants, financial advisors, experts and consultants employed by the respective parties in connection with the transactions contemplated hereby, whether or not the transactions contemplated by this Agreement are consummated. SECTION 14.6. Notices. Any notice, request, instruction or other communication to be given hereunder by any party to the others shall be in writing and shall be deemed to have been duly given (i) on the date of delivery if delivered personally, (ii) on the first business day following the date of dispatch if delivered by Federal Express or other nationally reputable next-day courier service, or (iii) on the third business day following the date of mailing if delivered by registered or certified mail, return receipt requested, postage prepaid. All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice. (a) If to Buyer: Arcade Marketing, Inc. 120 East 56th Street New York, New York 10022 Attention: Chief Executive Officer and Arcade Marketing, Inc. 1850 East Main Street Chattanooga, Tennessee 37404 Attention: Chief Financial Officer with a copy to: Akin, Gump, Strauss, Hauer & Feld, L.L.P. 590 Madison Avenue 20th Floor New York, NY 10022 Attention: L. Kevin O'Mara, Jr. 25 (b) If to Seller: Minnesota Mining and Manufacturing Company 3M Center St. Paul, Minnesota 55144-1000 Attention: John J. Ursu Senior Vice President and General Counsel With a copy to: Corporate Financial Services Minnesota Mining and Manufacturing Company 3M Center St. Paul, Minnesota 55144-1000 Attention: John Barkholtz SECTION 14.7. Brokers. Seller represents and warrants that there are no Claims (or any basis for any Claims) for brokerage commissions, finder's fees or like payments in connection with this Agreement or the transactions contemplated hereby resulting from any action taken by or on behalf of Seller for which Buyer may be found to be liable. Buyer represents and warrants that there are no Claims (or any basis for any Claims) for brokerage commissions, finder's fees or like payments in connection with this Agreement or the transactions contemplated hereby resulting from any action taken by or on behalf of it for which Seller may be found to be liable. SECTION 14.8. Certain Definitions. "Claims" shall mean any rights or claims of every nature, whether or not reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, known or unknown, secured or unsecured and arising at any time. "Employee Plan" shall mean any written and unwritten "employee benefit plan" (within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), or any other payroll practices, bonus, stock option, stock appreciation, stock purchase, severance, termination, lay-off, leave of absence, disability, workers compensation, pension, profit sharing, retirement, medical plan, life insurance plan, hospitalization plan, insurance, deferred compensation, phantom stock, other executive compensation arrangement or other employee or welfare benefit plan, agreement or arrangement which is sponsored, maintained or contributed to by Seller and is applicable to Seller's past, present or future employees. "fragrance" shall mean a scent that can be perceived by the human olfactory system. 26 "Governmental Authority" shall mean any United States, state, local or foreign governmental entity or municipality or subdivision thereof or any authority, department, commission, board, bureau, agency, court or instrumentality. "Intellectual Property" shall mean all inventions, discoveries, patents, copyrights, know-how, intellectual property, licenses, developments, research data, designs, drawings, technology, computer software secrets, test procedures, processes, literature, reports and other confidential information, intellectual and similar tangible property rights, whether or not patentable or copyrightable (or otherwise subject to legally enforceable restrictions or protections against unauthorized third party usage), and any and all applications for, registrations of, and extensions, continuations in part, divisions, renewals and reissuances of, any of the foregoing, and rights therein. "Laws" shall mean any statute, rule, regulation or other law. "Lien" shall mean any lien, equity, claim, prior assignment, mortgage, charge, security interest, pledge, conditional sales contract, collateral security arrangement or other title retention arrangement or restriction. "Material Adverse Effect" shall mean any effect that is or can reasonably be expected to be materially adverse to the business, assets, liabilities, properties, condition (financial or otherwise) or the results of operations of the Business. "non-proprietary fragrance" shall mean any fragrance other than perfumes, colognes and other such premium fragrances, as well as fragrances that are distinguishable as a signature fragrance corresponding to the unique fragrance of a product formulated to help identify that product (e.g., cleaning products). Non-proprietary fragrances shall specifically include fragrances offered for sale as of May 1, 1998 by Seller on repositionable note products (e.g., apple, banana, black cherry, bubble gum, chocolate, cinnamon, dill pickle, floral, natural gas, grape, lemon, orange, peppermint, pine, pineapple, pizza, root beer, rose, strawberry and watermelon). "Taxes" shall mean all income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property or windfall profits taxes, customs duties or other taxes, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign). In addition, the following terms shall have the respective meanings set forth in the Section noted: TERM SECTION - ---- ------- Acquired Assets............................................ 1.1 Assigned Contracts......................................... 1.1(c) 27 Assumed Liabilities........................................ 2.1 Business................................................... Recitals Business Records........................................... 1.1(b) Buyer...................................................... Preamble Buyer Group................................................ 11.1 Circumstance............................................... 11.3 Closing.................................................... 4.1 Confidential Commercial Information........................ 13.1 Closing Date............................................... 4.1 Contracts.................................................. 1.1(c) Damages.................................................... 11.1 Excluded Assets............................................ 1.2 Excluded Liabilities....................................... 2.2 Financial Information...................................... 5.11 Fixed Assets............................................... 1.1(a) Income Statements.......................................... 5.11 Indemnified Party.......................................... 11.3 Indemnifying Party......................................... 11.3 Purchase Price............................................. 3.1 Representatives............................................ 13.1 Related Agreements......................................... 5.1 Seller..................................................... Preamble Seller Group............................................... 11.2 Transfer Taxes............................................. 4.4 SECTION 14.9. Captions. The Article, Section and paragraph captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof. Unless otherwise specified, all references herein to numbered sections and articles are to sections and articles of this Agreement and all references herein to Exhibits and Schedules are to Exhibits and Schedules to this Agreement. SECTION 14.10. Entire Agreement. This Agreement and the Related Agreements constitute the entire agreement between the parties with respect to the subject matter hereof and this Agreement supersedes all prior agreements or understandings of the parties relating thereto. SECTION 14.11. Specific Performance. In the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement, the party or parties who are or are to be thereby aggrieved shall have the right to seek specific performance and injunctive relief giving effect to its or their rights under this Agreement, in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies shall be cumulative. The parties agree that the remedies at law for any breach or threatened breach, including monetary damages, are inadequate compensation for any loss and that any defense in any action for specific performance that a remedy at law would be adequate is waived. 28 SECTION 14.12. Severability. If any provision of this Agreement or the application thereof to any person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions thereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated thereby is not affected in any manner adverse to any party. Upon any such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties. SECTION 14.13. Waiver of Jury Trial. The parties hereto waive any right to a jury trial. SECTION 14.14. Representatives. No individual representative of any party to this Agreement shall be personally liable for any Damages under this Agreement irrespective of the legal theory asserted. SECTION 14.15. Public Announcement. Each of the parties agree not to issue any press release or make any public statements with respect to this Agreement or the transactions contemplated hereby without first obtaining the written consent of the other party. SECTION 14.16. Exhibits and Schedules. All Exhibits and Schedules attached hereto are hereby incorporated in and made a part of this Agreement as if set forth in full herein. Capitalized terms used in the Exhibits and Schedules hereto but not otherwise defined therein shall have the respective meanings assigned to such terms in this Agreement. SECTION 14.17. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to contracts made and to be performed entirely within such State, without regard to the conflicts of law principles of such State. SECTION 14.18. Counterparts. For the convenience of the parties, this Agreement may be executed in any number of separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto on the date first herein above written. BUYER: ARCADE MARKETING, INC. By: _____________________________ Roger L. Barnett President SELLER: MINNESOTA MINING AND MANUFACTURING COMPANY By: _____________________________ Name: Title: EX-10.12 14 INDENTURE EXECUTION COPY =============================================================================== AKI HOLDING CORP. $50,000,000 ------------------------------------------- 13 1/2% SENIOR DISCOUNT DEBENTURES DUE 2009 ------------------------------------------- -------------------------- INDENTURE DATED AS OF JUNE 25, 1998 -------------------------- STATE STREET BANK AND TRUST COMPANY Trustee =============================================================================== CROSS-REFERENCE TABLE*
Trust Indenture Act Section Indenture Section 310(a)(1).................................................................................................7.10 (a)(2) ...................................................................................................7.10 (a)(3)....................................................................................................N.A. (a)(4)....................................................................................................N.A. (a)(5)....................................................................................................7.10 (b) .....................................................................................................7.10 (c) .....................................................................................................N.A. 311(a)....................................................................................................7.11 (b) .....................................................................................................7.11 (c) .....................................................................................................N.A. 312 (a)...................................................................................................2.05 (b) .....................................................................................................11.03 (c) .....................................................................................................11.03 313(a)....................................................................................................7.06 (b)(1)....................................................................................................10.03 (b)(2)....................................................................................................7.07 (c) .....................................................................................................7.06; 11.02 (d) .....................................................................................................7.06 314(a)....................................................................................................4.03; 11.02 (b) .....................................................................................................10.02 (c)(1)....................................................................................................11.04 (c)(2)....................................................................................................11.04 (c)(3)....................................................................................................N.A. (e) .....................................................................................................11.05 (f) .....................................................................................................N.A. 315 (a)...................................................................................................7.01 (b) .....................................................................................................7.05, 11.02 (c) .....................................................................................................7.01 (d) .....................................................................................................7.01 (e) .....................................................................................................6.11 316 (a)(last sentence)....................................................................................2.09 (a)(1)(A).................................................................................................6.05 (a)(1)(B).................................................................................................6.04 (a)(2)....................................................................................................N.A. (b) .....................................................................................................6.07 (c) .....................................................................................................2.12 317(a)(1).................................................................................................6.08 (a)(2)....................................................................................................6.09 (b) .....................................................................................................2.04 318(a)....................................................................................................11.01 (b) .....................................................................................................N.A. (c) .....................................................................................................11.01
N.A. means not applicable. *This Cross-Reference Table is not part of the Indenture. TABLE OF CONTENTS
PAGE ---- ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE.............................................................1 SECTION 1.01. DEFINITIONS......................................................................................1 SECTION 1.02. OTHER DEFINITIONS...............................................................................14 SECTION 1.03. TRUST INDENTURE ACT TERMS.......................................................................14 SECTION 1.04. RULES OF CONSTRUCTION...........................................................................15 ARTICLE 2. THE DEBENTURES........................................................................................15 SECTION 2.01. FORM AND DATING.................................................................................15 SECTION 2.02. EXECUTION AND AUTHENTICATION....................................................................16 SECTION 2.03. REGISTRAR AND PAYING AGENT......................................................................17 SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST.............................................................17 SECTION 2.05. HOLDER LISTS....................................................................................17 SECTION 2.06. TRANSFER AND EXCHANGE...........................................................................18 SECTION 2.07. REPLACEMENT DEBENTURES..........................................................................29 SECTION 2.08. OUTSTANDING DEBENTURES..........................................................................30 SECTION 2.09. TREASURY DEBENTURES.............................................................................30 SECTION 2.10. TEMPORARY DEBENTURES............................................................................30 SECTION 2.11. CANCELLATION....................................................................................30 SECTION 2.12. DEFAULTED INTEREST..............................................................................31 ARTICLE 3. REDEMPTION AND PREPAYMENT.............................................................................31 SECTION 3.01. NOTICES TO TRUSTEE..............................................................................31 SECTION 3.02. SELECTION OF DEBENTURES TO BE REDEEMED..........................................................31 SECTION 3.03. NOTICE OF REDEMPTION............................................................................32 SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION..................................................................32 i SECTION 3.05. DEPOSIT OF REDEMPTION PRICE.....................................................................32 SECTION 3.06. DEBENTURES REDEEMED IN PART.....................................................................33 SECTION 3.07. OPTIONAL REDEMPTION.............................................................................33 SECTION 3.08. NO MANDATORY REDEMPTION OR SINKING FUND PAYMENTS................................................33 SECTION 3.09. OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS.............................................34 ARTICLE 4. COVENANTS.............................................................................................35 SECTION 4.01. PAYMENT OF DEBENTURES...........................................................................35 SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY.................................................................36 SECTION 4.03. REPORTS.........................................................................................36 SECTION 4.04. COMPLIANCE CERTIFICATE..........................................................................36 SECTION 4.05. TAXES...........................................................................................37 SECTION 4.06. STAY, EXTENSION AND USURY LAWS..................................................................37 SECTION 4.07. RESTRICTED PAYMENTS.............................................................................37 SECTION 4.08. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES..................................40 SECTION 4.09. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK......................................40 SECTION 4.10. ASSET SALES.....................................................................................43 SECTION 4.11. TRANSACTIONS WITH AFFILIATES....................................................................43 SECTION 4.12. LIENS...........................................................................................44 SECTION 4.13. BUSINESS ACTIVITIES.............................................................................44 SECTION 4.14. CORPORATE EXISTENCE.............................................................................44 SECTION 4.15. OFFER TO REPURCHASE UPON CHANGE OF CONTROL......................................................45 SECTION 4.16. LIMITATION ON SALE AND LEASEBACK TRANSACTIONS...................................................45 ARTICLE 5. SUCCESSORS............................................................................................46 SECTION 5.01. MERGER, CONSOLIDATION, OR SALE OF ASSETS........................................................46 SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED...............................................................46 ARTICLE 6. DEFAULTS AND REMEDIES.................................................................................47 ii SECTION 6.01. EVENTS OF DEFAULT...............................................................................47 SECTION 6.02. ACCELERATION....................................................................................48 SECTION 6.03. OTHER REMEDIES..................................................................................49 SECTION 6.04. WAIVER OF PAST DEFAULTS.........................................................................49 SECTION 6.05. CONTROL BY MAJORITY.............................................................................49 SECTION 6.06. LIMITATION ON SUITS.............................................................................49 SECTION 6.07. RIGHTS OF HOLDERS OF DEBENTURES TO RECEIVE PAYMENT..............................................50 SECTION 6.08. COLLECTION SUIT BY TRUSTEE......................................................................50 SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM................................................................50 SECTION 6.10. PRIORITIES......................................................................................51 SECTION 6.11. UNDERTAKING FOR COSTS...........................................................................51 ARTICLE 7. TRUSTEE...............................................................................................51 SECTION 7.01. DUTIES OF TRUSTEE...............................................................................51 SECTION 7.02. RIGHTS OF TRUSTEE...............................................................................52 SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE....................................................................53 SECTION 7.04. TRUSTEE'S DISCLAIMER............................................................................53 SECTION 7.05. NOTICE OF DEFAULTS..............................................................................53 SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE DEBENTURES.................................................54 SECTION 7.07. COMPENSATION AND INDEMNITY......................................................................54 SECTION 7.08. REPLACEMENT OF TRUSTEE..........................................................................55 SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC................................................................56 SECTION 7.10. ELIGIBILITY; DISQUALIFICATION...................................................................56 SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY...............................................56 ARTICLE 8. LEGAL DEFEASANCE AND COVENANT DEFEASANCE..............................................................56 SECTION 8.01. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE........................................56 SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE..................................................................56 iii SECTION 8.03. COVENANT DEFEASANCE.............................................................................57 SECTION 8.04. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE......................................................57 SECTION 8.05. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS........................................................................58 SECTION 8.06. REPAYMENT TO COMPANY............................................................................59 SECTION 8.07. REINSTATEMENT...................................................................................59 ARTICLE 9. AMENDMENT, SUPPLEMENT AND WAIVER......................................................................59 SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF DEBENTURES........................................................59 SECTION 9.02. WITH CONSENT OF HOLDERS OF DEBENTURES...........................................................60 SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT.............................................................61 SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS...............................................................61 SECTION 9.05. NOTATION ON OR EXCHANGE OF DEBENTURES...........................................................61 SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC.................................................................62 ARTICLE 10. MISCELLANEOUS........................................................................................62 SECTION 10.01. TRUST INDENTURE ACT CONTROLS...................................................................62 SECTION 10.02. NOTICES........................................................................................62 SECTION 10.03. COMMUNICATION BY HOLDERS OF DEBENTURES WITH OTHER HOLDERS OF DEBENTURES........................63 SECTION 10.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.............................................63 SECTION 10.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION..................................................64 SECTION 10.06. RULES BY TRUSTEE AND AGENTS....................................................................64 SECTION 10.07. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS.......................64 SECTION 10.08. GOVERNING LAW..................................................................................64 SECTION 10.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS..................................................65 SECTION 10.10. SUCCESSORS.....................................................................................65 SECTION 10.11. SEVERABILITY...................................................................................65 SECTION 10.12. COUNTERPART ORIGINALS..........................................................................65 SECTION 10.13. TABLE OF CONTENTS, HEADINGS, ETC...............................................................65
iv EXHIBITS Exhibit A: FORM OF NOTE Exhibit B: FORM OF CERTIFICATE OF TRANSFER Exhibit C: FORM OF CERTIFICATE OF EXCHANGE Exhibit D: FORM OF CERTIFICATE OF ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR v INDENTURE dated as of June 25, 1998 between AKI Holding Corp., a Delaware corporation ("Holding"), and State Street Bank and Trust Company, as trustee (the "Trustee"). Holding and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the 13 1/2% Senior Discount Debentures due 2009 (the "Series A Debentures") and the new 13 1/2% Senior Discount Debentures due 2009 to be issued pursuant to the Debenture Registration Rights Agreement (the "Series B Debentures" and, together with the Series A Debentures, the "Debentures"): ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. DEFINITIONS. "144A Global Debenture" means a global note in the form of Exhibit A-1 hereto bearing the Global Debenture Legend and the Private Placement Legend and deposited with or on behalf of, and registered in the name of, the Depositary or its nominee that will be issued in a denomination equal to the outstanding principal amount of the Debentures sold in reliance on Rule 144A. "Accreted Value" means for each $1,000 of Debentures, as of any date of determination prior to July 1, 2003, the sum of (i) the initial offering price of each Debenture and (ii) that portion of the excess of the principal amount of each Debenture over such initial offering price which shall have been accreted thereon through such date, such amount to be so accreted on a daily basis and compounded semi-annually on each January 1 and July 1 at the rate of 13 1/2% per annum from the date of issuance of the Debentures through the date of determination. "Acquired Debt" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise. "Agent" means any Registrar, Paying Agent or co-registrar. "Applicable Procedures" means, with respect to any transfer or exchange of or for beneficial interests in any Global Debenture, the rules and procedures of the Depositary, Euroclear and Cedel that apply to such transfer or exchange. "Asset Sale" means (i) the sale, lease, conveyance or other disposition (a "disposition") of any assets or rights (including, without limitation, by way of a sale and leaseback) provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole will be governed by 4.15 and 5.01 and not by the provisions of the Section 4.10 hereof, and (ii) the issue or sale by Holding or any of its Restricted Subsidiaries of Equity Interests of any of Holding's Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $3.0 million or (b) for net proceeds in excess of $3.0 million. Notwithstanding the foregoing the following items shall not be deemed to be Asset Sales: (i) a disposition of assets by Holding to a Restricted Subsidiary or by a Restricted Subsidiary to Holding or to another Restricted Subsidiary, (ii) an issuance of Equity Interests by a Restricted Subsidiary to Holding or to another Restricted Subsidiary, (iii) a Restricted Payment that is permitted by Section 4.07 hereof, (iv) a disposition in the ordinary course of business, (v) the sale and leaseback of any assets within 90 days of the acquisition thereof, (vi) foreclosures on assets and (vii) any exchange of property pursuant to Section 1031 on the Internal Revenue Code of 1986, as amended, for use in a Related Business. "Attributable Debt" in respect of a sale and leaseback transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Bankruptcy Law" means Title 11, U.S. Code or any similar federal or state law for the relief of debtors. "Board of Directors" means the board of directors of Holding. "Business Day" means any day other than a Legal Holiday. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means (i) United States dollars, (ii) Government Securities having maturities of not more than six months from the date of acquisition, (iii) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any lender party to the Credit Agreement or with any domestic commercial bank having capital and surplus in excess of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase obligations 2 with a term of not more than seven days for underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above, (v) commercial paper having the rating of "P-2" (or higher) from Moody's Investors Service, Inc. or "A-3" (or higher) from Standard & Poor's Corporation and in each case maturing within six months after the date of acquisition and (vi) any fund investing exclusively in investments of the type described in clauses (i) through (v) above. "Cedel" means Cedel Bank, SA. "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of Holding and its Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than the Principals or their Related Parties (as defined below), (ii) the adoption of a plan relating to the liquidation or dissolution of Holding, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), other than the Principals and their Related Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, directly or indirectly, of more than 50% of the Voting Stock of Holding (measured by voting power rather than number of shares), or (iv) the first day on which a majority of the members of the Board of Directors of Holding are not Continuing Directors. "Company" means AKI, Inc., a Delaware corporation, and any and all successors thereto. "Consolidated Cash Flow" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period plus (i) an amount equal to any extraordinary loss plus any net loss realized in connection with an Asset Sale (to the extent such losses were deducted in computing such Consolidated Net Income), plus (ii) provision for taxes based on income or profits of such Person and its Subsidiaries for such period, to the extent that such provision for taxes was included in computing such Consolidated Net Income, plus (iii) consolidated interest expense of such Person and its Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income, plus (iv) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash expenses were deducted in computing such Consolidated Net Income, plus (v) expenses and charges of Holding or the Company related to the Refinancing which are paid, taken or otherwise accounted for within 90 days of the consummation of the Refinancing, plus (vi) any non-capitalized transaction costs incurred in connection with actual or proposed financings, acquisitions or divestitures (including, but not limited to, financing and refinancing fees and costs incurred in connection with the Refinancing). Notwithstanding the foregoing, the provision for taxes on the income or profits of, and the depreciation and amortization and other non-cash charges of, a Subsidiary of the referent Person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent (and in the same proportion) that Net Income of such Subsidiary was included in calculating Consolidated Net Income of such Person. 3 "Consolidated Interest Expense" means, with respect to any Person for any period, the sum of, without duplication, (a) the interest expense of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP (including amortization of original issue discount, non-cash interest payments, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments, if any, pursuant to Hedging Obligations; provided that in no event shall any amortization of deferred financing costs be included in Consolidated Interest Expense); and (b) the consolidated capitalized interest of such Person and its Restricted Subsidiaries for such period, whether paid or accrued. Notwithstanding the foregoing, the Consolidated Interest Expense with respect to any Restricted Subsidiary that is not a Wholly Owned Restricted Subsidiary shall be included only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (i) the Net Income (but not loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Restricted Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iv) the cumulative effect of a change in accounting principles shall be excluded and (v) the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not distributed to Holding or one of its Restricted Subsidiaries for purposes of Section 4.09 hereof and shall be included for purposes of Section 4.07 hereof only to the extent of the amount of dividends or distributions paid in cash to Holding or one of its Restricted Subsidiaries. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of Holding who (i) was a member of such Board of Directors on the date of this Indenture or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Corporate Trust Office of the Trustee" shall be at the address of the Trustee specified in Section 10.02 hereof or such other address as to which the Trustee may give notice to Holding. "Credit Agreement" means that certain Credit Agreement, dated as of April 30, 1996, as amended on December 12, 1997, between the Company and Heller Financial, Inc., providing for revolving credit borrowings, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, modified, renewed, refunded, replaced or refinanced from time to time. "Custodian" means the Trustee, as custodian with respect to the Debenture in global form, or any successor entity thereto. "Debenture Registration Rights Agreement" means the Debenture Registration Rights Agreement, dated as of June 25, 1998, by and among Holding and the other parties named on the 4 signature pages thereof, as such agreement may be amended, modified or supplemented from time to time. "Debentures" has the meaning assigned to it in the preamble to this Indenture. "Default" means any event that is, or with the passage of time or the giving of notice or both would be an Event of Default. "Definitive Debenture" means a certificated Debenture registered in the name of the Holder thereof and issued in accordance with Section 2.06 hereof, in the form of Exhibit A-1 hereto except that such Debenture shall not bear the Global Debenture Legend and shall not have the "Schedule of Exchanges of Interests in the Global Debenture" attached thereto. "Depositary" means, with respect to the Debentures issuable or issued in whole or in part in global form, the Person specified in Section 2.03 hereof as the Depositary with respect to the Debentures, and any and all successors thereto appointed as depositary hereunder and having become such pursuant to the applicable provision of this Indenture. "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the Holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the Debentures mature; provided, however, that any Capital Stock that would not qualify as Disqualified Stock but for change of control provisions shall not constitute Disqualified Stock if the provisions are not more favorable to the holders of such Capital Stock than the provisions described under Section 4.15 hereof applicable to the Holders of the Debentures. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Euroclear" means Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear system. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Exchange Debentures" means the Debentures issued in the Exchange Offer pursuant to Section 2.06(f) hereof. "Exchange Offer" has the meaning set forth in the Debenture Registration Rights Agreement. "Exchange Offer Registration Statement" has the meaning set forth in the Debenture Registration Rights Agreement. "Existing Indebtedness" means Indebtedness of Holding and its Subsidiaries (other than Indebtedness under the Credit Agreement) in existence on the date of this Indenture, until such amounts are repaid. 5 "Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of (i) the Consolidated Interest Expense of such Person for such period, (ii) any interest expense on Indebtedness of another Person that is Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iii) the product of (a) all dividend payments, whether or not in cash, on any series of preferred stock of such Person or any of its Restricted Subsidiaries, other than dividend payments on Equity Interests payable solely in Equity Interests of Holding, times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "Fixed Charge Coverage Ratio" means with respect to any Person for any period, the ratio of the Consolidated Cash Flow of such Person for such period to the Fixed Charges of such Person for such period. In the event that Holding or any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any Indebtedness (other than revolving credit borrowings) or issues preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such issuance or redemption of preferred stock, as if the same had occurred at the beginning of the applicable four-quarter reference period. In addition, for purposes of making the computation referred to above, (i) acquisitions that have been made by Holding or any of its Restricted Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be calculated to include the Consolidated Cash Flow of the acquired entities on a pro forma basis after giving effect to cost savings resulting from employee terminations, facilities consolidations and closings, standardization of employee benefits and compensation policies, consolidation of property, casualty and other insurance coverage and policies, standardization of sales and distribution methods, reductions in taxes other than income taxes and other cost savings reasonably expected to be realized from such acquisition, shall be deemed to have occurred on the first day of the four-quarter reference period and Consolidated Cash Flow for such reference period shall be calculated without giving effect to clause (iii) of the proviso set forth in the definition of Consolidated Net Income, (ii) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such Fixed Charges will not be obligations of the referent Person or any of its Restricted Subsidiaries following the Calculation Date. "Foreign Subsidiary" means any Subsidiary of Holding that is not organized under the laws of a state or territory of the United States or the District of Columbia. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date of this Indenture. "Global Debentures" means, individually and collectively, each of the Restricted Global Debentures and the Unrestricted Global Debentures, in the form of Exhibit A hereto issued in accordance with Section 2.01, 2.06(b)(iv), 2.06(d)(ii) or 2.06(f) hereof. 6 "Global Debenture Legend" means the legend set forth in Section 2.06(g)(ii), which is required to be placed on all Global Debentures issued under this Indenture. "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States is pledged. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency exchange rates. "Holder" means a Person in whose name a Debenture is registered. "Indebtedness" means, with respect to any Person, any indebtedness of such Person, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or bankers' acceptances or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such Indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person; provided that Indebtedness shall not include the pledge by Holding of the Capital Stock of an Unrestricted Subsidiary of Holding to secure Non-Recourse Debt of such Unrestricted Subsidiary. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness that does not require current payments of interest, and (ii) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. "Indenture" means this Indenture, as amended or supplemented from time to time. "Indirect Participant" means a Person who holds a beneficial interest in a Global Debenture through a Participant. "Institutional Accredited Investor" means an institution that is an "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act, who are not also QIBs. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If Holding or any Restricted Subsidiary of Holding sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of Holding such that, after giving effect to any such sale or disposition, such Person is 7 no longer a Restricted Subsidiary of Holding, Holding shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Restricted Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of Section 4.07 hereof. "Issue Date" means the date of original issuance of the Debentures. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the City of New York or the city in which the principal corporate trust office of the Trustee is located or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue on such payment for the intervening period. "Letter of Transmittal" means the letter of transmittal to be prepared by Holding and sent to all Holders of the Debentures for use by such Holders in connection with the Exchange Offer. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Liquidated Damages" means all liquidated damages then owing pursuant to Section 5 of the Debenture Registration Rights Agreement. "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by Holding or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), the amounts required to be applied to the payment of Indebtedness (other than Indebtedness incurred pursuant to the Credit Agreement), secured by a Lien on the asset or assets that were the subject of the Asset Sale, and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "Non-Recourse Debt" means Indebtedness (i) as to which neither Holding nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor or otherwise), or (c) constitutes the lender; (ii) no default with respect to which (including any rights that the 8 holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness (other than the Debentures being offered hereby and the Notes being offered concurrently by the Company) of Holding or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the lenders have been notified in writing that they will not have any recourse to the stock (other than stock of an Unrestricted Subsidiary pledged by Holding to secure debt of such Unrestricted Subsidiary) or assets of Holding or any of its Restricted Subsidiaries. "Non-U.S. Person" means a Person who is not a U.S. Person. "Notes" means the Company's $115,000,000 in aggregate principal amount of 10 1/2% Senior Notes due 2008. "Note Indenture" means the indenture, dated as of June 25, between the Company and IBJ Schroder Bank and Trust Company, as trustee, governing the Notes. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Offering" means the offering of the Debentures by Holding. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary, Assistant Secretary or any Vice-President of such Person. "Officers' Certificate" means a certificate signed by (i) the Chairman of the Board of Directors, the Chief Executive Officer, the President or a Vice President of Holding and (ii) the Chief Financial Officer or the Secretary of Holding, that meets the requirements of Sections 10.04 and 10.05 hereof. "Opinion of Counsel" means an opinion from legal counsel who is reasonably acceptable to the Trustee, that meets the requirements of Sections 10.04 and 10.05 hereof. The counsel may be an employee of or counsel to Holding, any Subsidiary of Holding or the Trustee. "Participant" means, with respect to the Depositary, Euroclear or Cedel, a Person who has an account with the Depositary, Euroclear or Cedel, respectively (and, with respect to The Depository Trust Company, shall include Euroclear and Cedel). "Participating Broker-Dealer" has the meaning set forth in the Debenture Registration Rights Agreement. "Permitted Business" means any business in which Holding and its Restricted Subsidiaries are engaged on the date of this Indenture or any business reasonably related, incidental or ancillary thereto. "Permitted Investments" means (a) any Investment in Holding or in a Restricted Subsidiary of Holding that is engaged in a Permitted Business; (b) any Investment in Cash Equivalents; (c) any Investment by Holding or any Restricted Subsidiary of Holding in a Person, if as a result of such Investment (i) such Person becomes a Restricted Subsidiary of Holding that is engaged in a Permitted Business or (ii) 9 such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, Holding or a Restricted Subsidiary of Holding that is engaged in a Permitted Business; (d) any Restricted Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with Section 4.10 hereof; (e) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of Holding; and (f) other Investments made after the date of this Indenture in any Person having an aggregate fair market value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (f) that are at the time outstanding, not to exceed $10.0 million. "Permitted Liens" means (i) Liens securing Indebtedness under the Credit Agreement that was permitted by the terms of this Indenture to be incurred or other Indebtedness allowed to be incurred under clause (i) of Section 4.09 hereof; (ii) Liens in favor of Holding; (iii) Liens on property of a Person existing at the time such Person is merged into or consolidated with Holding or any Restricted Subsidiary of Holding, provided that such Liens were not incurred in contemplation of such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with Holding or any Restricted Subsidiary; (iv) Liens on property existing at the time of acquisition thereof by Holding or any Restricted Subsidiary of Holding, provided that such Liens were in existence prior to the contemplation of such acquisition; (v) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (vi) Liens existing on the date of this Indenture; (vii) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded, provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (viii) Liens to secure Indebtedness (including Capital Lease Obligations) permitted by clause (iv) of Section 4.09 hereof; (ix) Liens securing Permitted Refinancing Indebtedness where the Liens securing the Permitted Refinancing Indebtedness were permitted under this Indenture; (x) Liens incurred in the ordinary course of business of Holding or any Restricted Subsidiary of Holding with respect to obligations that do not exceed $5.0 million at any one time outstanding and that (a) are not incurred in connection with the borrowing of money or the obtaining of advances or credit (other than trade credit in the ordinary course of business) and (b) do not in the aggregate materially detract from the value of the property or materially impair the use thereof in the operation of business by Holding or such Restricted Subsidiary; and (xi) Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries. "Permitted Refinancing Indebtedness" means any Indebtedness of Holding or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of Holding or any of its Restricted Subsidiaries; provided that: (i) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accreted value, if applicable), plus accrued interest on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity date no earlier than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Debentures, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Debentures on terms at least as favorable to the Holders of Debentures as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. 10 "Person" means an individual, partnership, corporation, limited liability company, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof. "Principals" means Roger L. Barnett, DLJ Merchant Banking Partners II, L.P., DLJ Merchant Banking Partners II-A, L.P., DLJ Offshore Partners II, L.P., DLJ Offshore Partners II, C.V., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJMB Funding II, Inc., DLJ Millennium Partners, L.P., DLJ Millennium Partners-A, L.P., DLJ EAB Partners, L.P., UK Investment Plan 1997 Partners and DLJ First ESC L.P. "Private Placement Legend" means the legend set forth in Section 2.06(g)(i) to be placed on all Debentures issued under this Indenture except where otherwise permitted by the provisions of this Indenture. "Public Equity Offering" means a public offering of Equity Interests (other than Disqualified Stock) of (i) Holding or (ii) Acquisition Corp. to the extent the net proceeds thereof are contributed to Holding as a capital contribution, that, in each case, results in net proceeds to Holding of at least $25.0 million. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "Regulation S" means Regulation S promulgated under the Securities Act. "Regulation S Global Debentures" means the Regulation S Temporary Global Debentures or the Regulation S Permanent Global Debentures as applicable. "Regulation S Permanent Global Debentures" means the permanent global notes that are deposited with and registered in the name of the Depositary or its nominee, representing a series of Debentures sold in reliance on Regulation S. "Regulation S Temporary Global Debentures" means the temporary global notes that are deposited with and registered in the name of the Depositary or its nominee, representing a series of Debentures sold in reliance on Regulation S. "Related Party" with respect to any Principal means (A) any controlling stockholder or partner, 80% (or more) owned Subsidiary, or spouse or immediate family member (in the case of an individual) of such Principal or (B) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding (directly or through one or more Subsidiaries) a 51% or more controlling interest of which consist of the Principals and/or such other Persons referred to in the immediately preceding clause (A). "Responsible Officer," when used with respect to the Trustee, means any officer within the Corporate Trust Administration of the Trustee (or any successor group of the Trustee) or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Definitive Debenture" means a Definitive Debenture bearing the Private Placement Legend. 11 "Restricted Global Debenture" means a Global Debenture bearing the Private Placement Legend. "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Period" means the 40-day restricted period as defined in Regulation S. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "Rule 144" means Rule 144 promulgated under the Securities Act. "Rule 144A" means Rule 144A promulgated under the Securities Act. "Rule 144A Global Debenture" means a permanent global note that is deposited with and registered in the name of the Depositary or its nominee, representing a series of Debentures sold in reliance on Rule 144A. "Rule 903" means Rule 903 promulgated under the Securities Act. "Rule 904" means Rule 904 promulgated the Securities Act. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Shelf Registration Statement" means the Shelf Registration Statement as defined in the Debenture Registration Rights Agreement. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Act, as such Regulation is in effect on the date hereof. "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership or limited liability company (a) the sole general partner or the managing general partner or managing member of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as in effect on the date on which this Indenture is qualified under the TIA. 12 "Trustee" means the party named as such above until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor serving hereunder. "Unrestricted Definitive Debenture" means one or more Definitive Debentures that do not bear and are not required to bear the Private Placement Legend. "Unrestricted Global Debenture" means a permanent global Debenture in the form of Exhibit A-1 attached hereto that bears the Global Debenture Legend and that has the "Schedule of Exchanges of Interests in the Global Debenture" attached thereto, and that is deposited with or on behalf of and registered in the name of the Depositary, representing a series of Debentures that do not bear the Private Placement Legend. "Unrestricted Subsidiary" means any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution; but only to the extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with Holding or any Restricted Subsidiary of Holding unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to Holding or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of Holding; (c) is a Person with respect to which neither Holding nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; and (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of Holding or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by Section 4.07 hereof. If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of this Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of Holding as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under Section 4.09 hereof, Holding shall be in default of such covenant). The Board of Directors of Holding may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of Holding of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall be permitted only if (i) such Indebtedness is permitted under the covenant described under Section 4.09 hereof and (ii) no Default or Event of Default would be in existence following such designation. "U.S. Person" means a U.S. person as defined in Rule 902(o) under the Securities Act. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. 13 "Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person and one or more Wholly Owned Subsidiaries of such Person. SECTION 1.02. OTHER DEFINITIONS.
Defined in Term Section "Affiliate Transaction"............................................................4.11 "Asset Sale Offer".................................................................3.09 "Authentication Order".............................................................2.02 "Change of Control Offer"..........................................................4.15 "Change of Control Payment"........................................................4.15 "Change of Control Payment Date" ..................................................4.15 "Covenant Defeasance"..............................................................8.03 "Event of Default".................................................................6.01 "Excess Proceeds"..................................................................4.10 "incur"............................................................................4.09 "Legal Defeasance" ................................................................8.02 "Offer Amount".....................................................................3.09 "Offer Period".....................................................................3.09 "Paying Agent".....................................................................2.03 "Permitted Debt"...................................................................4.09 "Purchase Date"....................................................................3.09 "Registrar"........................................................................2.03 "Restricted Payments"..............................................................4.07
SECTION 1.03. TRUST INDENTURE ACT TERMS. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Debentures; "indenture security Holder" means a Holder of a Debenture; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and "obligor" on the Debentures means Holding and any successor obligor upon the Debentures. 14 All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. SECTION 1.04. RULES OF CONSTRUCTION. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) references to sections of or rules under the Securities Act shall be deemed to include substitute, replacement of successor sections or rules adopted by the SEC from time to time. ARTICLE 2. THE DEBENTURES SECTION 2.01. FORM AND DATING. (a) General. The Debentures and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto. The Debentures may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Debenture shall be dated the date of its authentication. The Debentures shall be in denominations of $1,000 and integral multiples thereof. The terms and provisions contained in the Debentures shall constitute, and are hereby expressly made, a part of this Indenture and Holding and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. However, to the extent any provision of any Debenture conflicts with the express provisions of this Indenture, the provisions of this Indenture shall govern and be controlling. (b) Global Debentures. Debentures issued in global form shall be substantially in the form of Exhibits A-1 or A-2 attached hereto (including the Global Debenture Legend thereon and the "Schedule of Exchanges of Interests in the Global Debenture" attached thereto). Debentures issued in definitive form shall be substantially in the form of Exhibit A-1 attached hereto (but without the Global Debenture Legend thereon and without the "Schedule of Exchanges of Interests in the Global Debenture" attached thereto). Each Global Debenture shall represent such of the outstanding Debentures as shall be specified therein and each shall provide that it shall represent the aggregate principal amount of outstanding Debentures from time to time endorsed thereon and that the aggregate principal amount of outstanding Debentures represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Debenture to reflect the amount of any increase or decrease in the aggregate principal amount of outstanding Debentures represented thereby 16 shall be made by the Trustee or the Debenture Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.06 hereof. (c) Temporary Global Debentures. Debentures offered and sold in reliance on Regulation S shall be issued initially in the form of the Regulation S Temporary Global Debenture, which shall be deposited on behalf of the purchasers of the Debentures represented thereby with the Trustee, at its New York, New York office, as custodian for the Depositary, and registered in the name of the Depositary or the nominee of the Depositary for the accounts of designated agents holding on behalf of Euroclear or Cedel Bank, duly executed by Holding and authenticated by the Trustee as hereinafter provided. The Restricted Period shall be terminated upon the receipt by the Trustee of (i) a written certificate from the Depositary, together with copies of certificates from Euroclear and Cedel Bank certifying that they have received certification of non-United States beneficial ownership of 100% of the aggregate principal amount of the Regulation S Temporary Global Debenture (except to the extent of any beneficial owners thereof who acquired an interest therein during the Restricted Period pursuant to another exemption from registration under the Securities Act and who will take delivery of a beneficial ownership interest in a 144A Global Debenture or an IAI Global Debenture bearing a Private Placement Legend, all as contemplated by Section 2.06(a)(ii) hereof), and (ii) an Officers' Certificate from Holding. Following the termination of the Restricted Period, beneficial interests in the Regulation S Temporary Global Debenture shall be exchanged for beneficial interests in Regulation S Permanent Global Debentures pursuant to the Applicable Procedures. Simultaneously with the authentication of Regulation S Permanent Global Debentures, the Trustee shall cancel the Regulation S Temporary Global Debenture. The aggregate principal amount of the Regulation S Temporary Global Debenture and the Regulation S Permanent Global Debentures may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee, as the case may be, in connection with transfers of interest as hereinafter provided. (d) Euroclear and Cedel Procedures Applicable. The provisions of the "Operating Procedures of the Euroclear System" and "Terms and Conditions Governing Use of Euroclear" and the "General Terms and Conditions of Cedel Bank" and "Customer Handbook" of Cedel Bank shall be applicable to transfers of beneficial interests in the Regulation S Temporary Global Debenture and the Regulation S Permanent Global Debentures that are held by Participants through Euroclear or Cedel Bank. SECTION 2.02. EXECUTION AND AUTHENTICATION. One Officer shall sign the Debentures for Holding by manual or facsimile signature. Holding's seal shall be reproduced on the Debentures and may be in facsimile form. If an Officer whose signature is on a Debenture no longer holds that office at the time a Debenture is authenticated, the Debenture shall nevertheless be valid. A Debenture shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Debenture has been authenticated under this Indenture. The Trustee shall, upon a written order of Holding signed by one Officer (an "Authentication Order"), authenticate Debentures for original issue up to the aggregate principal amount stated in paragraph 4 of the Debentures. The aggregate principal amount of Debentures outstanding at any time may not exceed such amount except as provided in Section 2.07 hereof. 16 The Trustee may appoint an authenticating agent acceptable to Holding to authenticate Debentures. An authenticating agent may authenticate Debentures whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with Holders or an Affiliate of Holding. SECTION 2.03. REGISTRAR AND PAYING AGENT. Holding shall maintain an office or agency where Debentures may be presented for registration of transfer or for exchange ("Registrar") and an office or agency where Debentures may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Debentures and of their transfer and exchange. Holding may appoint one or more co-registrars and one or more additional paying agents. The term "Registrar" includes any co-registrar and the term "Paying Agent" includes any additional paying agent. Holding may change any Paying Agent or Registrar without notice to any Holder. Holding shall notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. If Holding fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. Holding or any of its Subsidiaries may act as Paying Agent or Registrar. Holding initially appoints The Depository Trust Company ("DTC") to act as Depositary with respect to the Global Debentures. Holding initially appoints the Trustee to act as the Registrar and Paying Agent and to act as Debenture Custodian with respect to the Global Debentures. SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. Holding shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal, premium or Liquidated Damages, if any, or interest on the Debentures, and will notify the Trustee of any default by Holding in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. Holding at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than Holding or a Subsidiary) shall have no further liability for the money. If Holding or a Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Upon any bankruptcy or reorganization proceedings relating to Holding, the Trustee shall serve as Paying Agent for the Debentures. SECTION 2.05. HOLDER LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders and shall otherwise comply with TIAss. 312(a). If the Trustee is not the Registrar, Holding shall furnish to the Trustee at least seven Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders of Debentures and Holding shall otherwise comply with TIAss. 312(a). 17 SECTION 2.06. TRANSFER AND EXCHANGE. (a) Transfer and Exchange of Global Debentures. A Global Debenture may not be transferred as a whole except by the Depositary to a nominee of the Depositary, by a nominee of the Depositary to the Depositary or to another nominee of the Depositary, the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. All Global Debentures will be exchanged by Holding for Definitive Debentures if (i) Holding delivers to the Trustee notice from the Depositary that it is unwilling or unable to continue to act as Depositary or that it is no longer a clearing agency registered under the Exchange Act and, in either case, a successor Depositary is not appointed by Holding within 120 days after the date of such notice from the Depositary or (ii) Holding in its sole discretion determines that the Global Debentures (in whole but not in part) should be exchanged for Definitive Debentures and delivers a written notice to such effect to the Trustee; provided that in no event shall the Regulation S Temporary Global Debenture be exchanged by Holding for Definitive Debentures prior to (x) the expiration of the Restricted Period and (y) the receipt by the Registrar of any certificates required pursuant to Rule 903(c)(3)(ii)(B) under the Securities Act. Upon the occurrence of either of the preceding events in (i) or (ii) above, Definitive Debentures shall be issued in such names as the Depositary shall instruct the Trustee. Global Debentures also may be exchanged or replaced, in whole or in part, as provided in Sections 2.07 and 2.10 hereof. Every Debenture authenticated and delivered in exchange for, or in lieu of, a Global Debenture or any portion thereof, pursuant to this Section 2.06 or Section 2.07 or 2.10 hereof, shall be authenticated and delivered in the form of, and shall be, a Global Debenture. A Global Debenture may not be exchanged for another Debenture other than as provided in this Section 2.06(a), however, beneficial interests in a Global Debenture may be transferred and exchanged as provided in Section 2.06(b), (c) or (f) hereof. (b) Transfer and Exchange of Beneficial Interests in the Global Debentures. The transfer and exchange of beneficial interests in the Global Debentures shall be effected through the Depositary, in accordance with the provisions of this Indenture and the Applicable Procedures. Beneficial interests in the Restricted Global Debentures shall be subject to restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. Transfers of beneficial interests in the Global Debentures also shall require compliance with either subparagraph (i) or (ii) below, as applicable, as well as one or more of the other following subparagraphs, as applicable: (i) Transfer of Beneficial Interests in the Same Global Debenture. Beneficial interests in any Restricted Global Debenture may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the same Restricted Global Debenture in accordance with the transfer restrictions set forth in the Private Placement Legend; provided, however, that prior to the expiration of the Restricted Period, transfers of beneficial interests in the Temporary Regulation S Global Debenture may not be made to a U.S. Person or for the account or benefit of a U.S. Person (other than an Initial Purchaser). Beneficial interests in any Unrestricted Global Debenture may be transferred to Persons who take delivery thereof in the form of a beneficial interest in an Unrestricted Global Debenture. No written orders or instructions shall be required to be delivered to the Registrar to effect the transfers described in this Section 2.06(b)(i). (ii) All Other Transfers and Exchanges of Beneficial Interests in Global Debentures. In connection with all transfers and exchanges of beneficial interests that are not subject to Section 2.06(b)(i) above, the transferor of such beneficial interest must deliver to the Registrar either (A) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to credit or cause to be credited a beneficial interest in another Global Debenture in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given in accordance with the Applicable Procedures containing 18 information regarding the Participant account to be credited with such increase or (B) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to cause to be issued a Definitive Debenture in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given by the Depositary to the Registrar containing information regarding the Person in whose name such Definitive Debenture shall be registered to effect the transfer or exchange referred to in (1) above; provided that in no event shall Definitive Debentures be issued upon the transfer or exchange of beneficial interests in the Regulation S Temporary Global Debenture prior to (x) the expiration of the Restricted Period and (y) the receipt by the Registrar of any certificates required pursuant to Rule 903 under the Securities Act. Upon consummation of an Exchange Offer by Holding in accordance with Section 2.06(f) hereof, the requirements of this Section 2.06(b)(ii) shall be deemed to have been satisfied upon receipt by the Registrar of the instructions contained in the Letter of Transmittal delivered by the Holder of such beneficial interests in the Restricted Global Debentures. Upon satisfaction of all of the requirements for transfer or exchange of beneficial interests in Global Debentures contained in this Indenture and the Debentures or otherwise applicable under the Securities Act, the Trustee shall adjust the principal amount of the relevant Global Debenture(s) pursuant to Section 2.06(h) hereof. (iii) Transfer of Beneficial Interests to Another Restricted Global Debenture. A beneficial interest in any Restricted Global Debenture may be transferred to a Person who takes delivery thereof in the form of a beneficial interest in another Restricted Global Debenture if the transfer complies with the requirements of Section 2.06(b)(ii) above and the Registrar receives the following: (A) if the transferee will take delivery in the form of a beneficial interest in the 144A Global Debenture, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; (B) if the transferee will take delivery in the form of a beneficial interest in the Regulation S Temporary Global Debenture or the Regulation S Global Debenture, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof; and (C) if the transferee will take delivery in the form of a beneficial interest in the IAI Global Debenture, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications and certificates and Opinion of Counsel required by item (3) thereof, if applicable. (iv) Transfer and Exchange of Beneficial Interests in a Restricted Global Debenture for Beneficial Interests in the Unrestricted Global Debenture. A beneficial interest in any Restricted Global Debenture may be exchanged by any holder thereof for a beneficial interest in an Unrestricted Global Debenture or transferred to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Debenture if the exchange or transfer complies with the requirements of Section 2.06(b)(ii) above and: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Debenture Registration Rights Agreement and the holder of the beneficial interest to be transferred, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Exchange Debentures or (3) a Person who is an affiliate (as defined in Rule 144) of Holding; 19 (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Debenture Registration Rights Agreement; (C) such transfer is effected by a Participating Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Debenture Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the holder of such beneficial interest in a Restricted Global Debenture proposes to exchange such beneficial interest for a beneficial interest in an Unrestricted Global Debenture, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(a) thereof; or (2) if the Holder of such beneficial interest in a Restricted Global Debenture proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a beneficial interest in an Unrestricted Global Debenture, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. If any such transfer is effected pursuant to subparagraph (B) or (D) above at a time when an Unrestricted Global Debenture has not yet been issued, Holding shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate one or more Unrestricted Global Debentures in an aggregate principal amount equal to the aggregate principal amount of beneficial interests transferred pursuant to subparagraph (B) or (D) above. Beneficial interests in an Unrestricted Global Debenture cannot be exchanged for, or transferred to Persons who take delivery thereof in the form of, a beneficial interest in a Restricted Global Debenture. (c) Transfer or Exchange of Beneficial Interests for Definitive Debentures. (i) Beneficial Interests in Restricted Global Debentures to Restricted Definitive Debentures. If any holder of a beneficial interest in a Restricted Global Debenture proposes to exchange such beneficial interest for a Restricted Definitive Debenture or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Restricted Definitive Debenture, then, upon receipt by the Registrar of the following documentation: (A) if the holder of such beneficial interest in a Restricted Global Debenture proposes to exchange such beneficial interest for a Restricted Definitive Debenture, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (2)(a) thereof; 20 (B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof; (C) if such beneficial interest is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof; (D) if such beneficial interest is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof; (E) if such beneficial interest is being transferred to an Institutional Accredited Investor in reliance on an exemption from the registration requirements of the Securities Act other than those listed in subparagraphs (B) through (D) above, a certificate to the effect set forth in Exhibit B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable; (F) if such beneficial interest is being transferred to Holding or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or (G) if such beneficial interest is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof, the Trustee shall cause the aggregate principal amount of the applicable Global Debenture to be reduced accordingly pursuant to Section 2.06(h) hereof, and Holding shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions a Definitive Debenture in the appropriate principal amount. Any Definitive Debenture issued in exchange for a beneficial interest in a Restricted Global Debenture pursuant to this Section 2.06(c) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall deliver such Definitive Debentures to the Persons in whose names such Debentures are so registered. Any Definitive Debenture issued in exchange for a beneficial interest in a Restricted Global Debenture pursuant to this Section 2.06(c)(i) shall bear the Private Placement Legend and shall be subject to all restrictions on transfer contained therein. (ii) Notwithstanding Sections 2.06(c)(i)(A) and (c) hereof, a beneficial interest in the Regulation S Temporary Global Debenture may not be exchanged for a Definitive Debenture or transferred to a Person who takes delivery thereof in the form of a Definitive Debenture prior to (x) the expiration of the Restricted Period and (y) the receipt by the Registrar of any certificates required pursuant to Rule 903(c)(3)(ii)(B) under the Securities Act, except in the case of a transfer pursuant to an exemption from the registration requirements of the Securities Act other than Rule 903 or Rule 904. 21 (iii) Beneficial Interests in Restricted Global Debentures to Unrestricted Definitive Debentures. A holder of a beneficial interest in a Restricted Global Debenture may exchange such beneficial interest for an Unrestricted Definitive Debenture or may transfer such beneficial interest to a Person who takes delivery thereof in the form of an Unrestricted Definitive Debenture only if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Debenture Registration Rights Agreement and the holder of such beneficial interest, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Exchange Debentures or (3) a Person who is an affiliate (as defined in Rule 144) of Holding; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Debenture Registration Rights Agreement; (C) such transfer is effected by a Participating Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Debenture Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the holder of such beneficial interest in a Restricted Global Debenture proposes to exchange such beneficial interest for a Definitive Debenture that does not bear the Private Placement Legend, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(b) thereof; or (2) if the holder of such beneficial interest in a Restricted Global Debenture proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a Definitive Debenture that does not bear the Private Placement Legend, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. (iv) Beneficial Interests in Unrestricted Global Debentures to Unrestricted Definitive Debentures. If any holder of a beneficial interest in an Unrestricted Global Debenture proposes to exchange such beneficial interest for a Definitive Debenture or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Definitive Debenture, then, upon satisfaction of the conditions set forth in Section 2.06(b)(ii) hereof, the Trustee shall cause the aggregate principal amount of the applicable Global Debenture to be reduced accordingly pursuant to Section 2.06(h) hereof, and Holding shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions a Definitive Debenture in the appropriate principal amount. Any Definitive Debenture issued in exchange for a beneficial interest pursuant to this Section 2.06(c)(iii) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall deliver such Definitive 22 Debentures to the Persons in whose names such Debentures are so registered. Any Definitive Debenture issued in exchange for a beneficial interest pursuant to this Section 2.06(c)(iii) shall not bear the Private Placement Legend. (d) Transfer and Exchange of Definitive Debentures for Beneficial Interests. (i) Restricted Definitive Debentures to Beneficial Interests in Restricted Global Debentures. If any Holder of a Restricted Definitive Debenture proposes to exchange such Debenture for a beneficial interest in a Restricted Global Debenture or to transfer such Restricted Definitive Debentures to a Person who takes delivery thereof in the form of a beneficial interest in a Restricted Global Debenture, then, upon receipt by the Registrar of the following documentation: (A) if the Holder of such Restricted Definitive Debenture proposes to exchange such Debenture for a beneficial interest in a Restricted Global Debenture, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (2)(b) thereof; (B) if such Restricted Definitive Debenture is being transferred to a QIB in accordance with Rule 144A under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof; (C) if such Restricted Definitive Debenture is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof; (D) if such Restricted Definitive Debenture is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof; (E) if such Restricted Definitive Debenture is being transferred to an Institutional Accredited Investor in reliance on an exemption from the registration requirements of the Securities Act other than those listed in subparagraphs (B) through (D) above, a certificate to the effect set forth in Exhibit B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable; (F) if such Restricted Definitive Debenture is being transferred to Holding or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or (G) if such Restricted Definitive Debenture is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof; the Trustee shall cancel the Restricted Definitive Debenture, increase or cause to be increased the aggregate principal amount of, in the case of clause (A) above, the appropriate Restricted Global Debenture, in the case of clause (B) above, the 144A Global Debenture, in the case of clause (c) above, the Regulation S Global Debenture, and in all other cases, the IAI Global Debenture. 23 (ii) Restricted Definitive Debentures to Beneficial Interests in Unrestricted Global Debentures. A Holder of a Restricted Definitive Debenture may exchange such Debenture for a beneficial interest in an Unrestricted Global Debenture or transfer such Restricted Definitive Debenture to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Debenture only if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Debenture Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Exchange Debentures or (3) a Person who is an affiliate (as defined in Rule 144) of Holding; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Debenture Registration Rights Agreement; (C) such transfer is effected by a Participating Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Debenture Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the Holder of such Definitive Debentures proposes to exchange such Debentures for a beneficial interest in the Unrestricted Global Debenture, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(c) thereof; or (2) if the Holder of such Definitive Debentures proposes to transfer such Debentures to a Person who shall take delivery thereof in the form of a beneficial interest in the Unrestricted Global Debenture, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. Upon satisfaction of the conditions of any of the subparagraphs in this Section 2.06(d)(ii), the Trustee shall cancel the Definitive Debentures and increase or cause to be increased the aggregate principal amount of the Unrestricted Global Debenture. (iii) Unrestricted Definitive Debentures to Beneficial Interests in Unrestricted Global Debentures. A Holder of an Unrestricted Definitive Debenture may exchange such Debenture for a beneficial interest in an Unrestricted Global Debenture or transfer such Definitive Debentures to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Debenture at any time. Upon receipt of a request for such an exchange or transfer, the Trustee shall cancel the applicable Unrestricted Definitive Debenture and increase or cause to be increased the aggregate principal amount of one of the Unrestricted Global Debentures. 24 If any such exchange or transfer from a Definitive Debenture to a beneficial interest is effected pursuant to subparagraphs (ii)(B), (ii)(D) or (iii) above at a time when an Unrestricted Global Debenture has not yet been issued, Holding shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate one or more Unrestricted Global Debentures in an aggregate principal amount equal to the principal amount of Definitive Debentures so transferred. (e) Transfer and Exchange of Definitive Debentures for Definitive Debentures. Upon request by a Holder of Definitive Debentures and such Holder's compliance with the provisions of this Section 2.06(e), the Registrar shall register the transfer or exchange of Definitive Debentures. Prior to such registration of transfer or exchange, the requesting Holder shall present or surrender to the Registrar the Definitive Debentures duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by his attorney, duly authorized in writing. In addition, the requesting Holder shall provide any additional certifications, documents and information, as applicable, required pursuant to the following provisions of this Section 2.06(e). (i) Restricted Definitive Debentures to Restricted Definitive Debentures. Any Restricted Definitive Debenture may be transferred to and registered in the name of Persons who take delivery thereof in the form of a Restricted Definitive Debenture if the Registrar receives the following: (A) if the transfer will be made pursuant to Rule 144A under the Securities Act, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; (B) if the transfer will be made pursuant to Rule 903 or Rule 904, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof; and (C) if the transfer will be made pursuant to any other exemption from the registration requirements of the Securities Act, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable. (ii) Restricted Definitive Debentures to Unrestricted Definitive Debentures. Any Restricted Definitive Debenture may be exchanged by the Holder thereof for an Unrestricted Definitive Debenture or transferred to a Person or Persons who take delivery thereof in the form of an Unrestricted Definitive Debenture if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Debenture Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (1) a broker-dealer, (2) a Person participating in the distribution of the Exchange Debentures or (3) a Person who is an affiliate (as defined in Rule 144) of Holding; (B) any such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Debenture Registration Rights Agreement; 25 (C) any such transfer is effected by a Participating Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Debenture Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the Holder of such Restricted Definitive Debentures proposes to exchange such Debentures for an Unrestricted Definitive Debenture, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(d) thereof; or (2) if the Holder of such Restricted Definitive Debentures proposes to transfer such Debentures to a Person who shall take delivery thereof in the form of an Unrestricted Definitive Debenture, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests, an Opinion of Counsel in form reasonably acceptable to Holding to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. (iii) Unrestricted Definitive Debentures to Unrestricted Definitive Debentures. A Holder of Unrestricted Definitive Debentures may transfer such Debentures to a Person who takes delivery thereof in the form of an Unrestricted Definitive Debenture. Upon receipt of a request to register such a transfer, the Registrar shall register the Unrestricted Definitive Debentures pursuant to the instructions from the Holder thereof. (f) Exchange Offer. Upon the occurrence of the Exchange Offer in accordance with the Debenture Registration Rights Agreement, Holding shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02, the Trustee shall authenticate (i) one or more Unrestricted Global Debentures in an aggregate principal amount equal to the principal amount of the beneficial interests in the Restricted Global Debentures tendered for acceptance by Persons that certify in the applicable Letters of Transmittal that (x) they are not broker-dealers, (y) they are not participating in a distribution of the Exchange Debentures and (z) they are not affiliates (as defined in Rule 144) of Holding, and accepted for exchange in the Exchange Offer and (ii) Definitive Debentures in an aggregate principal amount equal to the principal amount of the Restricted Definitive Debentures accepted for exchange in the Exchange Offer. Concurrently with the issuance of such Debentures, the Trustee shall cause the aggregate principal amount of the applicable Restricted Global Debentures to be reduced accordingly, and Holding shall execute and the Trustee shall authenticate and deliver to the Persons designated by the Holders of Definitive Debentures so accepted Definitive Debentures in the appropriate principal amount. (g) Legends. The following legends shall appear on the face of all Global Debentures and Definitive Debentures issued under this Indenture unless specifically stated otherwise in the applicable provisions of this Indenture. 26 (i) Private Placement Legend. (A) Except as permitted by subparagraph (B) below, each Global Debenture and each Definitive Debenture (and all Debentures issued in exchange therefor or substitution thereof) shall bear the legend in substantially the following form: "THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A OR REGULATION S THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (d) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) OF THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR") THAT, PRIOR TO SUCH TRANSFER, FURNISHES THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS (THE FORM OF WHICH CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF SECURITIES LESS THAN $250,000, AN OPINION OF COUNSEL THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT OR (e) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE." (B) Notwithstanding the foregoing, any Global Debenture or Definitive Debenture issued pursuant to subparagraphs (b)(iv), (c)(ii), (c)(iii), (d)(ii), (d)(iii), (e)(ii), (e)(iii) or (f) to this Section 2.06 (and all Debentures issued in exchange therefor or substitution thereof) shall not bear the Private Placement Legend. (ii) Global Debenture Legend. Each Global Debenture shall bear a legend in substantially the following form: 27 "THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY." (iii) Regulation S Temporary Global Debenture Legend. The Regulation S Temporary Global Debenture shall bear a legend in substantially the following form: "THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON." (iv) Original Issue Discount Legend. Each Note shall bear a legend in substantially the following form: FOR THE PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT; FOR EACH $1,000 PRINCIPAL AMOUNT OF THIS SECURITY, THE ISSUE PRICE IS $519.24, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $480.76, THE ISSUE DATE IS JUNE 25, 1998 AND THE YIELD TO MATURITY IS 13 1/2% PER ANNUM." (h) Cancellation and/or Adjustment of Global Debentures. At such time as all beneficial interests in a particular Global Debenture have been exchanged for Definitive Debentures or a particular Global Debenture has been redeemed, repurchased or canceled in whole and not in part, each such Global Debenture shall be returned to or retained and canceled by the Trustee in accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Debenture is exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Debenture or for Definitive Debentures, the principal amount of Debentures represented by such Global Debenture shall be reduced accordingly and an endorsement shall be made on such Global Debenture by the Trustee or by the Depositary at the direction of the Trustee to reflect such reduction; and if the beneficial interest is being exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Debenture, such other Global Debenture shall be increased accordingly and an endorsement shall be made on such Global Debenture by the Trustee or by the Depositary at the direction of the Trustee to reflect such increase. (i) General Provisions Relating to Transfers and Exchanges. 28 (i) To permit registrations of transfers and exchanges, Holding shall execute and the Trustee shall authenticate Global Debentures and Definitive Debentures upon Holding's order or at the Registrar's request. (ii) No service charge shall be made to a holder of a beneficial interest in a Global Debenture or to a Holder of a Definitive Debenture for any registration of transfer or exchange, but Holding may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 2.10, 3.06, 3.09, 4.10, 4.15 and 9.05 hereof). (iii) The Registrar shall not be required to register the transfer of or exchange any Debenture selected for redemption in whole or in part, except the unredeemed portion of any Debenture being redeemed in part. (iv) All Global Debentures and Definitive Debentures issued upon any registration of transfer or exchange of Global Debentures or Definitive Debentures shall be the valid obligations of Holding, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Global Debentures or Definitive Debentures surrendered upon such registration of transfer or exchange. (v) Holding shall not be required (A) to issue, to register the transfer of or to exchange any Debentures during a period beginning at the opening of business 15 days before the day of any selection of Debentures for redemption under Section 3.02 hereof and ending at the close of business on the day of selection, (B) to register the transfer of or to exchange any Debenture so selected for redemption in whole or in part, except the unredeemed portion of any Debenture being redeemed in part or (C) to register the transfer of or to exchange a Debenture between a record date and the next succeeding Interest Payment Date. (vi) Prior to due presentment for the registration of a transfer of any Debenture, the Trustee, any Agent and Holding may deem and treat the Person in whose name any Debenture is registered as the absolute owner of such Debenture for the purpose of receiving payment of principal of and interest on such Debentures and for all other purposes, and none of the Trustee, any Agent or Holding shall be affected by notice to the contrary. (vii) The Trustee shall authenticate Global Debentures and Definitive Debentures in accordance with the provisions of Section 2.02 hereof. (viii) All certifications, certificates and Opinions of Counsel required to be submitted to the Registrar pursuant to this Section 2.06 to effect a registration of transfer or exchange may be submitted by facsimile. SECTION 2.07. REPLACEMENT DEBENTURES. If any mutilated Debenture is surrendered to the Trustee or Holding and the Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Debenture, Holding shall issue and the Trustee, upon receipt of an Authentication Order, shall authenticate a replacement Debenture if the Trustee's requirements are met. If required by the Trustee or Holding, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and Holding to protect Holding, the Trustee, any Agent and any authenticating agent from any loss that any of them may suffer if a Debenture is replaced. Holding may charge for its expenses in replacing a Debenture. 29 Every replacement Debenture is an additional obligation of Holding and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Debentures duly issued hereunder. SECTION 2.08. OUTSTANDING DEBENTURES. The Debentures outstanding at any time are all the Debentures authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, those reductions in the interest in a Global Debenture effected by the Trustee in accordance with the provisions hereof, and those described in this Section as not outstanding. Except as set forth in Section 2.09 hereof, a Debenture does not cease to be outstanding because Holding or an Affiliate of Holding holds the Debenture. If a Debenture is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Debenture is held by a bona fide purchaser. If the principal amount of any Debenture is considered paid under Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue. If the Paying Agent (other than Holding, a Subsidiary or an Affiliate of any thereof) holds, on a redemption date or maturity date, money sufficient to pay Debentures payable on that date, then on and after that date such Debentures shall be deemed to be no longer outstanding and shall cease to accrue interest. SECTION 2.09. TREASURY DEBENTURES. In determining whether the Holders of the required principal amount of Debentures have concurred in any direction, waiver or consent, Debentures owned by Holding, or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with Holding, shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Debentures that the Trustee actually knows are so owned shall be so disregarded. SECTION 2.10. TEMPORARY DEBENTURES. Until certificates representing Debentures are ready for delivery, Holding may prepare and the Trustee, upon receipt of an Authentication Order, shall authenticate temporary Debentures. Temporary Debentures shall be substantially in the form of certificated Debentures but may have variations that Holding considers appropriate for temporary Debentures and as shall be reasonably acceptable to the Trustee. Without unreasonable delay, Holding shall prepare and the Trustee shall authenticate definitive Debentures in exchange for temporary Debentures. Holders of temporary Debentures shall be entitled to all of the benefits of this Indenture. SECTION 2.11. CANCELLATION. Holding at any time may deliver Debentures to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Debentures surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel all Debentures surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall destroy 30 canceled Debentures (subject to the record retention requirement of the Exchange Act). Certification of the destruction of all canceled Debentures shall be delivered to Holding. Holding may not issue new Debentures to replace Debentures that it has paid or that have been delivered to the Trustee for cancellation. SECTION 2.12. DEFAULTED INTEREST. If Holding defaults in a payment of interest on the Debentures, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date, in each case at the rate provided in the Debentures and in Section 4.01 hereof. Holding shall notify the Trustee in writing of the amount of defaulted interest proposed to be paid on each Debenture and the date of the proposed payment. Holding shall fix or cause to be fixed each such special record date and payment date, provided that no such special record date shall be less than 10 days prior to the related payment date for such defaulted interest. At least 15 days before the special record date, Holding (or, upon the written request of Holding, the Trustee in the name and at the expense of Holding) shall mail or cause to be mailed to Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid. ARTICLE 3. REDEMPTION AND PREPAYMENT SECTION 3.01. NOTICES TO TRUSTEE. If Holding elects to redeem Debentures pursuant to the optional redemption provisions of Section 3.07 hereof, it shall furnish to the Trustee, at least 35 days but not more than 60 days before a redemption date, an Officers' Certificate setting forth (i) the clause of this Indenture pursuant to which the redemption shall occur, (ii) the redemption date, (iii) the principal amount of Debentures to be redeemed and (iv) the redemption price. SECTION 3.02. SELECTION OF DEBENTURES TO BE REDEEMED. If less than all of the Debentures are to be redeemed or purchased in an offer to purchase at any time, the Trustee shall select the Debentures to be redeemed or purchased among the Holders of the Debentures in compliance with the requirements of the principal national securities exchange, if any, on which the Debentures are listed or, if the Debentures are not so listed, on a pro rata basis, provided that no Debentures having a principal amount at maturity of $1,000 or less shall be redeemed in part. In the event of partial redemption by lot, the particular Debentures to be redeemed shall be selected, unless otherwise provided herein, not less than 30 nor more than 60 days prior to the redemption date by the Trustee from the outstanding Debentures not previously called for redemption. The Trustee shall promptly notify Holding in writing of the Debentures selected for redemption and, in the case of any Debenture selected for partial redemption, the principal amount thereof to be redeemed. Debentures and portions of Debentures selected shall be in amounts of $1,000 or whole multiples of $1,000; except that if all of the Debentures of a Holder are to be redeemed, the entire outstanding amount of Debentures held by such Holder, even if not a multiple of $1,000, shall be redeemed. Except as provided in the preceding sentence, provisions of this Indenture that apply to Debentures called for redemption also apply to portions of Debentures called for redemption. 31 SECTION 3.03. NOTICE OF REDEMPTION. Subject to the provisions of Section 3.09 hereof, at least 30 days but not more than 60 days before a redemption date, Holding shall mail or cause to be mailed, by first class mail, a notice of redemption to each Holder whose Debentures are to be redeemed at its registered address. The notice shall identify the Debentures to be redeemed and shall state: (a) the redemption date; (b) the redemption price; (c) if any Debenture is being redeemed in part, the portion of the principal amount of such Debenture to be redeemed and that, after the redemption date upon surrender of such Debenture, a new Debenture or Debentures in principal amount equal to the unredeemed portion shall be issued upon cancellation of the original Debenture; (d) the name and address of the Paying Agent; (e) that Debentures called for redemption must be surrendered to the Paying Agent to collect the redemption price; (f) that, unless Holding defaults in making such redemption payment, interest on Debentures called for redemption ceases to accrue on and after the redemption date; (g) the paragraph of the Debentures and/or Section of this Indenture pursuant to which the Debentures called for redemption are being redeemed; and (h) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Debentures. At Holding's request, the Trustee shall give the notice of redemption in Holding's name and at its expense; provided, however, that Holding shall have delivered to the Trustee, at least 45 days prior to the redemption date, an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice as provided in the preceding paragraph. SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed in accordance with Section 3.03 hereof, Debentures called for redemption become irrevocably due and payable on the redemption date at the redemption price. A notice of redemption may not be conditional. SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. One Business Day prior to the redemption date, Holding shall deposit with the Trustee or with the Paying Agent money sufficient to pay the redemption price of and accrued interest on all Debentures to be redeemed on that date. The Trustee or the Paying Agent shall promptly return to Holding any money deposited with the Trustee or the Paying Agent by Holding in excess of the amounts necessary to pay the redemption price of, and accrued interest on, all Debentures to be redeemed. 32 If Holding complies with the provisions of the preceding paragraph, on and after the redemption date, interest shall cease to accrue on the Debentures or the portions of Debentures called for redemption. If a Debenture is redeemed on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest shall be paid to the Person in whose name such Debenture was registered at the close of business on such record date. If any Debenture called for redemption shall not be so paid upon surrender for redemption because of the failure of Holding to comply with the preceding paragraph, interest shall be paid on the unpaid principal, from the redemption date until such principal is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case at the rate provided in the Debentures and in Section 4.01 hereof. SECTION 3.06. DEBENTURES REDEEMED IN PART. Upon surrender of a Debenture that is redeemed in part, Holding shall issue and, upon Holding's written request, the Trustee shall authenticate for the Holder at the expense of Holding a new Debenture equal in principal amount to the unredeemed portion of the Debenture surrendered. SECTION 3.07. OPTIONAL REDEMPTION. (a) Except as set forth in clause (b) of this Section 3.07, Holding shall not have the option to redeem the Debentures pursuant to this Section 3.07 prior to July 1, 2003. Thereafter, Holding shall have the option to redeem the Debentures, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on July 1 of the years indicated below: YEAR PERCENTAGE - ---- ---------- 2003...................................................................106.750% 2004...................................................................103.375% 2005 and thereafter....................................................100.000% (b) Notwithstanding the provisions of clause (a) of this Section 3.07, at any time prior to July 1, 2001, Holding may on one or more occasions redeem up to 100% of the aggregate principal amount at maturity of Debentures originally issued at a redemption price of equal to 113.5% of the Accreted Value thereof (determined at the date of redemption), plus Liquidated Damages thereon, if any, to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the original aggregate principal amount at maturity of Debentures remains outstanding immediately after the occurrence of such redemption; provided, further, that such redemption shall occur within 90 days of the date of the closing of such Public Equity Offering. (c) Any redemption pursuant to this Section 3.07 shall be made pursuant to the provisions of Section 3.01 through 3.06 hereof. SECTION 3.08. NO MANDATORY REDEMPTION OR SINKING FUND PAYMENTS. Holding shall not be required to make mandatory redemption or sinking fund payments with respect to the Debentures. 33 SECTION 3.09. OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS. In the event that, pursuant to Section 4.10 hereof, Holding shall be required to commence an offer to all Holders to purchase Debentures (an "Asset Sale Offer"), it shall follow the procedures specified below. The Asset Sale Offer shall remain open for a period of 20 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Offer Period"). No later than five Business Days after the termination of the Offer Period (the "Purchase Date"), Holding shall purchase the principal amount of Debentures required to be purchased pursuant to Section 4.10 hereof (the "Offer Amount") or, if less than the Offer Amount has been tendered, all Debentures tendered in response to the Asset Sale Offer. Payment for any Debentures so purchased shall be made in the same manner as interest payments are made. If the Purchase Date is on or after an interest record date and on or before the related interest payment date, any accrued and unpaid interest shall be paid to the Person in whose name a Debenture is registered at the close of business on such record date, and no additional interest shall be payable to Holders who tender Debentures pursuant to the Asset Sale Offer. Upon the commencement of an Asset Sale Offer, Holding shall send, by first class mail, a notice to the Trustee and each of the Holders, with a copy to the Trustee. The notice shall contain all instructions and materials necessary to enable such Holders to tender Debentures pursuant to the Asset Sale Offer. The Asset Sale Offer shall be made to all Holders. The notice, which shall govern the terms of the Asset Sale Offer, shall state: (a) that the Asset Sale Offer is being made pursuant to this Section 3.09 and Section 4.10 hereof and the length of time the Asset Sale Offer shall remain open; (b) the Offer Amount, the purchase price and the Purchase Date; (c) that any Debenture not tendered or accepted for payment shall continue to accrete or accrue interest; (d) that, unless Holding defaults in making such payment, any Debenture accepted for payment pursuant to the Asset Sale Offer shall cease to accrete or accrue interest after the Purchase Date; (e) that Holders electing to have a Debenture purchased pursuant to an Asset Sale Offer may only elect to have all of such Debenture purchased and may not elect to have only a portion of such Debenture purchased; (f) that Holders electing to have a Debenture purchased pursuant to any Asset Sale Offer shall be required to surrender the Debenture, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Debenture completed, or transfer by book-entry transfer, to Holding, a depositary, if appointed by Holding, or a Paying Agent at the address specified in the notice at least three days before the Purchase Date; (g) that Holders shall be entitled to withdraw their election if Holding, the depositary or the Paying Agent, as the case may be, receives, not later than the expiration of the Offer Period, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the 34 Debenture the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Debenture purchased; (h) that, if the aggregate principal amount of Debentures surrendered by Holders exceeds the Offer Amount, Holding shall select the Debentures to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by Holding so that only Debentures in denominations of $1,000, or integral multiples thereof, shall be purchased); and (i) that Holders whose Debentures were purchased only in part shall be issued new Debentures equal in principal amount to the unpurchased portion of the Debentures surrendered (or transferred by book-entry transfer). On or before the Purchase Date, Holding shall, to the extent lawful, accept for payment, on a pro rata basis to the extent necessary, the Offer Amount of Debentures or portions thereof tendered pursuant to the Asset Sale Offer, or if less than the Offer Amount has been tendered, all Debentures tendered, and shall deliver to the Trustee an Officers' Certificate stating that such Debentures or portions thereof were accepted for payment by Holding in accordance with the terms of this Section 3.09. Holding, the Depositary or the Paying Agent, as the case may be, shall promptly (but in any case not later than five days after the Purchase Date) mail or deliver to each tendering Holder an amount equal to the purchase price of the Debentures tendered by such Holder and accepted by Holding for purchase, and Holding shall promptly issue a new Debenture, and the Trustee, upon written request from Holding shall authenticate and mail or deliver such new Debenture to such Holder, in a principal amount equal to any unpurchased portion of the Debenture surrendered. Any Debenture not so accepted shall be promptly mailed or delivered by Holding to the Holder thereof. Holding shall publicly announce the results of the Asset Sale Offer on the Purchase Date. Other than as specifically provided in this Section 3.09, any purchase pursuant to this Section 3.09 shall be made pursuant to the provisions of Sections 3.01 through 3.06 hereof. ARTICLE 4. COVENANTS SECTION 4.01. PAYMENT OF DEBENTURES. Holding shall pay or cause to be paid the principal of, premium, if any, and interest on the Debentures on the dates and in the manner provided in the Debentures. Principal, premium, if any, and interest shall be considered paid on the date due if the Paying Agent, if other than Holding or a Subsidiary thereof, holds as of 10:00 a.m. Eastern Time on the due date money deposited by Holding in immediately available funds and designated for and sufficient to pay all principal, premium, if any, and interest then due. Holding shall pay all Liquidated Damages, if any, in the same manner on the dates and in the amounts set forth in the Debenture Registration Rights Agreement. Holding shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Debentures to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace period) at the same rate to the extent lawful. 35 SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. Holding shall maintain in the Borough of Manhattan, the City of New York, an office or agency (which may be an office of the Trustee or an affiliate of the Trustee, Registrar or co-registrar) where Debentures may be surrendered for registration of transfer or for exchange and where notices and demands to or upon Holding in respect of the Debentures and this Indenture may be served. Holding shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time Holding shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. Holding may also from time to time designate one or more other offices or agencies where the Debentures may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve Holding of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York for such purposes. Holding shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. Holding hereby designates the Corporate Trust Office of the Trustee as one such office or agency of Holding in accordance with Section 2.03. SECTION 4.03. REPORTS. (a) Whether or not required by the rules and regulations of the Commission, so long as any Debentures are outstanding, Holding will furnish to the Holders of Debentures (i) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if Holding were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by Holding's certified independent accountants and (ii) all current reports that would be required to be filed with the SEC on Form 8-K if Holding were required to file such reports. In addition, following the consummation of the Exchange Offer, whether or not required by the rules and regulations of the SEC, Holding shall file a copy of all such information and reports with the SEC for public availability (unless the SEC will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. (b) Holding shall at all times comply with TIA ss. 314(a). (c) For so long as any Debentures remain outstanding, Holding shall furnish to the Holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. SECTION 4.04. COMPLIANCE CERTIFICATE. (a) Holding shall deliver to the Trustee, within 90 days after the end of each fiscal year, an Officers' Certificate stating that a review of the activities of Holding and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether Holding has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his or her knowledge Holding has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and 36 conditions of this Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action Holding is taking or proposes to take with respect thereto) and that to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest, if any, on the Debentures is prohibited or if such event has occurred, a description of the event and what action Holding is taking or proposes to take with respect thereto. (b) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the year-end financial statements delivered pursuant to Section 4.03(a) above shall be accompanied by a written statement of Holding's independent public accountants (who shall be a firm of established national reputation) that in making the examination necessary for certification of such financial statements, nothing has come to their attention that would lead them to believe that Holding has violated any provisions of Article 4 or Article 5 hereof or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. (c) Holding shall, so long as any of the Debentures are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action Holding is taking or proposes to take with respect thereto. SECTION 4.05. TAXES. Holding shall pay, and shall cause each of its Subsidiaries to pay, prior to delinquency, all material taxes, assessments, and governmental levies except such as are contested in good faith and by appropriate proceedings or where the failure to effect such payment is not adverse in any material respect to the Holders of the Debentures. SECTION 4.06. STAY, EXTENSION AND USURY LAWS. Holding covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and Holding (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. SECTION 4.07. RESTRICTED PAYMENTS. Holding shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of Holding's or any of its Restricted Subsidiaries' Equity Interests (including, without limitation, any payment on such Equity Interests in connection with any merger or consolidation involving Holding) or to the direct or indirect holders of Holding's or any of its Restricted Subsidiaries' Equity Interests in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of Holding); (ii) purchase, redeem or otherwise acquire or retire for value (including, without limitation, in connection with any merger or consolidation involving Holding) any Equity Interests of Holding or any direct or indirect parent of Holding (other than any such Equity Interests owned by Holding or any Restricted 37 Subsidiary of Holding); (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the Debentures, except scheduled payments of interest or principal at Stated Maturity of such Indebtedness; or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (a) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; and (b) Holding would, after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.09 hereof; and (c) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by Holding and its Restricted Subsidiaries after the date of this Indenture (excluding Restricted Payments permitted by clauses (i), (ii), (iii), (iv), (viii) (other than those permitted by clause (f) of the definition of "Permitted Investments"), (ix), (xii) and (xiii) of the next succeeding paragraph), is less than the sum of (i) 50% of the Consolidated Net Income of Holding for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date of this Indenture to the end of Holding's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds received by Holding as a contribution to Holding's capital or received by Holding from the issue or sale since the date of this Indenture of Equity Interests of Holding (other than Disqualified Stock) or of Disqualified Stock or debt securities of Holding that have been converted into such Equity Interests (other than Equity Interests (or Disqualified Stock or debt securities) sold to a Restricted Subsidiary of Holding and other than Disqualified Stock or convertible debt securities that have been converted into Disqualified Stock), plus (iii) to the extent that any Restricted Investment that was made after the date of this Indenture is sold for cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (B) the initial amount of such Restricted Investment, plus (iv) if any Unrestricted Subsidiary (A) is redesignated as a Restricted Subsidiary, the fair market value of such redesignated Subsidiary (as determined in good faith by the Board of Directors) as of the date of its redesignation or (B) pays any cash dividends or cash distributions to Holding or any of its Restricted Subsidiaries, 50% of any such cash dividends or cash distributions made after the date of this Indenture. The foregoing provisions shall not prohibit (i) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of this Indenture; (ii) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness or Equity Interests of Holding in exchange for, or out of the net cash proceeds of the substantially concurrent sale or issuance (other than to a Restricted Subsidiary of Holding) of, other Equity Interests of Holding (other than Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition shall be excluded from clause (c)(ii) of the preceding paragraph; (iii) the defeasance, redemption, repurchase or other acquisition of subordinated Indebtedness with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any dividend by a Restricted Subsidiary of Holding to the holders of its Equity Interests on a pro rata basis; (v) the declaration or payment of dividends to Acquisition Corp. or Holding for expenses incurred by Acquisition Corp. in its capacity as holding company or for services rendered on behalf of Holding, including, without limitation, (a) customary salary, 38 bonus and other benefits payable to officers and employees of Acquisition Corp., (b) fees and expenses paid to members of the Board of Directors of Acquisition Corp., (c) general corporate overhead expenses of Acquisition Corp., (d) management, consulting or advisory fees paid to Acquisition Corp. not to exceed $4.0 million in any fiscal year, and (e) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of Acquisition Corp. held by any member or former member of Acquisition Corp.'s (or any of its Restricted Subsidiaries') management pursuant to any management equity subscription agreement, stockholders agreement or stock option agreement; provided, however, the aggregate amount paid pursuant to the foregoing clauses (a) through (e) does not exceed $5.0 million in any fiscal year (with any unused amounts in any fiscal year being carried over to succeeding fiscal years, subject to a maximum (without giving effect to the following clause (y)) of $10.0 million in any calendar year, plus (y) the aggregate cash proceeds received by Holding from any reissuance of Equity Interests by Acquisition Corp. to members of management of Holding and its Restricted Subsidiaries; (vi) Investments in any Person (other than Holding or a Restricted Subsidiary) engaged in a Permitted Business in an amount not to exceed $5.0 million; (vii) other Investments in Unrestricted Subsidiaries having an aggregate fair market value, taken together with all other Investments made pursuant to this clause (vii) that are at that time outstanding, not to exceed $2.0 million; (viii) Permitted Investments; (ix) the declaration or payment of dividends or other payments to Acquisition Corp. pursuant to any tax sharing agreement or other arrangement among Acquisition Corp. and other members of the affiliated corporations of which Acquisition Corp. is the common parent; (x) other Restricted Payments in an aggregate amount not to exceed $10.0 million; (xi) so long as no Default or Event of Default has occurred and is continuing, the declaration and payment of dividends on Disqualified Stock issued or after the date of this Indenture, the incurrence of which satisfied the covenant set forth in the first paragraph of Section 4.09 hereof; (xii) the declaration or payment of dividends to Acquisition Corp. to satisfy any required purchase price adjustment payment arising out of the Acquisition; and (xiii) the declaration or payment of dividends or other payments to Acquisition Corp. in an amount not to exceed $2.0 million dollars to satisfy redemption obligations in respect of Equity Interests of Acquisition Corp. that are held by management of Acquisition Corp., Holding or the Company; provided, that such amount shall not be applied against expenses incurred pursuant to clause (v)(e) above. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default. For purposes of making such determination, all outstanding Investments by Holding and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments will be deemed to constitute Investments in an amount equal to the fair market value of such Investments at the time of such designation (as determined in good faith by the Board of Directors). Such designation will only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by Holding or such Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any non-cash Restricted Payment shall be determined in good faith by the Board of Directors whose resolution with respect thereto shall be delivered to the Trustee; such determination will be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if such fair market value exceeds $10.0 million. Not later than the date of making any Restricted Payment, Holding shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this Section 4.07 were computed, together with a copy of any fairness opinion or appraisal required by this Indenture. 39 SECTION 4.08. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. Holding shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any other distributions to Holding or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits, or (b) pay any Indebtedness owed to Holding or any of its Restricted Subsidiaries, (ii) make loans or advances to Holding or any of its Restricted Subsidiaries or (iii) transfer any of its properties or assets to Holding or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) Existing Indebtedness as in effect on the date of this Indenture, (b) the Credit Agreement as in effect as of the date of this Indenture, and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof, provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are no more restrictive in the aggregate (as determined in the good faith judgment of Holding's Board of Directors) with respect to such dividend and other payment restrictions than those contained in the Credit Agreement as in effect on the date of this Indenture, (c) this Indenture and the Debentures and the Note Indenture and the Notes, (d) any applicable law, rule, regulation or order, (e) any instrument of a Person acquired by Holding or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of this Indenture to be incurred, (f) by reason of customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices, (g) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (e) above on the property so acquired, (h) Permitted Refinancing Indebtedness, provided that the material restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive, in the good faith judgment of Holding's Board of Directors, taken as a whole, to the Holders of Debentures than those contained in the agreements governing the Indebtedness being refinanced, (i) contracts for the sale of assets, including, without limitation, customary restrictions with respect to a Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary, (j) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business and (k) other Indebtedness or Disqualified Stock of Restricted Subsidiaries permitted to be incurred subsequent to the Issuance Date pursuant to the provisions of Section 4.09 hereof. SECTION 4.09. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK. Holding shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and that Holding shall not issue any Disqualified Stock and shall not permit any of its Subsidiaries to issue any shares of preferred stock; provided, however, that Holding may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock or preferred stock and Holding's Restricted Subsidiaries may incur Indebtedness (including Acquired Debt) and issue Disqualified Stock or preferred stock if the Fixed Charge Coverage Ratio for Holding's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock or preferred stock is issued would have been at least 1.5 to 1, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock or preferred stock had been issued, as the case may be, at the beginning of such four-quarter period. 40 The foregoing provisions shall not apply to the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"): (i) the incurrence by the Company of Indebtedness and letters of credit pursuant to the Credit Agreement; provided that the aggregate principal amount of all such Indebtedness (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of the Company thereunder) then classified as having been incurred in reliance on this clause (i) that remains outstanding under the Credit Agreement after giving effect to such incurrence does not exceed the sum of $20.0 million; (ii) the incurrence by Holding and its Restricted Subsidiaries of the Existing Indebtedness; (iii) the incurrence by Holding of Indebtedness represented by the Debentures and the incurrence by the Company of Indebtedness represented by the Notes; (iv) the incurrence by Holding or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of Holding or such Restricted Subsidiary (whether through the direct purchase of assets or the Capital Stock of any Person owning such Assets), in an aggregate principal amount or accreted value, as applicable, not to exceed $10.0 million; (v) the incurrence by Holding or any of its Restricted Subsidiaries of Indebtedness in connection with the acquisition of assets or a new Restricted Subsidiary; provided that such Indebtedness was incurred by the prior owner of such assets or such Restricted Subsidiary prior to such acquisition by Holding or one of its Subsidiaries and was not incurred in connection with, or in contemplation of, such acquisition by Holding or one of its Subsidiaries; provided further that the principal amount (or accreted value, as applicable) of such Indebtedness, together with any other outstanding Indebtedness incurred pursuant to this clause (v), does not exceed $5.0 million; (vi) the incurrence by Holding or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness that was permitted by this Indenture to be incurred; (vii) the incurrence by Holding or any of its Restricted Subsidiaries of intercompany Indebtedness between or among Holding and any of its Restricted Subsidiaries; provided, however, that (i) if Holding is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all Obligations with respect to the Debentures and (ii)(A) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than Holding or a Restricted Subsidiary and (B) any sale or other transfer of any such Indebtedness to a Person that is not either Holding or a Restricted Subsidiary shall be deemed, in each case, to constitute an incurrence of such Indebtedness by Holding or such Restricted Subsidiary, as the case may be; (viii) the incurrence by Holding or any of its Restricted Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing or hedging (i) interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Indenture to be outstanding or (ii) exchange rate risk with respect to any agreement or Indebtedness of such Person payable in a currency other than U.S. dollars; (ix) the Guarantee by Holding or any of its Restricted Subsidiaries of Indebtedness of Holding or a Restricted Subsidiary of Holding that was permitted to be incurred by another provision of this Section 4.09; 41 (x) the incurrence by Holding's Unrestricted Subsidiaries of Non-Recourse Debt; provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of Holding; (xi) Indebtedness incurred by Holding or any of its Restricted Subsidiaries constituting reimbursement obligations with respect to letters of credit issued in the ordinary course of business, including, without limitation, to letters of credit in respect to workers' compensation claims or self-insurance, or other Indebtedness with respect to reimbursement type obligations regarding workers' compensation claims; provided, however, that upon the drawing of such letters of credit or the incurrence of such Indebtedness, such obligations are reimbursed within 30 days following such drawing or incurrence; (xii) Indebtedness arising from agreements of Holding or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, asset or Subsidiary, other than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or Subsidiary for the purpose of financing such acquisition; provided that (x) such Indebtedness is not reflected on the balance sheet of Holding or any Restricted Subsidiary (contingent obligations referred to in a footnote or footnotes to financial statements and not otherwise reflected on the balance sheet will not be deemed to be reflected on such balance sheet for purposes of this clause (x)) and (y) the maximum assumable liability in respect of such Indebtedness shall at no time exceed 50% of the gross proceeds including non-cash proceeds (the fair market value of such non-cash proceeds being measured at the time received and without giving effect to any such subsequent changes in value) actually received by Holding and/or such Restricted Subsidiary in connection with such disposition; (xiii) obligations in respect of performance and surety bonds and completion guarantees provided by Holding or any Restricted Subsidiary in the ordinary course of business; (xiv) guarantees incurred in the ordinary course of business in an aggregate principal amount not to exceed $5.0 million at any time outstanding; and (xv) the incurrence by Holding or any of its Restricted Subsidiaries of additional Indebtedness, including Attributable Debt incurred after the date of this Indenture, in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any other Indebtedness incurred pursuant to this clause (xv), not to exceed $20.0 million. For purposes of determining compliance with this Section 4.09, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (i) through (xv) above or is entitled to be incurred pursuant to the first paragraph of this Section 4.09, Holding shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this Section 4.09 and such item of Indebtedness will be treated as having been incurred pursuant to only one of such clauses or pursuant to the first paragraph hereof. In addition, Holding may, at any time, change the classification of an item of Indebtedness (or any portion thereof) to any other clause or to the first paragraph hereof provided that Holding would be permitted to incur such item of Indebtedness (or portion thereof) pursuant to such other clause or the first paragraph hereof, as the case may be, at such time of reclassification. Accrual of interest, accretion or amortization of original issue discount and the accretion of accreted value will not be deemed to be an incurrence of Indebtedness for purposes of this Section 4.09. 42 SECTION 4.10. ASSET SALES. Holding shall not, and shall not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) Holding (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 75% of the consideration therefor received by Holding or such Restricted Subsidiary is in the form of cash or Cash Equivalents; provided that the amount of (x) any liabilities (as shown on Holding's or such Restricted Subsidiary's most recent balance sheet) of Holding or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Debentures or any Guarantee thereof) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases Holding or such Restricted Subsidiary from further liability and (y) any securities, notes or other obligations received by Holding or any such Restricted Subsidiary from such transferee that are converted by Holding or such Restricted Subsidiary into cash or Cash Equivalents within 180 days (to the extent of the cash received), shall be deemed to be cash for purposes of this provision; and provided further that the 75% limitation referred to in clause (ii) above will not apply to any Asset Sale in which the cash or Cash Equivalents portion of the consideration received therefrom, determined in accordance with the foregoing proviso, is equal to or greater than what the after-tax proceeds would have been had such Asset Sale complied with the aforementioned 75% limitation. Within 360 days after the receipt of any Net Proceeds from an Asset Sale, Holding or any such Restricted Subsidiary may apply such Net Proceeds, at its option, (a) to repay or repurchase pari passu Indebtedness of Holding or any Indebtedness of any Restricted Subsidiary or (b) to the acquisition of a controlling interest in another business, the making of a capital expenditure or the acquisition of other long-term assets, in each case, in a Permitted Business. Pending the final application of any such Net Proceeds, Holding may temporarily reduce the revolving Indebtedness under the Credit Agreement or otherwise invest such Net Proceeds in any manner that is not prohibited by this Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million, Holding will be required to make an offer to all Holders of Debentures (an "Asset Sale Offer") to purchase the maximum principal amount of Debentures that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the Accreted Value thereof on the date of repurchase (if such date of repurchase is prior to July 1, 2003) or 100% of the principal amount thereof (if such date of repurchase is on or after July 1, 2003) plus, in each case, accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase, in accordance with the procedures set forth in this Indenture. To the extent that the aggregate amount of Debentures tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, Holding may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Debentures surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Debentures to be purchased on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this Section 4.10, Holding will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described in this Indenture by virtue thereof. SECTION 4.11. TRANSACTIONS WITH AFFILIATES. Holding shall not, and shall not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, 43 loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction") unless (i) such Affiliate Transaction is on terms that are no less favorable to Holding or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by Holding or such Restricted Subsidiary with an unrelated Person and (ii) Holding delivers to the Trustee (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $1.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving either aggregate consideration in excess of $5.0 million or an aggregate consideration in excess of $3.0 million where there are no disinterested members of the Board of Directors, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing; provided that the following shall not be deemed Affiliate Transactions: (q) customary directors' fees, indemnification or similar arrangements or any employment agreement or other compensation plan or arrangement entered into by Holding or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of Holding or such Restricted Subsidiary, (r) transactions between or among Holding and/or its Restricted Subsidiaries, (s) Permitted Investments and Restricted Payments that are permitted by Section 4.07 hereof, (t) customary loans, advances, fees and compensation paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of Holding or any of its Restricted Subsidiaries, (u) transactions pursuant to any contract or agreement in effect on the date of this Indenture as the same may be amended, modified or replaced from time to time so long as any such amendment, modification or replacement is no less favorable to Holding and its Restricted Subsidiaries than the contract or agreement as in effect on the Issue Date, (v) transactions between Holding or its Restricted Subsidiaries on the one hand, and Donaldson, Lufkin & Jenrette Securities Corporation or its Affiliates ("DLJ") on the other hand, involving the provision of financial, advisory, placement or underwriting services by DLJ; provided that fees payable to DLJ do not exceed the usual and customary fees of DLJ for similar services, (w) insurance arrangements among Acquisition Corp., Holding and its Subsidiaries that are not less favorable to Holding or any of its Subsidiaries than those that are in effect on the date hereof provided such arrangements are conducted in the ordinary course of business consistent with past practices, (x) payments under any tax sharing agreement or other arrangement among Acquisition Corp., Holding and other members of the affiliated group of corporations of which either is the common parent and (y) payments in connection with the Refinancing (including the payment of fees and expenses with respect thereto). SECTION 4.12. LIENS. Holding shall not, and shall not permit any of its Restricted Subsidiaries to, create, incur, assume or otherwise cause or suffer to exist or become effective any Lien (other than Permitted Liens) upon any of their property or assets, now owned or hereafter acquired. SECTION 4.13. BUSINESS ACTIVITIES. Holding shall not, and shall not permit any Restricted Subsidiary to, engage in any business other than a Permitted Business, except to such extent as would not be material to Holding and its Restricted Subsidiaries taken as a whole. SECTION 4.14. CORPORATE EXISTENCE. Subject to Article 5 hereof, Holding shall do or cause to be done all things necessary to preserve and keep in full force and effect (i) its corporate existence, and the corporate, partnership or 44 other existence of each of its Subsidiaries, in accordance with the respective organizational documents (as the same may be amended from time to time) of Holding or any such Subsidiary and (ii) the rights (charter and statutory), licenses and franchises of Holding and its Subsidiaries; provided, however, that Holding shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any of its Subsidiaries, if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of Holding and its Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders of the Debentures. SECTION 4.15. OFFER TO REPURCHASE UPON CHANGE OF CONTROL. (a) Upon the occurrence of a Change of Control, each Holder of Debentures will have the right to require Holding to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Debentures pursuant to the offer described in this Section 4.15 (the "Change of Control Offer") at an offer price in cash equal to 101% of the Accreted Value thereof on the date of repurchase (if such repurchase is prior to July 1, 2003) or 101% of the aggregate principal amount thereof (if such date of repurchase is on or after July 1, 2003) plus, in each case, accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of repurchase (the "Change of Control Payment"). Within 60 days following any Change of Control, Holding will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Debentures on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"), pursuant to the procedures required by this Indenture and described in such notice. Holding will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Debentures as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this Indenture relating to such Change of Control Offer, Holding will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described in this Indenture by virtue thereof. (b) On the Change of Control Payment Date, Holding will, to the extent lawful, (1) accept for payment all Debentures or portions thereof properly tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Debentures or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee the Debentures so accepted together with an Officers' Certificate stating the aggregate principal amount of Debentures or portions thereof being purchased by Holding. The Paying Agent will promptly mail to each Holder of Debentures so tendered the Change of Control Payment for such Debentures, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Debenture equal in principal amount to any unpurchased portion of the Debentures surrendered, if any; provided that each such new Debenture will be in a principal amount of $1,000 or an integral multiple thereof. SECTION 4.16. LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. Holding shall not, and shall not permit any of its Restricted Subsidiaries to, enter into any sale and leaseback transaction; provided that Holding or any Restricted Subsidiary may enter into a sale and leaseback transaction if (i) Holding or such Restricted Subsidiary could have (a) incurred Indebtedness in an amount equal to the Attributable Debt relating to such sale and leaseback transaction pursuant to Section 4.09 hereof and (b) incurred a Lien to secure such Indebtedness pursuant to Section 4.12 hereof; (ii) the gross cash proceeds of such sale and leaseback transaction are at least equal to the fair market value (as determined in good faith by the Board of Directors and set forth in an Officers' Certificate delivered to the 45 Trustee) of the property that is the subject of such sale and leaseback transaction and (iii) the transfer of assets in such sale and leaseback transaction is permitted by, and Holding applies the proceeds of such transaction in compliance with, Section 4.10 hereof. ARTICLE 5. SUCCESSORS SECTION 5.01. MERGER, CONSOLIDATION, OR SALE OF ASSETS. Holding shall not consolidate or merge with or into (whether or not Holding is the surviving corporation), or sell, assign, transfer, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another Person unless (i) Holding is the surviving corporation or the Person formed by or surviving any such consolidation or merger (if other than Holding) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the entity or Person formed by or surviving any such consolidation or merger (if other than Holding) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of Holding under the Debentures and this Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii) immediately after such transaction no Default or Event of Default exists; and (iv) Holding or the entity or Person formed by or surviving any such consolidation or merger (if other than Holding), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made (a) will, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.09 hereof or (b) would (together with its Restricted Subsidiaries) have a higher Fixed Charge Coverage Ratio immediately after such transaction (after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period) than the Fixed Charge Coverage Ratio of Holding and its subsidiaries immediately prior to the transaction. The foregoing clause (iv) will not prohibit (a) a merger between Holding and a Wholly Owned Subsidiary of Acquisition Corp. created for the purpose of holding the Capital Stock of Holding, (b) a merger between Holding and a Wholly Owned Subsidiary or (c) a merger between Holding and an Affiliate incorporated solely for the purpose of reincorporating Holding in another state of the United States so long as, in each case, the amount of Indebtedness of Holding and its Restricted Subsidiaries is not increased thereby. The Indenture will also provide that Holding may not, directly or indirectly, lease all or substantially all of its properties or assets, in one or more related transactions, to any other Person. The provisions of this Section 5.01 will not be applicable to a sale, assignment, transfer, conveyance or other disposition of assets between or among Holding and its Wholly Owned Restricted Subsidiaries. SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED. Upon any consolidation or merger, or any sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the assets of Holding in accordance with Section 5.01 hereof, the successor corporation formed by such consolidation or into or with which Holding is merged or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be substituted for (so that from and after the date of such consolidation, merger, sale, lease, conveyance or other disposition, the provisions of this Indenture referring to the "Company" shall refer instead to the successor corporation and not to Holding), and may exercise every right and power of Holding under this Indenture with the same effect as if such successor Person had been named as Holding herein; provided, however, that the predecessor Company shall not be relieved from the obligation to pay 46 the principal of and interest on the Debentures except in the case of a sale of all of Holding's assets that meets the requirements of Section 5.01 hereof. ARTICLE 6. DEFAULTS AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT. Each of the following constitutes an "Event of Default": (a) default for 30 days in the payment when due of interest on, or Liquidated Damages with respect to, the Debentures; (b) default in payment when due of the principal of or premium, if any, on the Debentures; (c) failure by Holding to comply with the provisions described under Section 4.10 or 4.14 hereof; (d) failure by Holding for 30 days after notice from the Trustee or at least 25% in principal amount of the Debentures then outstanding to comply with the provisions described under Sections 4.07 or 4.09 hereof; (e) failure by Holding for 60 days after notice from the Trustee or holders of at least 25% in principal amount of the Debentures then outstanding to comply with any of its other agreements in this Indenture or the Debentures; (f) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by Holding or any of its Restricted Subsidiaries (or the payment of which is guaranteed by Holding or any of its Restricted Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created after the date of this Indenture, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $10.0 million or more; (g) failure by Holding or any of its Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; and (h) Holding, any of its Restricted Subsidiaries that are Significant Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, pursuant to or within the meaning of Bankruptcy Law: (i) commences a voluntary case, (ii) consents to the entry of an order for relief against it in an involuntary case, (iii) consents to the appointment of a Custodian of it or for all or substantially all of its property, 47 (iv) makes a general assignment for the benefit of its creditors, or (v) generally is not paying its debts as they become due; or (i) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against Holding, any of its Restricted Subsidiaries that are Significant Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, in an involuntary case; (ii) appoints a Custodian of Holding, any of its Restricted Subsidiaries that are Significant Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary or for all or substantially all of the property of Holding, any of its Restricted Subsidiaries that are Significant Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary; or (iii) orders the liquidation of Holding, any of its Restricted Subsidiaries that are Significant Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary; and the order or decree remains unstayed and in effect for 60 consecutive days. SECTION 6.02. ACCELERATION. If any Event of Default (other than an Event of Default specified in clause (h) or (i) of Section 6.01 hereof with respect to Holding, any Restricted Subsidiary that is a Significant Subsidiary or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Debentures may declare all the Debentures to be due and payable immediately. Upon any such declaration, the Debentures shall become due and payable immediately. Notwithstanding the foregoing, if an Event of Default specified in clause (h) or (i) of Section 6.01 hereof occurs with respect to Holding, any Restricted Subsidiary that is a Significant Subsidiary or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, all outstanding Debentures shall be due and payable immediately without further action or notice. The Holders of a majority in aggregate principal amount of the then outstanding Debentures by written notice to the Trustee may on behalf of all of the Holders rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal or interest that has become due solely because of the acceleration) have been cured or waived. If an Event of Default occurs on or after July 1, 2003 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of Holding with the intention of avoiding payment of the premium that Holding would have had to pay if Holding then had elected to redeem the Debentures pursuant to Section 3.07 hereof, then, upon acceleration of the Debentures, an equivalent premium shall also become and be immediately due and payable, to the extent permitted by law, anything in this Indenture or in the Debentures to the contrary notwithstanding. If an Event of Default occurs prior to July 1, 2003 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of Holding with the intention of avoiding the prohibition on redemption of the Debentures prior to such date, then, upon acceleration of the Debentures, an additional premium shall also become and be immediately due and payable in an amount, for each of the years beginning on July 1 of the years set forth 48 below, as set forth below (expressed as a percentage of the principal amount of the Debentures to the date of payment that would otherwise be due but for the provisions of this sentence): YEAR PERCENTAGE - ---- ---------- 1998...............................................................113.500% 1999...............................................................112.150% 2000...............................................................110.800% 2001...............................................................109.450% 2002...............................................................108.100% SECTION 6.03. OTHER REMEDIES. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal, premium, if any, and interest on the Debentures or to enforce the performance of any provision of the Debentures or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Debentures or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder of a Debenture in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. SECTION 6.04. WAIVER OF PAST DEFAULTS. Holders of not less than a majority in aggregate principal amount of the then outstanding Debentures by notice to the Trustee may on behalf of the Holders of all of the Debentures waive an existing Default or Event of Default and its consequences hereunder, except a continuing Default or Event of Default in the payment of the principal of, premium and Liquidated Damages, if any, or interest on, the Debentures (including in connection with an offer to purchase) (provided, however, that the Holders of a majority in aggregate principal amount of the then outstanding Debentures may rescind an acceleration and its consequences, including any related payment default that resulted from such acceleration). Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. SECTION 6.05. CONTROL BY MAJORITY. Holders of a majority in principal amount of the then outstanding Debentures may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture that the Trustee determines may be unduly prejudicial to the rights of other Holders of Debentures or that may involve the Trustee in personal liability. SECTION 6.06. LIMITATION ON SUITS. A Holder of a Debenture may pursue a remedy with respect to this Indenture or the Debentures only if: (a) the Holder of a Debenture gives to the Trustee written notice of a continuing Event of Default; 49 (b) the Holders of at least 25% in principal amount of the then outstanding Debentures make a written request to the Trustee to pursue the remedy; (c) such Holder of a Debenture or Holders of Debentures offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and (e) during such 60-day period the Holders of a majority in principal amount of the then outstanding Debentures do not give the Trustee a direction inconsistent with the request. A Holder of a Debenture may not use this Indenture to prejudice the rights of another Holder of a Debenture or to obtain a preference or priority over another Holder of a Debenture. SECTION 6.07. RIGHTS OF HOLDERS OF DEBENTURES TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder of a Debenture to receive payment of principal, premium and Liquidated Damages, if any, and interest on the Debenture, on or after the respective due dates expressed in the Debenture (including in connection with an offer to purchase), or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default specified in Section 6.01(a) or (b) occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against Holding for the whole amount of principal of, premium and Liquidated Damages, if any, and interest remaining unpaid on the Debentures and interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders of the Debentures allowed in any judicial proceedings relative to Holding (or any other obligor upon the Debentures), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties that the Holders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. 50 Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Debentures or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10. PRIORITIES. If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee, its agents and attorneys for amounts due under Section 7.07 hereof, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; Second: to Holders of Debentures for amounts due and unpaid on the Debentures for principal, premium and Liquidated Damages, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Debentures for principal, premium, and Liquidated Damages, if any, and interest, respectively; and Third: to Holding or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders of Debentures pursuant to this Section 6.10. SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder of a Debenture pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Debentures. ARTICLE 7. TRUSTEE SECTION 7.01. DUTIES OF TRUSTEE. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (i) the duties of the Trustee shall be determined solely by the express provisions of this Indenture and the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and 51 (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 hereof. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), (c), (e) and (f) of this Section and Section 7.02. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee shall be under no obligation to exercise any of its rights and powers under this Indenture at the request of any Holders, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with Holding. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 7.02. RIGHTS OF TRUSTEE. (a) In connection with the Trustee's rights and duties under this Indenture, the Trustee may conclusively rely upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within the rights or powers conferred upon it by this Indenture. 52 (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from Holding shall be sufficient if signed by an Officer of Holding. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction. (g) In no event shall the Trustee be required to take notice of any default or breach hereof or any Event of Default hereunder, except for Events of Default specified in Sections 6.01(a) and (b) hereof, unless and until the Trustee shall have received from a Holder or from Holding express written notice of the circumstances constituting the breach, default or Event of Default and stating that said circumstances constitute an Event of Default hereunder. (h) Except with respect to Section 4.01 hereof, the Trustee shall have no duty to inquire as to the performance of Holding's covenants in Article 4 hereof. In addition, the Trustee shall not be deemed to have knowledge of any Default or Event of Default except (i) any Event of Default occurring pursuant to Sections 6.01(a), 6.01(b) and 4.01 or (ii) any Default or Event of Default of which the Trustee shall have received written notification or obtained actual knowledge. (i) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee may, in its discretion, make such further inquiry or investigation into such facts or matters as it may see fit and if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of Holding personally or by agent or attorney. SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual or any other capacity may become the owner or pledgee of Debentures and may otherwise deal with Holding or any Affiliate of Holding with the same rights it would have if it were not Trustee. However, in the event that the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue as trustee or resign. Any Agent may do the same with like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof. SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Debentures, it shall not be accountable for Holding's use of the proceeds from the Debentures or any money paid to Holding or upon Holding's direction under any provision of this Indenture, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee, and it shall not be responsible for any statement or recital herein or any statement in the Debentures or any other document in connection with the sale of the Debentures or pursuant to this Indenture other than its certificate of authentication. SECTION 7.05. NOTICE OF DEFAULTS. If a Default or Event of Default occurs and is continuing and if it is known to the Trustee, or if appropriate notice is provided in writing in accordance with Section 7.02(g), as applicable, the 53 Trustee shall mail to Holders of Debentures a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment of principal of, premium, if any, or interest on any Debenture, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders of the Debentures. SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE DEBENTURES. Within 60 days after each July 1 beginning with the July 1 following the date of this Indenture, and for so long as Debentures remain outstanding, the Trustee shall mail to the Holders of the Debentures a brief report dated as of such reporting date that complies with TIA ss. 313(a) (but if no event described in TIA ss. 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA ss. 313(b)(2). The Trustee shall also transmit by mail all reports as required by TIA ss. 313(c). A copy of each report at the time of its mailing to the Holders of Debentures shall be mailed to Holding and filed with the SEC and each stock exchange on which the Debentures are listed in accordance with TIA ss. 313(d). Holding shall promptly notify the Trustee when the Debentures are listed on any stock exchange. SECTION 7.07. COMPENSATION AND INDEMNITY. Holding shall pay to the Trustee from time to time reasonable compensation for its acceptance of this Indenture and services hereunder. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. Holding shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. Holding shall indemnify the Trustee against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, including the costs and expenses of enforcing this Indenture against Holding (including this Section 7.07) and defending itself against any claim (whether asserted by Holding or any Holder or any other person) or liability in connection with the exercise or performance of any of its powers or duties hereunder, except to the extent any such loss, liability or expense may be attributable to its negligence or bad faith. The Trustee shall notify Holding promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify Holding shall not relieve Holding of its obligations hereunder. Holding shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and Holding shall pay the reasonable fees and expenses of such counsel. Holding need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The obligations of Holding under this Section 7.07 shall survive the satisfaction and discharge of this Indenture. To secure Holding's payment obligations in this Section, the Trustee shall have a Lien prior to the Debentures on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Debentures. Such Lien shall survive the satisfaction and discharge of this Indenture. 54 When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(g) or (h) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. The Trustee shall comply with the provisions of TIA ss. 313(b)(2) to the extent applicable. SECTION 7.08. REPLACEMENT OF TRUSTEE. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign in writing at any time and be discharged from the trust hereby created by so notifying Holding. The Holders of Debentures of a majority in principal amount of the then outstanding Debentures may remove the Trustee by so notifying the Trustee and Holding in writing. Holding may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10 hereof; (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a Custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, Holding shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Debentures may appoint a successor Trustee to replace the successor Trustee appointed by Holding. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, Holding, or the Holders of Debentures of at least 10% in principal amount of the then outstanding Debentures may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee, after written request by any Holder of a Debenture who has been a Holder of a Debenture for at least six months, fails to comply with Section 7.10, such Holder of a Debenture may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to Holding. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders of the Debentures. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, Holding's obligations under Section 7.07 hereof shall continue for the benefit of the retiring Trustee. 55 SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee. SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. There shall at all times be a Trustee hereunder that is a corporation organized and doing business under the laws of the United States of America or of any state thereof that is authorized under such laws to exercise corporate trustee power, that is subject to supervision or examination by federal or state authorities and that has a combined capital and surplus of at least $100 million as set forth in its most recent published annual report of condition. This Indenture shall always have a Trustee who satisfies the requirements of TIA ss. 310(a)(1), (2) and (5). The Trustee is subject to TIA ss. 310(b). SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The Trustee is subject to TIAss. 311(a), excluding any creditor relationship listed in TIAss. 311(b). A Trustee who has resigned or been removed shall be subject to TIAss. 311(a) to the extent indicated therein. ARTICLE 8. LEGAL DEFEASANCE AND COVENANT DEFEASANCE SECTION 8.01. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE. Holding may, at the option of its Board of Directors evidenced by a resolution set forth in an Officers' Certificate, at any time, elect to have either Section 8.02 or 8.03 hereof be applied to all outstanding Debentures upon compliance with the conditions set forth below in this Article 8. SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE. Upon Holding's exercise under Section 8.01 hereof of the option applicable to this Section 8.02, Holding shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be deemed to have been discharged from its obligations with respect to all outstanding Debentures on the date the conditions set forth below are satisfied (hereinafter, "Legal Defeasance"). For this purpose, Legal Defeasance means that Holding shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Debentures, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.05 hereof and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all its other obligations under such Debentures and this Indenture (and the Trustee, on demand of and at the expense of Holding, shall execute proper instruments acknowledging the same), except for the following provisions which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of outstanding Debentures to receive solely from the trust fund described in Section 8.04 hereof, and as more fully set forth in such Section, payments in respect of the principal of, premium, if any, and interest and Liquidated Damages on such Debentures when such payments are due, (b) Holding's obligations with respect to such Debentures under Article 2 and Section 4.02 hereof, (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder and Holding's obligations in connection therewith and (d) this Article 8. Subject to compliance 56 with this Article 8, Holding may exercise its option under this Section 8.02 notwithstanding the prior exercise of its option under Section 8.03 hereof. SECTION 8.03. COVENANT DEFEASANCE. Upon Holding's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, Holding shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be released from its obligations under the covenants contained in Sections 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.15, 4.16 and 5.01 hereof with respect to the outstanding Debentures on and after the date the conditions set forth in Section 8.04 are satisfied (hereinafter, "Covenant Defeasance") and the Debentures shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Debentures shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the outstanding Debentures, Holding may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.01 hereof, but, except as specified above, the remainder of this Indenture and such Debentures shall be unaffected thereby. In addition, upon Holding's exercise under Section 8.01 hereof of the option applicable to this Section 8.03 hereof, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, Sections 6.01(d) through 6.01(f) hereof shall not constitute Events of Default. SECTION 8.04. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE. The following shall be the conditions to the application of either Section 8.02 or 8.03 hereof to the outstanding Debentures: In order to exercise either Legal Defeasance or Covenant Defeasance: (a) Holding must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders, cash in United States dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium and Liquidated Damages, if any, and interest on the outstanding Debentures on the stated date for payment thereof or on the applicable redemption date, as the case may be, and Holding must specify whether the Debentures are being defeased to maturity or to a particular redemption date; (b) in the case of an election under Section 8.02 hereof, Holding shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that (A) Holding has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date hereof, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders of the outstanding Debentures will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (c) in the case of an election under Section 8.03 hereof, Holding shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that, 57 subject to customary assumptions and exclusions, the Holders of the outstanding Debentures will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (d) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds all or a portion of the proceeds of which will be used to defease the Debentures pursuant to this Article 8 concurrently with such borrowing) or insofar as Sections 6.01(h) or 6.01(i) hereof is concerned, at any time in the period ending on the 91st day after the date of deposit; (e) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any material agreement or instrument (other than this Indenture) to which Holding or any of its Subsidiaries is a party or by which Holding or any of its Subsidiaries is bound; (f) Holding shall have delivered to the Trustee an Opinion of Counsel (which may be subject to customary assumptions and exclusions) to the effect that on the 91st day following the deposit, the trust funds will not be subject to the effect of Section 547 of the United States Bankruptcy Code or any analogous New York State law provision to any other applicable federal or New York bankruptcy, insolvency, reorganization or similar law affecting creditors' rights generally; (g) Holding shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by Holding with the intent of preferring the Holders over any other creditors of Holding or with the intent of defeating, hindering, delaying or defrauding any other creditors of Holding; and (h) Holding shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel (which opinion may be subject to customary assumptions and exclusions), each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with. SECTION 8.05. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. Subject to Section 8.06 hereof, all money and non-callable Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 8.05, the "Trustee") pursuant to Section 8.04 hereof in respect of the outstanding Debentures shall be held in trust and applied by the Trustee, in accordance with the provisions of such Debentures and this Indenture, to the payment, either directly or through any Paying Agent (including Holding acting as Paying Agent) as the Trustee may determine, to the Holders of such Debentures of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. Holding shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or non-callable Government Securities deposited pursuant to Section 8.04 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Debentures. 58 Anything in this Article 8 to the contrary notwithstanding, the Trustee shall deliver or pay to Holding from time to time upon the request of Holding any money or non-callable Government Securities held by it as provided in Section 8.04 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 8.04(a) hereof), are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. SECTION 8.06. REPAYMENT TO COMPANY. Any money deposited with the Trustee or any Paying Agent, or then held by Holding, in trust for the payment of the principal of, premium, if any, or interest on any Debenture and remaining unclaimed for two years after such principal, and premium, if any, or interest has become due and payable shall be paid to Holding on its request or (if then held by Holding) shall be discharged from such trust; and the Holder of such Debenture shall thereafter, as a secured creditor, look only to Holding for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of Holding as Trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of Holding cause to be published once, in the New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining shall be repaid to Holding. SECTION 8.07. REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any United States dollars or non-callable Government Securities in accordance with Section 8.02 or 8.03 hereof, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then Holding's obligations under this Indenture and the Debentures shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.02 or 8.03 hereof until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.02 or 8.03 hereof, as the case may be; provided, however, that, if Holding makes any payment of principal of, premium, if any, or interest on any Debenture following the reinstatement of its obligations, Holding shall be subrogated to the rights of the Holders of such Debentures to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE 9. , AMENDMENT, SUPPLEMENT AND WAIVER , SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF DEBENTURES. Notwithstanding Section 9.02 of this Indenture, Holding and the Trustee may amend or supplement this Indenture or the Debentures without the consent of any Holder of a Debenture: (a) to cure any ambiguity, defect or inconsistency; (b) to provide for uncertificated Debentures in addition to or in place of certificated Debentures or to alter the provisions of Article 2 hereof (including the related definitions) in a manner that does not materially adversely affect any Holder; 59 (c) to provide for the assumption of Holding's obligations to the Holders of the Debentures by a successor to Holding pursuant to Article 5 hereof; (d) to make any change that would provide any additional rights or benefits to the Holders of the Debentures or that does not adversely affect the legal rights hereunder of any Holder of the Debenture; or (e) to comply with requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA. Upon the request of Holding accompanied by a resolution of its Board of Directors authorizing the execution of any such amended or supplemental Indenture, and upon receipt by the Trustee of the documents described in Section 7.02 hereof, the Trustee shall join with Holding in the execution of any amended or supplemental Indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into such amended or supplemental Indenture that affects its own rights, duties or immunities under this Indenture or otherwise. SECTION 9.02. WITH CONSENT OF HOLDERS OF DEBENTURES. Except as provided below in this Section 9.02, Holding and the Trustee may amend or supplement this Indenture (including Sections 3.09, 4.10 and 4.15 hereof) and the Debentures may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Debentures then outstanding voting as a single class (including consents obtained in connection with a tender offer or exchange offer for, or purchase of, the Debentures), and, subject to Sections 6.04 and 6.07 hereof, any existing Default or Event of Default (other than a Default or Event of Default in the payment of the principal of, premium, if any, or interest on the Debentures, except a payment default resulting from an acceleration that has been rescinded) or compliance with any provision of this Indenture or the Debentures may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Debentures voting as a single class (including consents obtained in connection with a tender offer or exchange offer for, or purchase of, the Debentures). Section 2.08 hereof shall determine which Debentures are considered to be "outstanding" for purposes of this Section 9.02. Upon the request of Holding accompanied by a resolution of its Board of Directors authorizing the execution of any such amended or supplemental Indenture, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consent of the Holders of Debentures as aforesaid, and upon receipt by the Trustee of the documents described in Section 7.02 hereof, the Trustee shall join with Holding in the execution of such amended or supplemental Indenture unless such amended or supplemental Indenture directly affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such amended or supplemental Indenture. It shall not be necessary for the consent of the Holders of Debentures under this Section 9.02 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section becomes effective, Holding shall mail to the Holders of Debentures affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of Holding to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amended or supplemental 60 Indenture or waiver. Subject to Sections 6.04 and 6.07 hereof, the Holders of a majority in aggregate principal amount of the Debentures then outstanding voting as a single class may waive compliance in a particular instance by Holding with any provision of this Indenture or the Debentures. However, without the consent of each Holder affected, an amendment or waiver under this Section 9.02 may not (with respect to any Debentures held by a non-consenting Holder): (a) reduce the principal amount of Debentures whose Holders must consent to an amendment, supplement or waiver; (b) reduce the principal of or change the fixed maturity of any Debenture or alter or waive any of the provisions with respect to the redemption of the Debentures, except as provided above with respect to Sections 3.09, 4.10 and 4.15 hereof; (c) reduce the rate of or change the time for payment of interest on any Debenture; (d) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the Debentures (except a rescission of acceleration of the Debentures by the Holders of at least a majority in aggregate principal amount of the Debentures and a waiver of the payment default that resulted from such acceleration); (e) make any Debenture payable in money other than that stated in the Debentures; (f) make any change in the provisions of this Indenture relating to waivers of past Defaults or the rights of Holders of Debentures to receive payments of principal of, interest, or premium, if any, on the Debentures; (g) waive a redemption payment with respect to any Debenture (other than a payment required by Section 4.10 or 4.15 hereof); or (h) amend this Section 9.02. SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment or supplement to this Indenture or the Debentures shall be set forth in a amended or supplemental Indenture that complies with the TIA as then in effect. SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Debenture is a continuing consent by the Holder of a Debenture and every subsequent Holder of a Debenture or portion of a Debenture that evidences the same debt as the consenting Holder's Debenture, even if notation of the consent is not made on any Debenture. However, any such Holder of a Debenture or subsequent Holder of a Debenture may revoke the consent as to its Debenture if the Trustee receives written notice of revocation before the date the waiver, supplement or amendment becomes effective. An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every Holder. SECTION 9.05. NOTATION ON OR EXCHANGE OF DEBENTURES. The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Debenture thereafter authenticated. Holding in exchange for all Debentures may issue and 61 the Trustee shall, upon receipt of an Authentication Order, authenticate new Debentures that reflect the amendment, supplement or waiver. Failure to make the appropriate notation or issue a new Debenture shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall sign any amended or supplemental Indenture authorized pursuant to this Article 9 if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. Holding may not sign an amendment or supplemental Indenture until the Board of Directors approves it. In executing any amended or supplemental indenture, the Trustee shall be entitled to receive and (subject to Section 7.01 hereof) shall be fully protected in relying upon, in addition to the documents required by Section 10.04 hereof, an Officer's Certificate and an Opinion of Counsel stating that the execution of such amended or supplemental indenture is authorized or permitted by this Indenture. ARTICLE 10. , MISCELLANEOUS , SECTION 10.01. TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA ss. 318(c), the imposed duties shall control. SECTION 10.02. NOTICES. Any notice or communication by Holding or the Trustee to the others is duly given if in writing and delivered in Person or mailed by first class mail (registered or certified, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery, to the others' address. If to Holding: AKI Holding Corp. 1815 East Main Street Chattanooga, Tennessee 37404 Telecopier No.: 423-624-3301 Attention: Chief Financial Officer With a copy to: Weil, Gotshal & Manges LLP 100 Crescent Court, Suite 1300 Dallas, Texas 75201-6950 Telecopier No.: 214-746-7777 Attention: R. Scott Cohen If to the Trustee: 62 State Street Bank and Trust Company 225 Asylum Street, 23rd Floor Hartford, Connecticut 06103 Telecopier No.: 860-244-1897 Attention: Steve Cimalore With a copy to: Brown, Rudnick, Freed & Gesmer Cityplace I 185 Asylum Street Hartford, Connecticut 06103 Telecopier No.: 860-509-6501 Attention: Kevin Mallery Holding or the Trustee, by notice to the others may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Holder shall be mailed by first class mail, certified or registered, return receipt requested, or by overnight air courier guaranteeing next day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA ss. 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If Holding mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. SECTION 10.03. COMMUNICATION BY HOLDERS OF DEBENTURES WITH OTHER HOLDERS OF DEBENTURES. Holders may communicate pursuant to TIA ss. 312(b) with other Holders with respect to their rights under this Indenture or the Debentures. Holding, the Trustee, the Registrar and anyone else shall have the protection of TIA ss. 312(c). SECTION 10.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by Holding to the Trustee to take any action under this Indenture, Holding shall furnish to the Trustee: 63 (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 10.05 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied; and (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 10.05 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied. SECTION 10.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA ss. 314(a)(4)) shall comply with the provisions of TIA ss. 314(e) and shall include: (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been satisfied; and (d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been satisfied. SECTION 10.06. RULES BY TRUSTEE AND AGENTS. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. SECTION 10.07. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS. No director, officer, employee, incorporator or stockholder of Holding, as such, shall have any liability for any obligations of Holding under the Debentures, this Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Debentures by accepting a Debenture waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Debentures. SECTION 10.08. GOVERNING LAW. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS INDENTURE AND THE NOTES WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE 64 APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. SECTION 10.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret any other indenture, loan or Indebtedness agreement of Holding or its Subsidiaries or of any other Person. Any such indenture, loan or Indebtedness agreement may not be used to interpret this Indenture. SECTION 10.10. SUCCESSORS. All agreements of Holding in this Indenture and the Debentures shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 10.11. SEVERABILITY. In case any provision in this Indenture or in the Debentures shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 10.12. COUNTERPART ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 10.13. TABLE OF CONTENTS, HEADINGS, ETC. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof. [Signatures on following page] 65 SIGNATURES Dated as of June ___, 1998 AKI HOLDING CORP. BY: -------------------------- Name: Title: State Street Bank and Trust Company BY: -------------------------- Name: Title: 66 EXHIBIT A-1 (Face of Global Debenture) =============================================================================== CUSIP/CINS________________ 13 1/2% Senior Discount Debentures due 2009 No. __ $______________ AKI HOLDING CORP. promises to pay to _______________, or registered assigns, the principal sum of _________________ Dollars on July 1, 2009. Interest Payment Dates: January 1 and July 1 Record Dates: December 15 and June 15 DATED: AKI HOLDING CORP. BY: ---------------------------- Name: Title: This is one of the Global Debentures referred to in the within-mentioned Indenture: State Street Bank and Trust Company, as Trustee By: ----------------------------------- Name: =============================================================================== A1-1 (Back of Debenture) 13 1/2% [Series A] [Series B] Senior Discount Debentures due 2009 FOR THE PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT; FOR EACH $1,000 PRINCIPAL AMOUNT OF THIS SECURITY, THE ISSUE PRICE IS $519.24, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $480.76, THE ISSUE DATE IS JUNE 25, 1998 AND THE YIELD TO MATURITY IS 13 1/2% PER ANNUM. [INSERT THE FOLLOWING IF THE DEBENTURE IS ISSUED IN GLOBAL FORM.] [Unless and until it is exchanged in whole or in part for Debentures in definitive form, this Debenture may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) ("DTC"), to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as may be requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as may be requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL in as much as the registered owner hereof, Cede & Co., has an interest herein.] [INSERT THE GLOBAL DEBENTURE LEGEND, IF APPLICABLE, PURSUANT TO THE PROVISIONS OF THE INDENTURE] [INSERT THE PRIVATE PLACEMENT LEGEND, IF APPLICABLE, PURSUANT TO THE PROVISIONS OF THE INDENTURE] Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. INTEREST. AKI Holding Corp., a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Debenture at 13 1/2% per annum from July 1, 2003 until maturity, shall pay the aggregate principal amount of this Debenture on July 1, 2009 and shall pay the Liquidated Damages payable pursuant to Section 5 of the Debenture Registration Rights Agreement referred to below. Holding shall pay interest and Liquidated Damages, if any, semi-annually in arrears on January 1 and July 1 (each an "Interest Payment Date") of each applicable year, or if any such day is not a Business Day, on the next succeeding Business Day. The Debentures will accrete at a rate of 13 1/2% per annum, compounded semi-annually to an aggregate principal amount of $50,000,000 at July 1, 2003. Thereafter, interest on the Debentures will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from July 1, 2003. No cash interest will be payable on the Debentures prior to July 1, 2003. Holding shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium, if any, from time to time on demand at a rate that is 1% per annum in excess of the rate then in effect; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. A1-2 2. METHOD OF PAYMENT. Holding will pay interest on the Debentures (except defaulted interest) and Liquidated Damages to the Persons who are registered Holders of Debentures at the close of business on the December 15 or June 15 next preceding the Interest Payment Date, even if such Debentures are canceled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Debentures will be payable as to principal, premium and Liquidated Damages, if any, and interest at the office or agency of Holding maintained for such purpose within or without the City and State of New York, or, at the option of Holding, payment of interest and Liquidated Damages may be made by check mailed to the Holders at their addresses set forth in the register of Holders, and provided that payment by wire transfer of immediately available funds will be required with respect to principal of and interest, premium and Liquidated Damages, if any, on, all Global Debentures and all other Debentures the Holders of which shall have provided wire transfer instructions to Holding or the Paying Agent. Such payment shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. 3. PAYING AGENT AND REGISTRAR. Initially, State Street Bank and Trust Company, the Trustee under the Indenture, will act as Paying Agent and Registrar. Holding may change any Paying Agent or Registrar without notice to any Holder. Holding or any of its Subsidiaries may act in any such capacity. 4. INDENTURE. Holding issued the Debentures under an Indenture dated as of June 25, 1998 (the "Indenture") between Holding and the Trustee. The terms of the Debentures include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code ss.ss. 77aaa-77bbbb). The Debentures are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. To the extent any provision of this Debenture conflicts with the express provisions of the Indenture, the provisions of the Indenture shall govern and be controlling. The Debentures are general, unsecured obligations of Holding limited to $115.0 million in aggregate principal amount, plus amounts, if any, issued to pay Liquidated Damages on outstanding Debentures as set forth in Paragraph 2 hereof. 5. OPTIONAL REDEMPTION. (a) Except as set forth in clause (b) of this Paragraph 5, Holding shall not have the option to redeem the Debentures prior to July 1, 2003. Thereafter, Holding shall have the option to redeem the Debentures, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on July 1 of the years indicated below: YEAR PERCENTAGE ---- ---------- 2003........................................................... 106.750% 2004........................................................... 103.375% 2005 and thereafter............................................ 100.000% (b) Notwithstanding the provisions of subparagraph (a) of this Paragraph 5, at any time prior to July 1, 2001, Holding may on one or more occasions redeem up to 35% of the aggregate principal amount at maturity of Debentures originally issued at a redemption price equal to 113.5% of the Accreted Value thereof (determined at the date of redemption), plus Liquidated Damages thereon, if any, to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the original aggregate principal amount at maturity of Debentures remains outstanding A1-3 immediately after the occurrence of such redemption; provided, further, that such redemption shall occur within 90 days of the date of the closing of such Public Equity Offering. (c) Any redemption pursuant to this subparagraph 5 shall be made pursuant to the provisions of Section 3.01 through 3.06 of the Indenture. 6. MANDATORY REDEMPTION. Except as set forth in paragraph 7 below, Holding shall not be required to make mandatory redemption payments with respect to the Debentures. 7. REPURCHASE AT OPTION OF HOLDER. (a) Upon the occurrence of a Change of Control, each Holder of Debentures will have the right to require Holding to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Debentures pursuant to the offer described in Section 4.15 of the Indenture (the "Change of Control Offer") at an offer price in cash equal to 101% of the Accreted Value thereof on the date of repurchase (if such date of repurchase is prior to July 1, 2003) or 101% of the aggregate principal amount thereof (if such date is on or after July 1, 2003) plus, in each case, accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of repurchase (the "Change of Control Payment"). Within 60 days following any Change of Control, Holding will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Debentures on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed, pursuant to the procedures required by the Indenture and described in such notice. (b) Within 360 days after the receipt of any Net Proceeds from an Asset Sale, Holding or any such Restricted Subsidiary may apply such Net Proceeds, at its option, (a) to repay or repurchase pari passu Indebtedness of Holding or any Indebtedness of any Restricted Subsidiary or (b) to the acquisition of a controlling interest in another business, the making of a capital expenditure or the acquisition of other long-term assets, in each case, in a Permitted Business. Pending the final application of any such Net Proceeds, Holding may temporarily reduce the revolving Indebtedness under the Credit Agreement or otherwise invest such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million, Holding will be required to make an offer to all Holders of Debentures (an "Asset Sale Offer") to purchase the maximum principal amount of Debentures that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the Accreted Value thereof on the date of repurchase (if such date of repurchase is prior to July 1, 2003) or 100% of the aggregate principal amount thereof (if such date of repurchase is on or after July 1, 2003) plus, in each case, accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase, in accordance with the procedures set forth in the Indenture. To the extent that the aggregate amount of Debentures tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, Holding may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Debentures surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Debentures to be purchased on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. Holders of Debentures that are the subject of an offer to purchase may elect to have such Debentures purchased by completing the form entitled "Option of Holder to Elect Purchase" on the reverse of the Debentures. 8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Debentures are to be redeemed at its registered address. Debentures in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Debentures held by a Holder are to be A1-4 redeemed. On and after the redemption date interest ceases to accrue on Debentures or portions thereof called for redemption. 9. DENOMINATIONS, TRANSFER, EXCHANGE. The Debentures are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Debentures may be registered and Debentures may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and Holding may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. Holding need not exchange or register the transfer of any Debenture or portion of a Debenture selected for redemption, except for the unredeemed portion of any Debenture being redeemed in part. Also, Holding need not exchange or register the transfer of any Debentures for a period of 15 days before a selection of Debentures to be redeemed or during the period between a record date and the corresponding Interest Payment Date. 10. PERSONS DEEMED OWNERS. The registered Holder of a Debenture may be treated as its owner for all purposes. 11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, the Indenture or the Debentures may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the then outstanding Debentures and any existing Default or compliance with any provision of the Indenture or the Debentures may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Debentures. Without the consent of any Holder of a Debenture, the Indenture or the Debentures may be amended or supplemented to cure any ambiguity, defect or inconsistency, to provide for uncertificated Debentures in addition to or in place of certificated Debentures, to provide for the assumption of Holding's obligations to Holders of the Debentures in case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of the Debentures or that does not adversely affect the legal rights under the Indenture of any such Holder, or to comply with the requirements of the SEC in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act. 12. DEFAULTS AND REMEDIES. Each of the following constitutes an "Event of Default": (a) default for 30 days in the payment when due of interest on, or Liquidated Damages with respect to, the Debentures; (b) default in payment when due of the principal of or premium, if any, on the Debentures; (c) failure by Holding to comply with the provisions described under Section 4.10 or 4.14 of the Indenture; (d) failure by Holding for 30 days after notice from the Trustee or at least 25% in principal amount of the Debentures then outstanding to comply with the provisions described under Sections 4.07 or 4.09 of the Indenture; (e) failure by Holding for 60 days after notice from the Trustee or holders of at least 25% in principal amount of the Debentures then outstanding to comply with any of its other agreements in the Indenture or the Debentures; (f) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by Holding or any of its Restricted Subsidiaries (or the payment of which is guaranteed by Holding or any of its Restricted Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created after the date of the Indenture, which default (i) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (ii) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $10.0 million or more; (g) failure by Holding or any of its Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; and (h) certain events of bankruptcy or insolvency as described in the Indenture. A1-5 If any Event of Default (other than certain events of bankruptcy or insolvency) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Debentures may declare all the Debentures to be due and payable immediately. Upon any such declaration, the Debentures shall become due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, all outstanding Debentures shall be due and payable immediately without further action or notice. The Holders of a majority in aggregate principal amount of the then outstanding Debentures by written notice to the Trustee may on behalf of all of the Holders rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal or interest that has become due solely because of the acceleration) have been cured or waived. Holding is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and Holding is required upon becoming aware of any Default or Event of Default to deliver to the Trustee a statement specifying such Default or Event of Default. 13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for Holding or its Affiliates, and may otherwise deal with Holding or its Affiliates, as if it were not the Trustee. 14. NO RECOURSE AGAINST OTHERS. A director, officer, employee, incorporator or stockholder, of Holding, as such, shall not have any liability for any obligations of Holding under the Debentures or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Debenture waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Debentures. 15. AUTHENTICATION. This Debenture shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 16. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 17. ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL DEBENTURES AND RESTRICTED DEFINITIVE DEBENTURES. In addition to the rights provided to Holders of Debentures under the Indenture, Holders of Restricted Global Debentures and Restricted Definitive Debentures shall have all the rights set forth in the Debenture Registration Rights Agreement dated as of June 25, 1998, between Holding and the parties named on the signature pages thereof (the "Debenture Registration Rights Agreement" 18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, Holding has caused CUSIP numbers to be printed on the Debentures and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Debentures or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. Holding will furnish to any Holder upon written request and without charge a copy of the Indenture and/or the Debenture Registration Rights Agreement. Requests may be made to: A1-6 AKI Holding Corp. 1815 East Main Street Chattanooga, Tennessee 37404 Telecopier no.: 423-624-3301 Attention: Chief Financial Officer A1-7 ASSIGNMENT FORM To assign this Debenture, fill in the form below: (I) or (we) assign and transfer this Debenture to (Insert assignee's soc. sec. or tax I.D. no.) _______________________________________________________________________________ _______________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint________________________________________________________ to transfer this Debenture on the books of Holding. The agent may substitute another to act for him. Date: Your Signature:______________________________ (Sign exactly as your name appears on the Debenture) Tax Identification No:_______________________ Signature Guarantee. A1-8 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Debenture purchased by Holding pursuant to Section 4.10 or 4.15 of the Indenture, check the box below: [ ] Section 4.10 [ ] Section 4.15 If you want to elect to have only part of the Debenture purchased by Holding pursuant to Section 4.10 or Section 4.15 of the Indenture, state the amount you elect to have purchased: $________ Date: Your Signature:__________________________________ (Sign exactly as your name appears on the Debenture) Tax Identification No:___________________________ Signature Guarantee. A1-9 SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE 1 The following exchanges of a part of this Global Debenture for an interest in another Global Debenture or for a Definitive Debenture, or exchanges of a part of another Global Debenture or Definitive Debenture for an interest in this Global Debenture, have been made:
Principal Amount Signature of Amount of decrease Amount of increase of this Global authorized officer in Principal Amount in Principal Amount Debenture following of Trustee or of this of this such decrease Debenture Date of Exchange Global Debenture Global Debenture (or increase) Custodian - ---------------- ---------------- ---------------- ------------- ---------
- ------------- 1 This should be included only if the Note is issued in global form. A1-10 EXHIBIT A-2 (Face of Regulation S Temporary Global Debenture) =============================================================================== CUSIP/CINS________________ 13 1/2% Senior Discount Debentures due 2009 No.__ $________________ AKI HOLDING CORP. promises to pay to _______________, or registered assigns, the principal sum of _____________ Dollars on July 1, 2009. Interest Payment Dates: January 1 and July 1 Record Dates: December 15 and June 15 DATED: AKI HOLDING CORP. BY:_____________________________ Name: Title: This is one of the Global Debentures referred to in the within-mentioned Indenture: State Street Bank and Trust Company, as Trustee By: ______________________________ Name: =============================================================================== A2-1 (Back of Regulation S Temporary Global Debenture) 13 1/2% [Series A] [Series B] Senior Discount Debentures due 2009 FOR THE PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT; FOR EACH $1,000 PRINCIPAL AMOUNT OF THIS SECURITY, THE ISSUE PRICE IS $519.24, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $480.76, THE ISSUE DATE IS JUNE 25, 1998 AND THE YIELD TO MATURITY IS 13 1/2% PER ANNUM." THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON. THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A OR REGULATION S THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (d) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) OF THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR") THAT, PRIOR TO SUCH TRANSFER, FURNISHES THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS (THE FORM OF WHICH CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF SECURITIES LESS THAN $250,000, AN OPINION OF COUNSEL THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT OR (e) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE. Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. A2-2 1. INTEREST. AKI Holding Corp., a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Debenture at 13 1/2% per annum from July 1, 2003 until maturity, shall pay the aggregate principal amount of this Debenture on July 1, 2009 and shall pay the Liquidated Damages payable pursuant to Section 5 of the Debenture Registration Rights Agreement referred to below. Holding shall pay interest and Liquidated Damages, if any, semi-annually in arrears on January 1 and July 1 (each an "Interest Payment Date") of each applicable year, or if any such day is not a Business Day, on the next succeeding Business Day. The Debentures will accrete at a rate of 13 1/2% per annum, compounded semi-annually to an aggregate principal amount of $50,000,000 at July 1, 2003. Thereafter, interest on the Debentures will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from July 1, 2003. No cash interest will be payable on the Debentures prior to July 1, 2003. Holding shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium, if any, from time to time on demand at a rate that is 1% per annum in excess of the rate then in effect; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. METHOD OF PAYMENT. Holding will pay interest on the Debentures (except defaulted interest) and Liquidated Damages to the Persons who are registered Holders of Debentures at the close of business on the December 15 or June 15 next preceding the Interest Payment Date, even if such Debentures are canceled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Debentures will be payable as to principal, premium and Liquidated Damages, if any, and interest at the office or agency of Holding maintained for such purpose within or without the City and State of New York, or, at the option of Holding, payment of interest and Liquidated Damages may be made by check mailed to the Holders at their addresses set forth in the register of Holders, and provided that payment by wire transfer of immediately available funds will be required with respect to principal of and interest, premium and Liquidated Damages, if any, on, all Global Debentures. Such payment shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. 3. PAYING AGENT AND REGISTRAR. Initially, State Street Bank and Trust Company, the Trustee under the Indenture, will act as Paying Agent and Registrar. Holding may change any Paying Agent or Registrar without notice to any Holder. Holding or any of its Subsidiaries may act in any such capacity. 4. INDENTURE. Holding issued the Debentures under an Indenture dated as of June 25, 1998 (the "Indenture") between Holding and the Trustee. The terms of the Debentures include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Codess.ss. 77aaa-77bbbb). The Debentures are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. To the extent any provision of this Debenture conflicts with the express provisions of the Indenture, the provisions of the Indenture shall govern and be controlling. The Debentures are general, unsecured obligations of Holding limited to $115.0 million in aggregate principal amount, plus amounts, if any, issued to pay Liquidated Damages on outstanding Debentures as set forth in Paragraph 2 hereof. 5. OPTIONAL REDEMPTION. A2-3 (a) Except as set forth in clause (b) of this Paragraph 5, Holding shall not have the option to redeem the Debentures prior to July 1, 2003. Thereafter, Holding shall have the option to redeem the Debentures, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on July 1 of the years indicated below: YEAR PERCENTAGE ---- ---------- 2003....................................................... 106.750% 2004....................................................... 103.375% 2005 and thereafter........................................ 100.000% (b) Notwithstanding the provisions of subparagraph (a) of this Paragraph 5, at any time prior to July 1, 2001, Holding may on one or more occasions redeem up to 35% of the aggregate principal amount at maturity of Debentures originally issued at a redemption price equal to 113.5% of the Accreted Value thereof (determined at the date of redemption), plus Liquidated Damages thereon, if any, to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the original aggregate principal amount at maturity of Debentures remains outstanding immediately after the occurrence of such redemption; provided, further, that such redemption shall occur within 90 days of the date of the closing of such Public Equity Offering. (c) Any redemption pursuant to this subparagraph 5 shall be made pursuant to the provisions of Section 3.01 through 3.06 of the Indenture. 6. MANDATORY REDEMPTION. Except as set forth in paragraph 7 below, Holding shall not be required to make mandatory redemption payments with respect to the Debentures. 7. REPURCHASE AT OPTION OF HOLDER. (a) Upon the occurrence of a Change of Control, each Holder of Debentures will have the right to require Holding to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Debentures pursuant to the offer described in Section 4.15 of the Indenture (the "Change of Control Offer") at an offer price in cash equal to 101% of the Accreted Value thereof on the date of repurchase (if such date of repurchase is prior to July 1, 2003) or 101% of the aggregate principal amount thereof (if such date is on or after July 1, 2003) plus, in each case, accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of repurchase (the "Change of Control Payment"). Within 60 days following any Change of Control, Holding will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Debentures on the date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed, pursuant to the procedures required by the Indenture and described in such notice. (b) Within 360 days after the receipt of any Net Proceeds from an Asset Sale, Holding or any such Restricted Subsidiary may apply such Net Proceeds, at its option, (a) to repay or repurchase pari passu Indebtedness of Holding or any Indebtedness of any Restricted Subsidiary or (b) to the acquisition of a controlling interest in another business, the making of a capital expenditure or the acquisition of other long-term assets, in each case, in a Permitted Business. Pending the final application of any such Net Proceeds, Holding may temporarily reduce the revolving Indebtedness under the Credit Agreement or otherwise invest such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds A2-4 from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million, Holding will be required to make an offer to all Holders of Debentures (an "Asset Sale Offer") to purchase the maximum principal amount of Debentures that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the Accreted Value thereof on the date of repurchase (if such date of repurchase is prior to July 1, 2003) or 100% of the aggregate principal amount thereof (if such date of repurchase is on or after July 1, 2003) plus, in each case, accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase, in accordance with the procedures set forth in the Indenture. To the extent that the aggregate amount of Debentures tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, Holding may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Debentures surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Debentures to be purchased on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. Holders of Debentures that are the subject of an offer to purchase may elect to have such Debentures purchased by completing the form entitled "Option of Holder to Elect Purchase" on the reverse of the Debentures. 8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Debentures are to be redeemed at its registered address. Debentures in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Debentures held by a Holder are to be redeemed. On and after the redemption date interest ceases to accrue on Debentures or portions thereof called for redemption. 9. DENOMINATIONS, TRANSFER, EXCHANGE. The Debentures are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Debentures may be registered and Debentures may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and Holding may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. Holding need not exchange or register the transfer of any Debenture or portion of a Debenture selected for redemption, except for the unredeemed portion of any Debenture being redeemed in part. Also, Holding need not exchange or register the transfer of any Debentures for a period of 15 days before a selection of Debentures to be redeemed or during the period between a record date and the corresponding Interest Payment Date. 10. PERSONS DEEMED OWNERS. The registered Holder of a Debenture may be treated as its owner for all purposes. 11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, the Indenture or the Debentures may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the then outstanding Debentures and any existing Default or compliance with any provision of the Indenture or the Debentures may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Debentures. Without the consent of any Holder of a Debenture, the Indenture or the Debentures may be amended or supplemented to cure any ambiguity, defect or inconsistency, to provide for uncertificated Debentures in addition to or in place of certificated Debentures, to provide for the assumption of Holding's obligations to Holders of the Debentures in case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of the Debentures or that does not adversely affect the legal rights under the Indenture of any such Holder, or to comply with the requirements of the SEC in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act. A2-5 12. DEFAULTS AND REMEDIES. Each of the following constitutes an "Event of Default": (a) default for 30 days in the payment when due of interest on, or Liquidated Damages with respect to, the Debentures; (b) default in payment when due of the principal of or premium, if any, on the Debentures; (c) failure by Holding to comply with the provisions described under Section 4.10 or 4.14 of the Indenture; (d) failure by Holding for 30 days after notice from the Trustee or at least 25% in principal amount of the Debentures then outstanding to comply with the provisions described under Sections 4.07 or 4.09 of the Indenture; (e) failure by Holding for 60 days after notice from the Trustee or holders of at least 25% in principal amount of the Debentures then outstanding to comply with any of its other agreements in the Indenture or the Debentures; (f) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by Holding or any of its Restricted Subsidiaries (or the payment of which is guaranteed by Holding or any of its Restricted Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created after the date of the Indenture, which default (i) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default") or (ii) results in the acceleration of such Indebtedness prior to its express maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $10.0 million or more; (g) failure by Holding or any of its Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; and (h) certain events of bankruptcy or insolvency as described in the Indenture. If any Event of Default (other than certain events of bankruptcy or insolvency) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Debentures may declare all the Debentures to be due and payable immediately. Upon any such declaration, the Debentures shall become due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, all outstanding Debentures shall be due and payable immediately without further action or notice. The Holders of a majority in aggregate principal amount of the then outstanding Debentures by written notice to the Trustee may on behalf of all of the Holders rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal or interest that has become due solely because of the acceleration) have been cured or waived. Holding is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and Holding is required upon becoming aware of any Default or Event of Default to deliver to the Trustee a statement specifying such Default or Event of Default. 13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for Holding or its Affiliates, and may otherwise deal with Holding or its Affiliates, as if it were not the Trustee. 14. NO RECOURSE AGAINST OTHERS. A director, officer, employee, incorporator or stockholder, of Holding, as such, shall not have any liability for any obligations of Holding under the Debentures or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Debenture waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Debentures. 15. AUTHENTICATION. This Debenture shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. A2-6 16. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 17. ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL DEBENTURES AND RESTRICTED DEFINITIVE DEBENTURES. In addition to the rights provided to Holders of Debentures under the Indenture, Holders of Restricted Global Debentures and Restricted Definitive Debentures shall have all the rights set forth in the Debenture Registration Rights Agreement dated as of June 25, 1998, between Holding and the parties named on the signature pages thereof (the "Debenture Registration Rights Agreement" 18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, Holding has caused CUSIP numbers to be printed on the Debentures and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Debentures or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. Holding will furnish to any Holder upon written request and without charge a copy of the Indenture and/or the Debenture Registration Rights Agreement. Requests may be made to: AKI Holding Corp. 1815 East Main Street Chattanooga, Tennessee 37404 Telecopier no.: 423-624-3301 Attention: Chief Financial Officer A2-7 ASSIGNMENT FORM To assign this Debenture, fill in the form below: (I) or (we) assign and transfer this Debenture to (Insert assignee's soc. sec. or tax I.D. no.) _______________________________________________________________________________ _______________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint________________________________________________________ to transfer this Debenture on the books of Holding. The agent may substitute another to act for him. Date: Your Signature:____________________________ (Sign exactly as your name appears on the Debenture) Tax Identification No:_____________________ Signature Guarantee. A2-8 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Debenture purchased by Holding pursuant to Section 4.10 or 4.15 of the Indenture, check the box below: [ ] Section 4.10 [ ] Section 4.15 If you want to elect to have only part of the Debenture purchased by Holding pursuant to Section 4.10 or Section 4.15 of the Indenture, state the amount you elect to have purchased: $________ Date: Your Signature:________________________________ (Sign exactly as your name appears on the Debenture) Tax Identification No:_________________________ Signature Guarantee. A2-9 SCHEDULE OF EXCHANGES OF REGULATION S TEMPORARY GLOBAL NOTE The following exchanges of a part of this Regulation S Temporary Global Debenture for an interest in another Global Debenture, or of other Restricted Global Debentures for an interest in this Regulation S Temporary Global Debenture, have been made:
Principal Amount Signature of Amount of decrease Amount of increase of this Global authorized officer in Principal Amount in Principal Amount Debenture following of Trustee or of this of this such decrease Debenture Date of Exchange Global Debenture Global Debenture (or increase) Custodian - ---------------- ---------------- ---------------- ------------- ---------
A2-10 EXHIBIT B FORM OF CERTIFICATE OF TRANSFER AKI Holding Corp. 1815 East Main Street Chattanooga, Tennessee 37404 Telecopier no.: 423-624-3301 Attention: Chief Financial Officer State Street Bank and Trust Company 225 Asylum Street, 23rd Floor Hartford, Connecticut 06103 Telecopier no.: 860-244-1844 Attention: Steve Cimalore Re: 13 1/2% Senior Discount Debentures due 2009 Reference is hereby made to the Indenture, dated as of June 25, 1998 (the "Indenture"), between AKI Holding Corp. ("Holding"), as issuer, and State Street Bank and Trust Company, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. - --------- ------- ______________, (the "Transferor") owns and proposes to transfer the Debenture[s] or interest in such Debenture[s] specified in Annex A hereto, in the principal amount of $___________ in such Debenture[s] or interests (the "Transfer"), to __________ (the "Transferee"), as further specified in Annex A hereto. In connection with the Transfer, the Transferor hereby certifies that: ---------- -------- ---------- [CHECK ALL THAT APPLY] 1. [ ] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE 144A GLOBAL DEBENTURE OR A DEFINITIVE DEBENTURE PURSUANT TO RULE 144A. The Transfer is being effected pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Transferor hereby further certifies that the beneficial interest or Definitive Debenture is being transferred to a Person that the Transferor reasonably believed and believes is purchasing the beneficial interest or Definitive Debenture for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A and such Transfer is in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Debenture will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the 144A Global Debenture and/or the Definitive Debenture and in the Indenture and the Securities Act. 2. [ ] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE TEMPORARY REGULATION S GLOBAL DEBENTURE, THE REGULATION S GLOBAL DEBENTURE OR A DEFINITIVE DEBENTURE PURSUANT TO REGULATION S. The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and, accordingly, the Transferor hereby further certifies that (i) the Transfer is not being made to a Person in the United States and (x) at the time the buy order was B-1 originated, the Transferee was outside the United States or such Transferor and any Person acting on its behalf reasonably believed and believes that the Transferee was outside the United States or (y) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither such Transferor nor any Person acting on its behalf knows that the transaction was prearranged with a buyer in the United States, (ii) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S under the Securities Act and (iii) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act and (iv) if the proposed transfer is being made prior to the expiration of the Restricted Period, the transfer is not being made to a U.S. Person or for the account or benefit of a U.S. Person (other than an Initial Purchaser). Upon consummation of the proposed transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Debenture will be subject to the restrictions on Transfer enumerated in the Private Placement Legend printed on the Regulation S Global Debenture , the Temporary Regulation S Global Debenture and/or the Definitive Debenture and in the Indenture and the Securities Act. 3. [ ] CHECK AND COMPLETE IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE IAI GLOBAL DEBENTURE OR A DEFINITIVE DEBENTURE PURSUANT TO ANY PROVISION OF THE SECURITIES ACT OTHER THAN RULE 144A OR REGULATION S. The Transfer is being effected in compliance with the transfer restrictions applicable to beneficial interests in Restricted Global Debentures and Restricted Definitive Debentures and pursuant to and in accordance with the Securities Act and any applicable blue sky securities laws of any state of the United States, and accordingly the Transferor hereby further certifies that (check one): (a) such Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act; or (b) such Transfer is being effected to Holding or a subsidiary thereof; or (c) such Transfer is being effected pursuant to an effective registration statement under the Securities Act and in compliance with the prospectus delivery requirements of the Securities Act; or (d) such Transfer is being effected to an Institutional Accredited Investor and pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A, Rule 144 or Rule 904, and the Transferor hereby further certifies that it has not engaged in any general solicitation within the meaning of Regulation D under the Securities Act and the Transfer complies with the transfer restrictions applicable to beneficial interests in a Restricted Global Debenture or Restricted Definitive Debentures and the requirements of the exemption claimed, which certification is supported by (1) a certificate executed by the Transferee in the form of Exhibit D to the Indenture and (2) if such Transfer is in respect of a principal amount of Debentures at the time of transfer of less than $250,000, an Opinion of Counsel provided by the Transferor or the Transferee (a copy of which the Transferor has attached to this certification), to the effect that such Transfer is in compliance with the Securities Act. Upon consummation of the proposed transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Debenture will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the IAI Global Debenture and/or the Definitive Debentures and in the Indenture and the Securities Act. B-2 4. Check if Transferee will take delivery of a beneficial interest in an Unrestricted Global Debenture or of an Unrestricted Definitive Debenture. (a) [ ] CHECK IF TRANSFER IS PURSUANT TO RULE 144. (i) The Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Debenture will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Debentures, on Restricted Definitive Debentures and in the Indenture. (b) [ ] CHECK IF TRANSFER IS PURSUANT TO REGULATION S. (i) The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Debenture will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Debentures, on Restricted Definitive Debentures and in the Indenture. (c) [ ] CHECK IF TRANSFER IS PURSUANT TO OTHER EXEMPTION. (i) The Transfer is being effected pursuant to and in compliance with an exemption from the registration requirements of the Securities Act other than Rule 144, Rule 903 or Rule 904 and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Debenture will not be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Debentures or Restricted Definitive Debentures and in the Indenture. This certificate and the statements contained herein are made for your benefit and the benefit of Holding. ________________________________ [Insert Name of Transferor] BY:_____________________________ Name: Title: Dated: ____________, ____ B-3 ANNEX A TO CERTIFICATE OF TRANSFER 1. The Transferor owns and proposes to transfer the following: [CHECK ONE OF (a) OR (b)] (a) a beneficial interest in the: (i) [ ] 144A Global Debenture (CUSIP ), or (ii) [ ] Regulation S Global Debenture (CUSIP ), or (iii) [ ] IAI Global Debenture (CUSIP ), or (b) a Restricted Definitive Debenture. 2. After the Transfer the Transferee will hold: [CHECK ONE] (a) a beneficial interest in the: (i) [ ] 144A Global Debenture (CUSIP ), or (ii) [ ] Regulation S Global Debenture (CUSIP ), or (iii) [ ] IAI Global Debenture (CUSIP ), or (iv) [ ] Unrestricted Global Debenture (CUSIP ), or (b) a Restricted Definitive Debenture, or (c) an Unrestricted Definitive Debenture, in accordance with the terms of the Indenture. B-4 EXHIBIT C FORM OF CERTIFICATE OF EXCHANGE AKI Holding Corp. 1815 East Main Street Chattanooga, Tennessee 37404 Telecopier no.: 423-624-3301 Attention: Chief Financial Officer State Street Bank and Trust Company 225 Asylum Street, 23rd Floor Hartford, Connecticut 06103 Telecopier no.: 860-244-1844 Attention: Steve Cimalore Re: 13 1/2% Senior Discount Debentures due 2009 Reference is hereby made to the Indenture, dated as of June 25, 1998 (the "Indenture"), between AKI Holding Corp. ("Holding"), as issuer, and State Street Bank and Trust Company, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. ____________, (the "Owner") owns and proposes to exchange the Debenture[s] or interest in such Debenture[s] specified herein, in the principal amount of $____________ in such Debenture[s] or interests (the "Exchange"). In connection with the Exchange, the Owner hereby certifies that: 1. Exchange of Restricted Definitive Debentures or Beneficial Interests in a Restricted Global Debenture for Unrestricted Definitive Debentures or Beneficial Interests in an Unrestricted Global Debenture (a) [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED GLOBAL DEBENTURE TO BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL DEBENTURE. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Debenture for a beneficial interest in an Unrestricted Global Debenture in an equal principal amount, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Global Debentures and pursuant to and in accordance with the United States Securities Act of 1933, as amended (the "Securities Act"), (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest in an Unrestricted Global Debenture is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (b) [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED GLOBAL DEBENTURE TO UNRESTRICTED DEFINITIVE DEBENTURE. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Debenture for an Unrestricted Definitive Debenture, the Owner C-1 hereby certifies (i) the Definitive Debenture is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Debentures and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the Definitive Debenture is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (c) [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE DEBENTURE TO BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL DEBENTURE. In connection with the Owner's Exchange of a Restricted Definitive Debenture for a beneficial interest in an Unrestricted Global Debenture, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Definitive Debentures and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (d) [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE DEBENTURE TO UNRESTRICTED DEFINITIVE DEBENTURE. In connection with the Owner's Exchange of a Restricted Definitive Debenture for an Unrestricted Definitive Debenture, the Owner hereby certifies (i) the Unrestricted Definitive Debenture is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Definitive Debentures and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the Unrestricted Definitive Debenture is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. 2. Exchange of Restricted Definitive Debentures or Beneficial Interests in Restricted Global Debentures for Restricted Definitive Debentures or Beneficial Interests in Restricted Global Debentures (a) [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED GLOBAL DEBENTURE TO RESTRICTED DEFINITIVE DEBENTURE. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Debenture for a Restricted Definitive Debenture with an equal principal amount, the Owner hereby certifies that the Restricted Definitive Debenture is being acquired for the Owner's own account without transfer. Upon consummation of the proposed Exchange in accordance with the terms of the Indenture, the Restricted Definitive Debenture issued will continue to be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Definitive Debenture and in the Indenture and the Securities Act. (b) [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE DEBENTURE TO BENEFICIAL INTEREST IN A RESTRICTED GLOBAL DEBENTURE. In connection with the Exchange of the Owner's Restricted Definitive Debenture for a beneficial interest in the [CHECK ONE] "144A Global Debenture", "Regulation S Global Debenture", "IAI Global Debenture" with an equal principal amount, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer and (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Debentures and pursuant to and in accordance with the Securities Act, and in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Exchange in accordance with the terms of the Indenture, the beneficial C-2 interest issued will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the relevant Restricted Global Debenture and in the Indenture and the Securities Act. . C-3 This certificate and the statements contained herein are made for your benefit and the benefit of Holding. ______________________________ [Insert Name of Owner] BY:___________________________ Name: Title: Dated: __________, ____ C-4 EXHIBIT D FORM OF CERTIFICATE FROM ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR AKI Holding Corp. 1815 East Main Street Chattanooga, Tennessee 37404 Telecopier no.: 423-624-3301 Attention: Chief Financial Officer State Street Bank and Trust Company 225 Asylum Street, 23rd Floor Hartford, Connecticut 06103 Telecopier no.: 860-244-1844 Attention: Steve Cimalore Re: 13 1/2% Senior Discount Debentures due 2009 Reference is hereby made to the Indenture, dated as of June 25, 1998 (the "Indenture"), among AKI Holding Corp. ("Holding"), as issuer and State Street Bank and Trust Company, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. In connection with our proposed purchase of $____________ aggregate principal amount of: (a) [ ] a beneficial interest in a Global Debenture, or (b) [ ] a Definitive Debenture, we confirm that: 1. We understand that any subsequent transfer of the Debentures or any interest therein is subject to certain restrictions and conditions set forth in the Indenture and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Debentures or any interest therein except in compliance with, such restrictions and conditions and the United States Securities Act of 1933, as amended (the "Securities Act"). 2. We understand that the offer and sale of the Debentures have not been registered under the Securities Act, and that the Debentures and any interest therein may not be offered or sold except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell the Debentures or any interest therein, we will do so only (A) to Holding or any subsidiary thereof, (B) in accordance with Rule 144A under the Securities Act to a "qualified institutional buyer" (as defined therein), (c) to an institutional "accredited investor" (as defined below) that, prior to such transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to you and to Holding a signed letter substantially in the form of this letter and, if such transfer is in respect of a principal D-1 amount of Debentures, at the time of transfer of less than $250,000, an Opinion of Counsel in form reasonably acceptable to Holding to the effect that such transfer is in compliance with the Securities Act, (D) outside the United States in accordance with Rule 904 of Regulation S under the Securities Act, (E) pursuant to the provisions of Rule 144(k) under the Securities Act or (F) pursuant to an effective registration statement under the Securities Act, and we further agree to provide to any person purchasing the Definitive Debenture or beneficial interest in a Global Debenture from us in a transaction meeting the requirements of clauses (A) through (E) of this paragraph a notice advising such purchaser that resales thereof are restricted as stated herein. 3. We understand that, on any proposed resale of the Debentures or beneficial interest therein, we will be required to furnish to you and Holding such certifications, legal opinions and other information as you and Holding may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Debentures purchased by us will bear a legend to the foregoing effect. We further understand that any subsequent transfer by us of the Debentures or beneficial interest therein acquired by us must be effected through one of the Placement Agents. 4. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Debentures, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment. 5. We are acquiring the Debentures or beneficial interest therein purchased by us for our own account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. You and Holding are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. __________________________________________________ [Insert Name of Accredited Investor] By:_______________________________________________ Name: Title: Dated: __________________, ____ D-2 EX-12.1 15 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 AKI, INC AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
PREDECESSOR ---------------------------------------------------------------- NINE MONTHS JULY 1, FISCAL YEAR ENDED JUNE 30, ENDED 1997 TO ----------------------------------- MARCH 31, DECEMBER 15, 1995 1996 1997 1997 1997 ----------- ----------- ----------- ------------- -------------- Income (loss) before income taxes ............ 7,247 4,279 7,117 6,676 3,234 Add: Interest on all indebtedness which includes amortization of deferred financing costs ................... 6,170 6,762 6,203 4,694 2,646 ----- ----- ----- ----- ----- Earnings available for fixed charges ........... 13,417 11,041 13,320 11,370 5,880 Fixed charges ............ 6,170 6,762 6,203 4,694 2,646 ------ ------ ------ ------ ----- Ratio of earnings to fixed charges .......... 2.2 1.6 2.1 2.4 2.2 THE COMPANY ----------------------------------------- PRO FORMA -------------------------- DECEMBER 16, FISCAL YEAR NINE MONTHS 1997 TO ENDED ENDED MARCH 31, JUNE 30, MARCH 31, 1998 1997 1998 -------------- ------------- ------------ Income (loss) before income taxes ............ (1,325) 2,137 1,881 Add: Interest on all indebtedness which includes amortization of deferred financing costs ................... 5,163 12,961 9,642 ------ ------ ----- Earnings available for fixed charges ........... 3,838 15,098 11,523 Fixed charges ............ 5,163 12,961 9,642 ------ ------ ------ Ratio of earnings to fixed charges .......... -- 1.2 1.2
Earnings were not sufficient to cover fixed charges by $1,325 for the period from December 16, 1997 to March 31, 1998. EX-23.1 16 CONSENT OF INDEPENDENT ACCOUNTS PRICEWATERHOUSECOOPERS LLP Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-4 of our report dated April 22, 1998 relating to the consolidated financial statements of AKI, Inc. and Subsidiaries, formerly known as Arcade Holding Corporation (the "Predecessor") which appears in such Prospectus. We also consent to the application of such report to the Financial Statement Schedule for the three years ended June 30, 1997 listed under Item 21(b) of this Registration Statement when such schedule is read in conjunction with the consolidated financial statements referred to in our report. The audits referred to in such report also included this schedule. We also consent to the reference to us under the headings "Experts" in such Prospectus. PricewaterhouseCoopers LLP Nashville, Tennessee August 7, 1998 -----END PRIVACY-ENHANCED MESSAGE-----