-----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, O3HnyGGLMBUXkdtSQoyOy2q2tbmZa0ns3ijH63huaphFPrGLD9GenfrBOoWoh7jq 8kvFF1jRWKWHIkc7gl0cOQ== 0000950136-98-002205.txt : 19981116 0000950136-98-002205.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950136-98-002205 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 23 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AKI INC CENTRAL INDEX KEY: 0001067549 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 133785856 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-60989 FILM NUMBER: 98749328 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/A 1 AMENDED REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 1998. REGISTRATION NO. 333-60989 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- AMENDMENT NO. 1 TO 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. [ ] If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [X] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [ ] --------------
CALCULATION OF REGISTRATION FEE (1) - ------------------------------------------------------------------------------------------------------------ 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 (2) PRICE (2) FEE - ------------------------------------------------------------------------------------------------------------ 10 1/2% Senior Notes Due 2008 ......... $115,000,000 100% $115,000,000 $33,925 (3) - ------------------------------------------------------------------------------------------------------------
(1) This Registration Statement covers both the Prospectus filed hereby in connection with the Exchange Offer for the New Notes and the Prospectus filed hereby in connection with certain market making activities by an affiliate of the Registrant. (2) Estimated solely for the purpose of calculating the registration fee. (3) Fee previously paid. 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. In order to register under Rule 415 of the Securities Act of 1933 those New Notes that will be offered and sold in market-making transactions, the appropriate box on the cover page of the Registration Statement has been checked and the undertakings required by Item 512(a) of Regulation S-K have been included in Item 22 of Part II. 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 NOVEMBER 13, 1998 PROSPECTUS OFFER TO EXCHANGE NEW 10 1/2% 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 13 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. As of September 30, 1998, the Company had $16.7 million of other outstanding liabilities (including trade payables, accrued liabilities and deferred taxes), all of which ranks pari passu in right of payment with the New Notes. 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 September 30, 1998, the Company had no outstanding secured obligations, other than outstanding letters of credit in the amount of $0.6 million under the Credit Agreement and $1.9 million outstanding under a capitalized lease. In addition, as of such date 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 i Dealers Automated Quotation System. Accordingly, there can be no assurance as to the development or liquidity of any public market for the New Notes. The Company has been advised by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") as the initial purchaser (the "Initial Purchaser"), 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 (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 file a copy of all such information and reports with the SEC for public availability and 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 1996," "Fiscal 1997," "Fiscal 1998," and " Fiscal 1999" when used with respect to the Company refer to the Company's fiscal years ended June 30, 1996, 1997, 1998 and 1999, respectively. Fiscal 1998 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 based upon the number of units sold. 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 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. and Sanofi Beaute, Inc. Sampling is one of the most effective and widely used promotional practices for consumer products. Product sampling usage has increased faster than any other form of consumer promotional usage 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 microencapsulated fragrance 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 1 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 and L'Oreal/Cosmair 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 acquired (the "3M Acquisition") the fragrance sampling business of the Industrial and Consumer Products division of Minnesota Mining and Manufacturing Company ("3M") for approximately $7.25 million in cash and the assumption of a certain liability. 3M's fragrance sampling business was predominantly a sales and distribution business as it outsourced the production of the majority of the products it sold. The Company did not assume such outsourcing arrangements and relocated such operations to its existing facilities in Chattanooga to utilize current excess capacity at such facilities. Except for several sales and technical employees, the Company did not extend employment to any employees from 3M. Management believes that in order to properly service the incremental sales volume associated with the 3M Acquisition, several additional sales and technical employees will be hired. 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. Certain of the considerations the Holders should consider include: (i) the substantial amount of the Company's outstanding debt and debt service obligations; (ii) the effective subordination of the Notes to the debt of the Company and its subsidiaries; (iii) the material adverse effect that certain changes in postal regulations could have on the Company's competitiveness in subscription magazine sampling inserts; and (iv) the Company's reliance on a few number of customers to generate a majority of its sales and the lack of long term contracts with such 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. 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. o Low cost, highest quality producer. Management believes the Company's high degree of vertical integration, together with the Company's high volume, provides the Company with certain cost and quality advantages. o Strong customer relationships. More than 72% of Fiscal 1998 net sales were generated by sales to customers that have been doing business with the Company for the past five years or longer, although the Company does not have any long-term contracts with any of its customers. o Superior customer service. Managing sampling programs is highly service intensive and the Company has the most experienced customer service representatives in the industry. o Sole global provider. The Company is the only sampling company to provide local sales, service and production capabilities on a global basis. 2 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. Management believes that its recent innovative and cost effective developments in product sampling technologies for make-up and skin care categories, 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Cost Reduction Program." o Increase international sales. Given the Company's product innovations, the increasing globalization of the cosmetics industry and the success of sampling techniques in the U.S. market, the Company believes it can increase its international sales. 3 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. to acquire (the "Acquisition") of all the outstanding equity interests of the Company. The Acquisition was completed on December 15, 1997. The total cost of the Acquisition (including related fees, expenses and cash for working capital) was approximately $205.7 million. Included in the total cost of the Acquisition were approximately $6.2 million in non-cash costs comprised of (i) the assumption of a promissory note issued by the Company in connection with the 1995 acquisition of Scent Seal, Inc. (the "Scent Seal Note") and certain capital lease obligations and (ii) the exchange of stock options to acquire Preferred Stock in the Company by the Company's Chief Executive Officer to acquire preferred stock in Acquisition Corp. See "Description of Certain Indebtedness." To provide the $199.5 million of cash necessary to fund the Acquisition, including the equity purchase price and the retirement of all previously 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 Scratch & Sniff Funding, Inc. (the "Bridge Lender"), 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 certain prior stockholders. See "The Transactions--The Acquisition." As of September, 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, Conflicts of Interest" "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") for $7.25 million in cash and the assumption of a liability of $182,000 to one of the customers of the business. 3M's fragrance sampling business was predominantly a sales and distribution business as it outsourced the production of the majority of the products it sold. The Company did not assume such outsourcing arrangements and relocated such operations to its existing facilities in Chattanooga to utilize current excess capacity at such facilities. Except for several sales and technical employees, the Company did not extend employment to any employees from 3M. Many of 3M's existing customers are also existing customers of the Company. The Company anticipates that as a result of the 3M Acquisition its sales volume from these customers will increase. Management believes that in order to properly service such an increase in sales volume, several additional sales and technical employees will be hired. The Company financed the 3M Acquisition with borrowings under the Credit Agreement. Such borrowings were subsequently repaid with the proceeds of the Equity Contribution and the Note Offering. 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. The majority of the proceeds from the Debenture Offering were used to fund a capital contribution to the Company (the "Equity Contribution"). The Equity Contribution, together with the proceeds from the Note Offering, were used by the Company repay the Bridge Notes, to fund working capital requirements and for general corporate purposes, including repayment of borrowings under the Credit Agreement to fund the 3M Acquisition (collectively, the "Refinancing"). 4 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 "Sherman & Sterling," SEC No-Action Letter (available July 2, 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." 5 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 BENEFICIAL OWNERS........... Any beneficial owner whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender 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 6 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 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." U.S. FEDERAL INCOME TAX CONSEQUENCES................ In the opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P., legal counsel to the Company, the exchange of Old Notes for 7 New Notes by tendering holders will not be a taxable exchange for federal income tax purposes, 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 "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 $110.2 million (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 "The Transactions--3M Acquisition." 8 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. As of September 30, 1998, the Company had (i) $16.7 million in other unsecured obligations (including trade payables, accrued liabilities and deferred taxes), all of which ranks pari passu in right of payment with the Notes (ii) no outstanding liabilities ranking junior to the Notes (however, the Debentures of Holdings effectively rank junior to the Notes), and (iii) no outstanding liabilities ranking senior to the Notes. 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 September 9 30, 1998, the Company had no outstanding secured obligations, other than outstanding letters of credit in the amount of $0.6 million under the Credit Agreement and $1.9 million outstanding under a capitalized lease. In addition, as of such date, borrowings of up to approximately $19.4 million were available under the Credit Agreement, subject to certain conditions. 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." ------------ The Company is a wholly owned subsidiary of Holding. Holding is a wholly owned subsidiary of Acquisition Corp. The Company operates under the trade name "Arcade Marketing, Inc." and its principal executive offices are located at 1815 East Main Street, Chattanooga, Tennessee 37404 and its telephone number is (423) 624-3301. 10 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 three months ended September 30, 1997, which were derived from the unaudited consolidated interim financial statements of the Predecessor. The summary historical consolidated financial data of the Company as of June 30, 1998 and for the period from December 16, 1997 to June 30, 1998 have been derived from the audited consolidated financial statements of the Company. The summary historical consolidated financial data of the Company as of September 30, 1998 and three months then ended have been derived from the unaudited consolidated interim financial statements of the Company. In the opinion of management, the unaudited consolidated interim 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 Statements of Operations and the notes thereto, the Company's Consolidated Financial Statements and the notes thereto and the other information contained elsewhere in this Prospectus.
PREDECESSOR -------------------------------------------------------- FISCAL YEAR ENDED JUNE THREE MONTHS JULY 1, 1997 30, ENDED TO ------------------------- SEPTEMBER 30, DECEMBER 15, 1996 1997 1997 1997 ------------ ------------ --------------- -------------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales ...................... $ 73,486 $ 77,723 $ 21,928 $ 35,186 Cost of goods sold ............. 49,862 49,467 13,622 22,809 -------- -------- -------- -------- Gross profit ................... 23,624 28,256 8,306 12,377 Selling, general and administrative expenses ....... 10,655 13,353 3,322 5,712 Amortization of goodwill ....... 1,214 1,214 304 559 -------- -------- -------- -------- Income from operations ......... 11,755 13,689 4,680 6,106 Interest expense ............... 6,762 6,203 1,451 2,646 OTHER DATA (1): Capital expenditures .................. 2,051 2,462 448 807 Ratio of earnings to fixed charges (2) ................... 1.6x 2.1x 3.1x 2.2x THE COMPANY ------------------------------------------ PRO FORMA ------------ DECEMBER 16, FISCAL 1997 YEAR THREE MONTHS TO ENDED ENDED JUNE 30, JUNE 30, SEPTEMBER 30, 1998 1998 1998 -------------- ------------ -------------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales ...................... $36,066 $ 81,831 $ 24,024 Cost of goods sold ............. 24,518 52,127 15,421 ------- -------- -------- Gross profit ................... 11,548 29,704 8,603 Selling, general and administrative expenses ....... 5,601 12,350 3,121 Amortization of goodwill ....... 2,087 4,030 1,008 ------- -------- -------- Income from operations ......... 3,860 13,324 4,474 Interest expense ............... 11,269 13,049 3,210 OTHER DATA (1): Capital expenditures .................. 514 1,321 678 Ratio of earnings to fixed charges (2) ................... -- 1.0x 1.4x
THE COMPANY --------------------------- AT AT JUNE 30, SEPTEMBER 30, 1998 1998 ---------- -------------- BALANCE SHEET DATA (AT END OF PERIOD): Cash and cash equivalents ........... $ 1,641 $ 1,341 Working capital ..................... 12,845 14,444 Total assets ........................ 211,064 213,725 Total debt .......................... 118,428 116,951 Total stockholder's equity .......... 79,621 80,090
11 - ---------- (1) EBITDA for the Predecessor was $16,177 and $18,773 for the fiscal years ended June 30, 1996 and 1997, respectively, $6,081 for the three months ended September 30, 1997 and $8,562 for July 1, 1997 through December 15, 1997. EBITDA for the Company was $8,714 for December 16, 1997 through June 30, 1998, $6,523 for the three months ended September 30, 1998 and $20,713 on a pro forma basis for the fiscal year ended June 30, 1998. EBITDA is defined as income from operations plus depreciation and amortization of goodwill and other intangibles. EBITDA is discussed because it is a widely accepted financial indicator used by certain investors and analysts, and the Company believes that it is useful, 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 of cash flow from operations as determined under GAAP. EBITDA is not necessarily comparable with similarly titled measures for other companies. Pro forma EBITDA for the fiscal year ended June 30, 1998 has not been adjusted for the following unusual items: (i) $307 of legal costs and royalty payments associated with a successful patent infringement claim against a competitor; (ii) costs totaling $155 incurred in connection with centralizing certain acquired technologies; and (iii) costs totaling $16 related to former stockholder expenses and severance costs at the Company's European subsidiary. Net cash provided by (used in) operating activities for the Predecessor was $5,337 and $8,942 for the fiscal years ended June 30, 1996 and 1997, respectively, ($2,237) for the three months ended September 30, 1997 and $4,928 for July 1, 1997 through December 15, 1997. Net cash provided by (used in) operating activities for the Company was $(8,821) for December 16, 1997 through June 30, 1998 and $1,855 for the three months ended September 30, 1998. Net cash provided by operating activities for the Company was $3,146 on a pro forma basis for the fiscal year ended June 30, 1998. Net cash used in investing activities for the Predecessor was $12 and $2,424 for the fiscal years ended June 30, 1996 and 1997, respectively, $448 for the three months ended September 30, 1997 and $807 for July 1, 1997 through December 15, 1997. Net cash used in investing activities for the Company was $141,917 for December 16, 1997 through June 30, 1998, $678 for the three months ended September 30, 1998 and $1,321 on a pro forma basis for the fiscal year ended June 30, 1998. Net cash provided by (used in) financing activities for the Predecessor was ($8,895) and ($6,841) for the fiscal years ended June 30, 1996 and 1997, respectively, $3,896 for the three months ended September 30, 1997 and $57 for July 1, 1997 through December 15, 1997. Net cash provided by (used in) financing activities for the Company was $152,379 for December 16, 1997 through June 30, 1998 and ($1,477) for the three months ended September 30, 1998. Net cash used by financing activities was $657 on a pro forma basis for the fiscal year ended June 30, 1998. Depreciation and amortization of goodwill and other intangibles for the Predecessor was $4,422 and $5,084 for the fiscal years ended June 30, 1996 and 1997, respectively, $1,401 for the three months ended September 30, 1997 and $2,456 for July 1, 1997 through December 15, 1997. Depreciation and amortization of goodwill and other intangibles for the Company was $3,954 for December 16, 1997 through June 30, 1998, $2,049 for the three months ended September 30, 1998, and pro forma depreciation and amortization of goodwill and other intangibles was $7,389 for the fiscal year ended June 30, 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. In accordance with Regulation S-K, the calculation of the ratio of earnings to fixed charges for the pro forma fiscal year ended June 30, 1998 includes the effects of the Acquisition and the Refinancing but does not include the effects of the 3M Acquisition. Earnings were not sufficient to cover fixed charges by $7,487 and $4,094 for the period from December 16, 1997 to June 30, 1998 and the pro forma fiscal year ended June 30, 1998, respectively. 12 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 September 30, 1998 the Company had total consolidated indebtedness of approximately $116.9 million and the Company's deficiency of earnings available to cover fixed charges for Fiscal 1998, on a pro forma basis for the Acquisition and the Refinancing was $4.1 million. In addition, as of such 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." 13 EFFECTIVE SUBORDINATION; ASSETS SUBJECT TO SECURITY INTEREST 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 June 30, 1998, the Company 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, 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 35% of the Company's net sales in Fiscal 1998. 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 58% of the Company's net sales in Fiscal 1998. None of the Company's customers other than Estee Lauder accounted for 10% or more of net sales in Fiscal 1998. 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 may be required by certain customers to qualify its manufacturing operations under certain supplier standards. There can be no assurance that the Company will be able to qualify under such supplier standards or that such customers 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, 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 cosmetic sampling market are Webcraft, a subsidiary of Big Flower Holdings, Inc., Orlandi Inc., Retail Communications Corp., Quebecor Printing (USA) Corp., Nord'est, Marietta Corp., Klocke, Color Prelude, Rotocon, Drescher Ascent and Appliquessence. The Company also competes with numerous manufacturers of miniatures, vials, packettes, sachets, blisterpacks, and scratch and sniff products. In addition, certain cosmetic companies produce sampling products for their own cosmetic products. 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 14 services that meet customer 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 three months ended September 30, 1998 compared to the three months ended September 30, 1997, Fiscal 1998 compared to Fiscal 1997, 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. SOLE SUPPLIER OF CERTAIN RAW MATERIALS 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 1996, 1997 and 1998. 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 1998, utilize specific grades of paper that are produced exclusively for the Company by Westvaco Corporation. However, the Company does not have a supply contract with such supplier. The Company is currently researching methods of replicating the advantages of these specific grades of paper with other less costly grades of paper available from multiple suppliers. Until such 15 methods are developed, a 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 13.3% of the Company's net sales in Fiscal 1998 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; CONFLICTS OF INTEREST 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; EXPIRATION OF COLLECTIVE BARGAINING AGREEMENT As of September 30, 1998, approximately 67% 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." 16 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 evaluated its information technology systems and its non-information technology systems in order to assess its exposure to Year 2000 issues. The Company expects to make the necessary modifications or changes to its information systems to enable proper processing of transactions relating to the Year 2000 and beyond before January 1, 2000. While the Company is not substantially dependent upon the proper function of its computer systems, a failure of its systems could cause, among other things inaccurate or incomplete accounting, the inability to bill customers and the inability to process incoming orders which may cause business interruption or financial loss. If third parties with whom the Company interacts have Year 2000 problems which are not resolved, the Company could experience, among other things, the disruption of services including telecommunications and electrical power or financial or accounting difficulties. The Company currently estimates that the total cost of Year 2000 compliance will be less than $100,000. There can be no assurance that the Company's Year 2000 program will be effective or that the Company will not experience disruption or difficulties resulting from Year 2000 problems of third parties. 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 17 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. 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, were approximately $110.2 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 the Bridge Lender and the Initial Purchaser in connection with the Acquisition and (ii) to fund working capital requirements and for general corporate purposes, including the repayment of $7.25 million of borrowings under the Credit Agreement used to fund the purchase price of the 3M Acquisition. As of June 24, 1998, the interest rate on the Bridge Notes which were to mature on December 15, 1998 (subject to certain extension provisions) was 11.75% and the interest rate on outstanding borrowings under the Credit Agreement was 9.25%. The Credit Agreement terminates on December 31, 2002. See "Certain Relationships and Related Transactions," "Description of Certain Indebtedness" and "Plan of Distribution." 18 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. 19 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 "Shearman & Sterling," SEC No-Action Letter (available July 2, 1993); "Morgan Stanley and 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. 20 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, and if appropriate, the Company will file a post-effective amendment to the Registration Statement of which this Prospectus forms part. 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. 21 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 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 22 Exchange Agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Old Notes nor shall any of them incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such 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 23 (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 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. CONDITION 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 "--Terms of 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 24 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. 25 CAPITALIZATION The following table sets forth the consolidated cash and cash equivalents and capitalization of the Company at September 30, 1998 on a historical basis (which includes the effects of the Acquisition, the Refinancing and the 3M Acquisition as such events occurred prior to September 30, 1998). 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 Statements of Operations and notes thereto included elsewhere in this Prospectus.
AT SEPTEMBER 30, 1998 ---------------------- (IN THOUSANDS) Cash and cash equivalents ................. $ 1,341 ========= Debt: Notes offered hereby ...................... 115,000 Capital lease obligation .................. 1,951 --------- Total debt ............................. 116,951 --------- Stockholder's equity: Common stock .............................. -- Additional paid-in capital ................ 100,862 Accumulated deficit ....................... (5,097) Cumulative translation adjustment ......... 55 Carryover basis adjustment ................ (15,730) --------- Total stockholder's equity ............. 80,090 --------- Total capitalization ...................... $ 197,041 =========
26 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The selected historical consolidated financial data presented below as of November 3, 1993 and for the period from July 1, 1993 through 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, September 30, 1997 and December 15, 1997, and for the fiscal years ended June 30, 1995, 1996 and 1997 and the periods from November 4, 1993 through June 30, 1994, the three months ended September 30, 1997 and from July 1, 1997 through 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 June 30, 1998 and September 30, 1998 and for the period from December 16, 1997 through June 30, 1998 and the three months ended September 30, 1998 have been derived from the historical consolidated financial statements of the Company. The historical financial data as of June 30, 1997 and 1998 and December 15, 1997, the period from July 1, 1997 through December 15, 1997 and the period from December 16, 1997 through June 30, 1998 have been derived from the audited consolidated financial statements of the Predecessor and the Company. The historical financial data as of September 30, 1997 and 1998 and for each of the three month periods then ended have been derived from the unaudited consolidated interim 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 ------------- ------------------------------------------------ JULY 1, NOVEMBER 4, 1993 1993 THROUGH THROUGH FISCAL YEAR ENDED JUNE 30, NOVEMBER 3, JUNE 30, ---------------------------------- 1993 1994 1995 1996 1997 ------------- ------------- ---------- ---------- ------------ (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales .......................... $19,941 $ 18,213 $61,794 $ 73,486 $ 77,723 Cost of goods sold ................. 11,172 12,042 38,333 49,862 49,467 ------- -------- ------- -------- ---------- Gross profit ....................... 8,769 6,171 23,461 23,624 28,256 Selling, general and administrative expenses ........... 2,950 4,809 8,483 10,655 13,353 Amortization of goodwill ........... 78 723 1,113 1,214 1,214 ------- -------- ------- -------- ---------- Income from operations ............. 5,741 639 13,865 11,755 13,689 Interest expense, net .............. -- 3,718 6,170 6,762 6,203 Fees to stockholders ............... 102 197 470 470 470 Other, net ......................... 2,462 2,754 (22) 244 (101) Income tax expense (benefit) ......................... 1,310 (1,946) 3,114 2,101 3,135 ------- -------- ------- -------- ---------- Net income (loss) .................. $ 1,867 $ (4,084) $ 4,133 $ 2,178 $ 3,982 ======= ======== ======= ======== ========== BALANCE SHEET DATA (AT END OF PERIOD): Cash and cash equivalents .......... $ 68 $ 3,728 $ 4,196 $ 626 $ 303 Working capital (deficit) .......... 2,288 3,593 39 (4,685) (36,957) Total assets ....................... 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 ......... 16,940 2,927 6,572 7,932 11,225 OTHER DATA: Capital expenditures ............... 1,109 1,184 1,325 2,051 2,462 Ratio of earnings to fixed charges (1) ....................... n/m -- 2.2x 1.6x 2.1x PREDECESSOR THE COMPANY ------------------------------ ---------------------------- JULY 1, DECEMBER 16, THREE MONTHS 1997 1997 THREE MONTHS ENDED THROUGH THROUGH ENDED SEPTEMBER 30, DECEMBER 15, JUNE 30, SEPTEMBER 30, 1997 1997 1998 1998 --------------- -------------- ------------- -------------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales .......................... $ 21,928 $ 35,186 $ 36,066 $ 24,024 Cost of goods sold ................. 13,622 22,809 24,518 15,421 ---------- -------- -------- --------- Gross profit ....................... 8,306 12,377 11,548 8,603 Selling, general and administrative expenses ........... 3,322 5,712 5,601 3,121 Amortization of goodwill ........... 304 559 2,087 1,008 ---------- -------- -------- --------- Income from operations ............. 4,680 6,106 3,860 4,474 Interest expense, net .............. 1,451 2,646 11,269 3,210 Fees to stockholders ............... 118 215 125 63 Other, net ......................... 28 11 (47) -- Income tax expense (benefit) ......................... 1,287 1,441 (2,033) 844 ---------- -------- -------- --------- Net income (loss) .................. $ 1,796 $ 1,793 $ (5,454) $ 357 ========== ======== ======== ========= BALANCE SHEET DATA (AT END OF PERIOD): Cash and cash equivalents .......... $ 1,514 $ 4,481 $ 1,641 $ 1,341 Working capital (deficit) .......... (35,853) (4,959) 12,845 14,444 Total assets ....................... 83,518 77,399 211,064 213,725 Total debt and redeemable preferred stock ................... 59,142 55,408 118,428 116,951 Total stockholder's equity ......... 12,860 12,716 79,621 80,090 OTHER DATA: Capital expenditures ............... 448 807 514 678 Ratio of earnings to fixed charges (1) ....................... 3.1x 2.2x -- 1.4x
- --------- (1) 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 $7,487 for the periods from November 4, 1993 to June 30, 1994 and from December 16, 1997 to June 30, 1998, respectively. 27 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 66.5% of net sales in Fiscal 1998, 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 9.6% of net sales in Fiscal 1998 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 1998. 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--Sole Supplier of Certain Raw Materials." Selling, general and administrative expenses, which represented 15.8% of net sales in Fiscal 1998, 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 28 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. The Acquisition was accounted for using the purchase method of accounting and resulted in the recognition of $153.9 million of goodwill and a significant increase in amortization expense. The Company has evaluated the amortization period of the goodwill in accordance with Accounting Principles Board Opinion No. 17, "Intangible Assets" ("APB No. 17"). Based upon the guidance set forth in APB No. 17, the Company is amortizing the resulting goodwill over 40 years based upon the characteristics of the fragrance sampling industry and the composition of the customer base of the Company. The fragrance sample industry has experienced little change in its competitive environment, with each competitor servicing a similar and relatively small customer base, since the Company entered the industry in the early 1970s. The fragrance sampling business is comprised of relatively few competitors, each serving a similar and relatively small customer base, and has experienced little change in its competitive environment and customers since the Company entered the industry in 1979. The customers comprising the majority of the revenue base of the Company are primarily large national and multinational cosmetics companies that have been in operation and utilizing the services of the Company for a significant length of time. Also in conjunction with purchase accounting, the remaining useful lives of the Company's property, plant and equipment were reevaluated, and inventory and property, plant and equipment were recorded at their respective fair values at the date of Acquisition in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations" (APB No. 16). The adjustments to property, plant and equipment and inventory have the result of reducing depreciation expense and increasing cost of goods sold in periods subsequent to the Acquisition. COST REDUCTION PROGRAM The Company is implementing a comprehensive program designed to reduce annual operating costs by up to $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 (savings of approximately $1.2 million annually), (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 (savings of approximately $2.2 million annually), and (iii) rationalized staffing in the product support area (savings of approximately $0.6 million annually). Management expects the benefit of the materials cost reductions and rationalized staffing which were implemented in July 1998 will begin to be realized early in Fiscal 1999, while the streamlined manufacturing process is not expected to be fully implemented and realized until the fiscal year ended June 30, 2000. Because this program is still being implemented, no significant cost savings have been achieved to date. RESULTS OF OPERATIONS The discussion of results of operations for the three months ended September 30, 1998 compared to the three months ended September 30, 1997 compares the results of operations of the Company for the three months ended September 30, 1998 with the results of operations of the Predecessor for the three months ended September 30, 1997. For purposes of the following discussion, the results of operations for Fiscal 1998 reflect the combination of the results of operations of the Predecessor for the period July 1, 1997 through December 15, 1997, the date of the Acquisition, with the results of operations of the Company for the period December 16, 1997 through June 30, 1998. Because of the effects of purchase accounting applied in the Acquisition and the additional interest expense associated with the debt incurred to finance the Acquisition, the results of operations of the Company are not comparable in all respects to the results of operations of the Predecessor. 29 Three Months Ended September 30, 1998 Compared to Three Months Ended September 30, 1997 Net Sales. Net sales for the three months ended September 30, 1998 increased $2.1 million, or 9.6%, to $24.0 million as compared to $21.9 million for the three months ended September 30, 1997. The increase in net sales was attributable to increases in the sales of fragrance sampling products in the domestic market, which benefited from the 3M Acquisition, and growth of the Company's European sales. Domestic sales of sampling products to other categories of the cosmetics industry also increased. Gross Profit. Gross profit for the three months ended September 30, 1998 increased $0.3 million, or 3.6%, to $8.6 million as compared to $8.3 million for the three months ended September 30, 1997. Gross profit as a percentage of net sales decreased to 35.8% in the three months ended September 30, 1998 from 37.9% in the three months ended September 30, 1997. The increase in gross profit is primarily attributable to the increase in net sales discussed above. The decrease in gross profit as a percentage of net sales is due to changes in product sales mix, increased costs associated with the outsourcing of European production and increased costs associated with the initial production runs of certain customer products, offset by reductions in raw materials costs and improved margins resulting from increased sales due to the 3M Acquisition. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended September 30, 1998 decreased $0.2 million, or 6.1%, to $3.1 million as compared to $3.3 million for the three months ended September 30, 1997. The decrease in selling, general and administrative expenses was primarily due to staff reductions and realized gains from foreign currency transactions in Europe, offset partially by the costs associated with the transition of the 3M Acquisition. Income from Operations. Income from operations for the three months ended September 30, 1998 decreased $0.2 million, or 4.3%, to $4.5 million as compared to $4.7 million for the three months ended September 30, 1997. Income from operations as a percentage of net sales decreased to 18.8% in the three months ended September 30, 1998 from 21.5% in the three months ended September 30, 1997, principally as a result of the increase in amortization of goodwill resulting from the Acquisition and the 3M Acquisition and the factors described above. Interest Expense. Interest expense for the three months ended September 30, 1998 increased $1.7 million, or 113.3% to $3.2 million as compared to $1.5 million for the three months ended September 30, 1997. Interest expense as a percentage of net sales increased to 13.3% in the three months ended September 30, 1998 from 6.9% in the three months ended September 30, 1997. The increase in interest expense is a result of the recapitalization of the Company in connection with the Acquisition. Other Income/Expense and Management Fees. Other income/expense and management fees for the three months ended September 30, 1998 were $0.1 million as compared to $0.1 million for the three months ended September 30, 1997. Other income/expense and management fees as a percentage of net sales were relatively constant as a percentage of sales in the three months ended September 30, 1998 and 1997. Income Tax Expense. Income tax expense for the three months ended September 30, 1998 decreased $0.5 million or 38.5% to $0.8 million as compared to $1.3 million for the three months ended September 30, 1997. The Company's effective tax rate, after consideration of non-deductible goodwill, was 39.0% in the three months ended September 30, 1998 and 38.0% in the three months ended September 30, 1997. EBITDA. EBITDA for the three months ended September 30, 1998 increased $0.4 million, or 6.6%, to $6.5 million as compared to $6.1 million for the three months ended September 30, 1997, principally as a result of the factors described above. Fiscal 1998 Compared to Fiscal 1997 Net Sales. Net sales for Fiscal 1998 decreased $6.4 million, or 8.2%, to $71.3 million as compared to $77.7 million for Fiscal 1997. 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. In addition there was a decrease in 30 domestic sales of products for fragrance sampling. These decreases were partially offset by increased domestic and European sales of sampling products to other categories of the cosmetics industry as well as increased sales to the consumer products market. Gross Profit. Gross profit for Fiscal 1998 decreased $4.4 million, or 15.5%, to $23.9 million as compared to $28.3 million for Fiscal 1997. Gross profit as a percentage of net sales decreased to 33.5% in Fiscal 1998 from 36.4% in Fiscal 1997. 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 and the increase in cost of goods sold in the period subsequent to the Acquisition from the write-up of inventory in purchase accounting. Selling, General and Administrative Expenses. Selling, general and administrative expenses for Fiscal 1998 decreased $2.1 million, or 15.7%, to $11.3 million as compared to $13.4 million for Fiscal 1997. The decrease in selling, general and 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 Fiscal 1997. In addition, the Company also had decreased expenses in Fiscal 1998 versus Fiscal 1997 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 and administrative expenses as a percentage of net sales decreased to 15.8% in Fiscal 1998 from 17.2% in Fiscal 1997. Income from Operations. Income from operations for Fiscal 1998 decreased $3.7 million, or 27.0%, to $10.0 million as compared to $13.7 million for Fiscal 1997. Income from operations as a percentage of net sales decreased to 14.0% in Fiscal 1998 from 17.6% in Fiscal 1997 principally as a result of the factors described above and the increase in amortization of goodwill resulting from the Acquisition. Interest Expense. Interest expense for Fiscal 1998 increased $7.7 million, or 124.2% to $13.9 million as compared to $6.2 million for Fiscal 1997. Interest expense as a percentage of net sales increased to 19.5% in Fiscal 1998 from 8.0% in Fiscal 1997. The increase in interest expense is a result of the refinancing of the Company in connection with the Acquisition. Other Income/Expense and Management Fees. Other income/expense and management fees for Fiscal 1998 decreased $0.1 million, or 25.0% to $0.3 million as compared to $0.4 million for Fiscal 1997. Other income/expense and management fees as a percentage of net sales decreased to 0.4% in Fiscal 1998 from 0.5% in Fiscal 1997. The decrease in other income/expense and management fees is related to the decrease in management/advisory fees subsequent to the sale of the Company. Income Tax Expense. Income tax expense for Fiscal 1998 decreased $3.7 million or 119.4% to $(0.6) million as compared to $3.1 million for Fiscal 1997. The Company's effective tax rate, after consideration of non-deductible goodwill, was 36.8% in Fiscal 1998 and 37.6% in Fiscal 1997. EBITDA. EBITDA for Fiscal 1998 decreased $2.4 million, or 12.8%, to $16.4 million as compared to $18.8 million for Fiscal 1997, principally as a result of the factors described above. EBITDA is income from operations plus depreciation and amortization of goodwill and other intangibles. 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 and Administrative Expenses. Selling, general and 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. 31 The increase in selling, general and 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 and 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. Interest Expense. Interest expense for Fiscal 1997 decreased $0.6 million, or 8.8% to $6.2 million as compared to $6.8 million for Fiscal 1996. Interest expense as a percentage of net sales decreased to 8.0% in Fiscal 1997 from 9.3% in Fiscal 1996. The decrease in interest expense is primarily attributable to the decrease in the outstanding principal balance of the Scent Seal notes, capitalized lease obligations and Senior Loan Agreement including a decrease in the related interest rate due to a decrease in the prime rate, partially offset by increased borrowings against the revolving credit line. Other Income/Expense and Management Fees. Other income/expense and management fees for Fiscal 1997 decreased $0.3 million, or 42.9% to $0.4 million as compared to $0.7 million for Fiscal 1996. Other income/expense and management fees as a percentage of net sales decreased to 0.5% in Fiscal 1997 from 1.0% in Fiscal 1996. The decrease in other income/expense and management fees was due to a loss on the disposal of equipment in 1996 and a gain in 1997 related to the purchase and resale of preproduction material. Income Tax Expense. Income tax expense for Fiscal 1997 increased $1.0 million, or 47.6% to $3.1 million as compared to $2.1 million for Fiscal 1996. The Company's effective tax rate, after consideration of non-deductible goodwill, was 37.6% in Fiscal 1997 and 38.2% in Fiscal 1996. 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, principally as a result of the factors described above. EBITDA is income from operations plus depreciation and amortization of goodwill and other intangibles. 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 and Administrative Expenses. Selling, general and 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 and administrative expenses as a percentage of net sales increased to 14.6% in Fiscal 1996 from 13.8% in Fiscal 1995. 32 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 22.5% in Fiscal 1995 principally as a result of the factors described above. Interest Expense. Interest expense for Fiscal 1996 increased $0.6 million, or 9.7% to $6.8 million as compared to $6.2 million for Fiscal 1995. Interest expense as a percentage of net sales decreased to 9.3% in Fiscal 1996 from 10.0% in Fiscal 1995. The increase in interest expense is due to full year interest expense associated with the Scent Seal acquisition and capitalized lease related to new manufacturing equipment. Other Income/Expense and Management Fees. Other income/expense and management fees for Fiscal 1996 increased $0.3 million, or 75.0% to $0.7 million as compared to $0.4 million for Fiscal 1995. Other income/expense and management fees as a percentage of net sales increased to 1.0% in Fiscal 1996 from 0.6% in Fiscal 1995. The increase in other income/expense and management fees was due to the loss incurred on the disposal of certain manufacturing equipment. Income Tax Expense. Income tax expense for Fiscal 1996 decreased $1.0 million or 32.3% to $2.1 million as compared to $3.1 million for Fiscal 1995. The Company's effective tax rate, after consideration of non-deductible goodwill, was 38.2% in Fiscal 1996 and 37.2% in Fiscal 1995. 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, principally as a result of the factors described above. EBITDA is income from operations plus depreciation and amortization of goodwill and other intangibles. LIQUIDITY AND CAPITAL RESOURCES The Company has substantial indebtedness and significant debt service obligations. As of September 30, 1998, the Company had consolidated indebtedness in an aggregate amount of $116.9 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. At June 30, 1998, the Company was not in compliance with one such financial condition and obtained a waiver under the Credit Agreement with respect to such requirement effective through September 30, 1998. The Company and the Lender entered into a second amendment to the Credit Agreement dated October 30, 1998. This amendment to the Credit Agreement retroactively amended certain of the financial condition tests under the Credit Agreement and as of September 30, 1998 the Company was in compliance with all financial condition tests under the Credit Agreement, as amended. 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. Currently, the Company has letters of credit outstanding under the Credit Agreement in the amount of $0.6 million and has borrowings of approximately $19.4 million available, 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." 33 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 and $8.9 million for Fiscal 1996 and Fiscal 1997, respectively, together with borrowings under revolving credit facilities. In Fiscal 1998, cash totaling $3.9 million was used by operating activities primarily due to the assumption, and subsequent settlement, of a $5.8 million current liability arising from, and directly attributable to the Acquisition. Cash provided by operating activities was $1.8 million for the three months ended September 1998. Net cash provided by operating activities in Fiscal 1996 and 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. Net cash provided by operating activities during the three months ended September 30, 1998 resulted from net income before depreciation and amortization and the collection of an income tax refund receivable. These factors were partially offset by increased accounts receivable and inventory levels necessary to accommodate the Company's seasonal sales levels. In Fiscal 1997, Fiscal 1998, and the three months ended September 30, 1998, the Company had capital expenditures of approximately $2.5 million, $1.3 million, and $0.7 million, respectively. These capital expenditures consisted primarily of the purchase and maintenance of manufacturing equipment and furniture and fixtures and maintaining and upgrading its computer systems. 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 a liability associated with a credit of $182,000 issued by 3M in favor of one of its customers. The Company has relocated all of the production operations previously outsourced by 3M to its existing facilities to utilize excess capacity at such facilities. See "The Transactions." The purchase price for the 3M Acquisition was financed with borrowings under the Credit Agreement which were subsequently repaid with funds from the Equity Contribution and the Note Offering. 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. As of September 30, 1998, the Company had (i) $16.7 million in other unsecured obligations (including trade payables, accrued liabilities and deferred taxes), all of which ranks pari passu in right of payment with the Notes (ii) no outstanding liabilities ranking junior to the Notes (however, the Debentures of Holdings effectively rank junior to the Notes), and (iii) no outstanding liabilities ranking senior to the Notes. 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 obligation. As of September 30, 1998, the Company had no outstanding secured obligations, other than outstanding letters of credit in the amount of $0.6 million under the Credit Agreement and $1.9 million outstanding under a capitalized lease. Capital expenditures for the fiscal year ending June 30, 1999 ("Fiscal 1999") are budgeted to be approximately $3.0 million. Based on borrowings outstanding as of September 30, 1998, the Company expects total cash payments for debt service in Fiscal 1999 to be approximately $14.3 million, consisting of $12.1 million in interest payments on the Notes, the $1.3 million repayment of the Scent Seal Note on July 1, 1998, $0.8 million in capital lease obligations, and $0.1 million in fees under the Credit Agreement. The Company also expects to make royalty payments of approximately $1.0 million during Fiscal 1999. 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 34 requirements and interest and principal payments on its indebtedness, including the Notes for Fiscal 1999. In the event the Company consummates any additional acquisitions it may seek additional debt or equity financings subject to compliance with the terms of the Indenture. 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." RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income." The Company adopted the provisions of this Statement on July 1, 1998. This Statement establishes standards for reporting and displaying comprehensive income and its components in the financial statements. This Statement also requires that comparative information for earlier periods be reclassified. As the Company only has two items of comprehensive income, net income and foreign currency translations, adoption of this statement did not have a material effect upon the Company's financial position or results of operations. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. This Statement also established standards for related disclosures about products and services, geographic areas and major customers. The Company adopted the provisions of this Statement effective July 1, 1997. Based upon a review of its operations, management believes that the Company operated in only one reportable segment during each of the three years ended June 30, 1998 and the three months ended September 30, 1998. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities" which is effective for fiscal years beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Company has only utilized derivative financial instruments to hedge the Company's exposure to certain foreign currencies. Such hedging activity has historically been minor and, as a result, adoption of this Statement is not expected to have a material impact on the Company's financial condition or results of operations. The Company will adopt the provisions of this Statement on July 1, 1999. YEAR 2000 ISSUES The Company is currently working to resolve the potential impact of the Year 2000 on its information technology systems and its non-information technology systems so they will properly recognize and utilize dates beyond December 31, 1999. The Year 2000 problem is the result of computer systems and microprocessors with data functions being written using two digits (rather than four) to define the applicable year. The Company has in place a Year 2000 program which is being executed by a project team which is not relying to a significant degree on outside consultants. The objective of the Year 2000 program is to 35 determine and assess the risks of the Year 2000 issue and to plan and institute mitigating actions to minimize those risks to acceptable levels. If, however, all necessary actions are not taken on a timely basis to ensure Year 2000 compliance, the Year 2000 issue could have a material adverse effect on the Company. To date, all of the Company's systems have been assessed for Year 2000 compliance. The Company relies on five computerized systems all of which required remediation, two of which are maintained internally and the others are maintained by third party vendors. The Company estimates that 80% of these systems are currently Year 2000 compliant. In the fourth quarter of calendar 1998 the Company will complete the upgrade of its primary computer system and programs and receive certification from its key software supplier regarding Year 2000 compliance. The Company's personnel will conduct testing to ensure Year 2000 compliance. Upon review of the Company's non-information technology systems the Company believes that none of its manufacturing equipment is date sensitive. Of the remaining non-information technology systems, the Company believes all such systems are Year 2000 compliant. To date, the Company has spent $11,000 on Year 2000 compliance and expects additional expenditures of approximately $40,000 during Fiscal 1999. Although the Company expects the above referenced expenditures will be sufficient to ensure the Company is Year 2000 compliant, the Company anticipates budgeting an additional $49,000 for any unforeseen problems arising with respect to Year 2000 compliance between July 1, 1999 and the Year 2000. All expenditures with respect to Year 2000 compliance will be funded from working capital. The Company is communicating with its significant customers and vendors to understand their Year 2000 issues and how they might prepare themselves to manage those issues as they relate to the Company. To date, no significant customers or vendors have informed the Company that a material Year 2000 issue exists which will have a material effect on the Company. See "Risk Factors--Year 2000 Issues." The Company has not formulated a contingency plan in the event it or its significant customers or vendors are not Year 2000 compliant. 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. 36 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., and Sanofi Beaute, Inc. Sampling is one of the most effective and widely used promotional practices for consumer products. Product sampling usage has increased faster than any other form of consumer promotional usage 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 microencapsulated fragrance 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 and L'Oreal/Cosmair 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 37 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 Company's high volume 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 72% of Fiscal 1998 net sales were generated by sales to customers that have been doing business with the Company for the past five years or longer although the Company does not have long-term contracts with any of its customers. 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. 38 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. 39 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. (The industry's past growth rate is not necessarily indicative of the Company's future growth rate.) 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 through subscription 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 one of the fastest growing categories 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 $3.5 billion in annual sales in the United States in 1996. 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. 40 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." Each of the Company's products is a cosmetic sample delivery device, generally designed to perform the same basic function, and is generally sold to the same category of customers.
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. 41 o Resealable ScentStrip: Adds an innovative closure to ScentStrip that opens and reseals up to 25 times. 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 at the end of 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. 42 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 41% of Fiscal 1998 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., and Sanofi Beaute, Inc. The Company's top ten customers accounted for approximately 58% of total sales in Fiscal 43 1998. None of the Company's customers other than Estee Lauder accounted for 10% or more of net sales in Fiscal 1998. 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 44 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--Sole Supplier of Certain Raw Materials." 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. 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., Quebecor Printing (USA) Corp., Nord'est, Marietta Corp., Klocke, Color Prelude, Rotocon, Drescher Ascent, and Appliquesence. The Company also competes with numerous manufactures of miniatures, vials, packettes, sachets, blisterpacks and scratch and sniff products. In addition, certain cosmetics companies produce sampling products for their own cosmetic products. See "Risk Factors--Competition" and "--The Company." 45 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 September 30, 1998, the Company employed 325 persons, which includes 218 hourly and 107 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. 46 THE TRANSACTIONS THE ACQUISITION Prior to the Acquisition, the Company was controlled by two private investment firms and certain members of management. In 1997, the private investment firms decided to sell their equity interests to DLJMBII and certain affiliates. In connection with this activity, DLJMBII, certain members of the Company's management and certain stockholders in the Predecessor organized Acquisition Corp. to acquire all of the outstanding equity interests of the Company. The Acquisition was completed on December 15, 1997. The total cost of the Acquisition (including related fees, expenses and cash for working capital) was approximately $205.7 million. Included in the total cost of the Acquisition were approximately $6.2 million of non-cash costs comprised of (i) the assumption of the Scent Seal Note and certain capital lease obligations and (ii) the exchange of stock options to acquire common stock in the Company by the Company's Chief Executive Officer for stock options to acquire preferred stock in Acquisition Corp. See "Description of Certain Indebtedness and "Certain Relationships and Related Transactions." To provide the $199.5 million of cash necessary to fund the Acquisition, including the equity purchase price and the retirement of all previously 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 certain prior stockholders including the Company's Chief Executive Officer and Liberty Partners Holdings 4, L.L.C. As of September 30, 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. 3M's fragrance sampling business was predominantly a sales and distribution business as it outsourced the production of the majority of the products it sold. The Company did not assume such outsourcing arrangements and relocated such operations to its existing facilities in Chattanooga to utilize current excess capacity at such facilities. Except for several sales and technical employees, the Company did not extend employment to any employees from 3M. Many of 3M's existing customers are also existing customers of the Company. The Company anticipates that as a result of the 3M Acquisition its sales volume from these customers will increase. Management believes that in order to properly service such an increase in sales volume associated with the 3M Acquisition, several additional sales and technical 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 Company financed the 3M Acquisition with borrowings under the Credit Agreement. Such borrowings were subsequently repaid with the proceeds of the Equity Contribution and the Note Offering. 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. The majority of the proceeds from the Debenture Offering were used to fund the Equity Contribution. The Equity Contribution, together with the proceeds from the Note Offering, was used by the Company to fund the Refinancing. 47 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 ............. 34 President, Chief Executive Officer and Director Barry W. Miller .............. 46 Chief Operating Officer Kenneth A. Budde ............. 50 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. 48 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
LONG TERM ANNUAL COMPENSATION COMPENSATION ----------------------------------- -------------------- FISCAL SECURITIES ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION(1) - ----------------------------------- -------- ----------- ---------- -------------------- ---------------- Roger L. Barnett .................. 1998 $367,083 $ -- 32,500(2) $3,670 President, Chief Executive Officer 1997 210,000 275,000 -- 5,700 and Director 1996 210,000 225,000 -- 6,856 Hugh F. Brown (3) ................. 1998 145,000 100,000 -- 3,384 Executive Vice President 1997 145,000 100,000 -- 5,700 Manufacturing 1996 145,000 100,000 -- 5,636 Kenneth A. Budde .................. 1998 120,000 75,000 -- -- Chief Financial Officer 1997 100,000 50,000 -- -- 1996 100,000 20,000 -- --
- ---------- (1) Represents amounts contributed on behalf of the named executive to the Company's 401(k) retirement savings plan. (2) Option to purchase shares of Acquisition Corp. Common Stock. See "--Equity-Based Compensation." (3) Mr. Brown resigned from the Company in July 1998. Mr. Brown is expected to become a consultant to the Company. The following table contains information concerning the share options grants made to each of the named executive officers of the Company during the fiscal year ended June 30, 1998.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF SHARE PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM (2) -------------------------------------------------------- ----------------------- % OF TOTAL NUMBER OF OPTIONS SECURITIES GRANTED TO UNDERLYING EMPLOYEES EXERCISE OR OPTIONS IN FISCAL BASE PRICE EXPIRATION GRANTED(1) YEAR ($/SH) DATE 5% 10% ------------ ----------- ------------ ------------ ---------- ---------- Roger L. Barnett ......... 32,500 100 $ 1.00 06/17/2008 $20,439 $51,797 Hugh F. Brown ............ -- -- -- -- -- -- Kenneth A. Budde ......... -- -- -- -- -- --
- ---------- (1) The option to purchase 32,500 shares of Acquisition Corp. Common Stock was granted under Acquisition Corp.'s 1998 Stock Option Plan. See "--Equity-Based Compensation." (2) These amounts are based on compounded annual rates of share price appreciation of five and ten percent over the 10-year term of the options, as mandated by rules of the Securities and Exchange Commission, and are not indicative of expected share price performance. Actual gains, if any, on share option exercises are dependent on future performance of the overall market conditions, as well as the option holders' continued employment throughout the vesting period. The amount reflected in this table may not necessarily be achieved or may be exceeded. The indicated amounts are net of the option exercise price but before taxes that may be payable upon exercise. 49 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 in an amount equal to Mr. Barnett's annual base salary for the fiscal year prior to the fiscal year of termination and the amount equal to the bonus, if any, due or paid for the fiscal year prior to the fiscal year of termination. The Barnett Agreement also includes a non-competition provision pursuant to which Mr. Barnett may be prohibited for a specified period of time from engaging in certain activities that are competitive with the Company's business. Mr. Barnett has also 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 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 50 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. 51 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 F. Brown .......................................................... 2,625 0.2 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 12.3
- ---------- (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. 52 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; Conflicts of Interests." 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 of $2.0 million 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 an annual fee of $250,000 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 received discounts and commissions of approximately $1.0 million in connection with the offering of the Old Debentures and approximately $3.5 million in connection with the offering of the Old Notes, which amounts the Company believes are comparable to the discounts and commissions which would have been payable to an unrelated third party. See "Plan of Distribution." The Bridge Lender, an affiliate of DLJ Merchant Banking, DLJMBII and the Initial Purchaser, made the loans under and was the holder of all of the $123.5 million principal amount of the Bridge Notes, all of which were repaid by the Company with the proceeds of the Equity Contribution, together with the net proceeds of the Note Offering. The Bridge Notes were issued in order to finance the Acquisition. In connection with issuing the Bridge Notes, the Bridge Lender received customary fees. The Company believes that the terms of the Bridge Notes and the fees paid in connection therewith were comparable to those that could have been obtained from an unaffiliated third party. 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 (the "Prior Investors") in the Company prior to the Acquisition, including Roger L. Barnett and Hugh F. Brown (the "Management 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 restrictions on the ability of each holder of capital stock of Acquisition Corp. to transfer any capital stock of Acquisition Corp. to any person designated by the Board of Directors of Acquisition Corp. to be an "Adverse Person". In addition, the Prior Members are restricted in their ability to transfer capital stock of Acquisition Corp. prior to the date that is the earlier of (i) the consummation of a qualifying initial public offering or (ii) December 15, 2002, except (x) to DLJMBII or a party who is a Prior Investor, or (y) pursuant to an offering of equity securities registered under the Securities Act. The other material provisions of the Stockholders Agreement provide, subject to certain exceptions, (i) certain preemptive rights to the holders of capital stock of Acquisition Corp., (ii) "drag along" rights to DLJMBII to require the remaining holders of capital stock of Acquisition Corp. to sell a percentage of their ownership and (iii) "tag along" rights to the holders of capital stock of Acquisition Corp., other than DLJMBII, with respect to sales of capital stock of Acquisition Corp. by DLJMBII. 53 Pursuant to the Stockholders Agreement, DLJMBII was granted the right to demand up to three (3) Registrations on Form S-1 or the equivalent to sell Acquisition Corp. Common Stock (or if Acquisition Corp. is eligible to use Form S-3, the number of demand rights is unlimited) and all holders of capital stock of Acquisition Corp. were granted certain customary "piggyback" registration rights to register their common stock in any registration statement filed by Acquisition Corp. THE ACQUISITION In connection and contemporaneously with the closing of the Acquisition, the Management Investors sold certain of their options to purchase common stock of the Company to Acquisition Corp. at fair market value for approximately $12.1 million in cash. Such amount does not include any consideration indirectly attributable to the Management Investors. Further, Roger L. Barnett purchased an aggregate of 134,325 shares of Acquisition Corp. Common Stock for $1.00 per share 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 during Fiscal 1998 prior to the Acquisition, the Company made payments of approximately $612,000 and $160,000, respectively 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 and $55,000 to another significant prior stockholder for management fees in Fiscal 1997 and in Fiscal 1998 prior to the Acquisition, respectively. 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." 54 DESCRIPTION OF CERTAIN INDEBTEDNESS CREDIT AGREEMENT On April 30, 1996, the Company entered into the Credit Agreement with Heller Financial, Inc. (the "Lender"), which was amended on December 12, 1997 and October 30, 1998, 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. Borrowings under the Credit Agreement are an obligation of the Company and are secured by the current and future assets of the Company. Borrowings outstanding under the Credit Agreement will effectively rank senior to the Notes. On June 30, 1998 the Company received a waiver for its inability to meet one of its financial convenants. The Company and the Lender entered into a second amendment to the Credit Agreement dated October 30, 1998. This amendment to the Credit Agreement retroactively amended certain of the financial convenants under the Credit Agreement and as of September 30, 1998 the Company was in compliance with all financial covenants under the Credit Agreement, as amended. The following description of the material 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. At September 30, 1998, there were no borrowings outstanding under the Credit Agreement and outstanding letters of credit were $0.6 million. The Credit Agreement contains customary restrictive covenants, which, subject to certain exceptions, limit the ability of the Company to (i) incur additional indebtedness and liens in connection therewith, (ii) to make investments or loans in or to third parties, (iii) create or become liable for contingent obligations, (iv) amend the terms of its indebtedness, (v) enter into certain transactions with affiliates, (vi) pay dividends, redeem or retire stock or pay or prepay the principal of its outstanding debts (provided that the Company may make required repayments of interest under the Notes), (vii) amend any material provision of its articles of incorporation or bylaws or, consolidate, merge or effect certain asset sales, (viii) sell any of the stock of its subsidiaries, and (ix) 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). Upon a default under the Credit Agreement as the result of bankruptcy or default pursuant to other indebtedness of the Company, the unpaid principal amount and all accrued, unpaid interest will automatically become immediately due and payable. With respect to default under the Credit Agreement for any other reason, the Lender may declare all or a portion of the outstanding borrowings due and payable and the revolving loan commitment shall terminate. 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 Company paid $1.33 million on July 1, 1998 in full satisfaction of the Scent Seal Note. 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. 55 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." THE DEBENTURES The Debentures generated gross proceeds to Holding of approximately $26.0 million (before deducting discounts and commissions). The Debentures were issued under an Indenture dated as of June 25, 1998 (the "Debenture Indenture") between Holding and State Street Bank and Trust Company as trustee. The Debentures are general unsecured obligations of Holding and are effectively junior in right of payment to all existing and future senior unsecured indebtedness of the Company. The Debentures accrete at a rate of 13 1/2%, compounded semi-annually to an aggregate principal amount of $50.0 million at July 1, 2003. The Debentures accrue interest at the rate of 13 1/2% per annum, payable semi-annually on January 1 and July 1 of each year, commencing January 1, 2004. The Debentures are redeemable at the option of Holding, in whole or in part, at any time on or after July 1, 2003 in cash at the redemption prices set forth below, plus accrued and unpaid interest and Liquidated Damages (as defined in the Debenture Indenture), if any, thereon to the date of redemption.
YEAR REDEMPTION PRICE - ---- ---------------- 2003 ............... 106.750% 2004 ............... 103.375% 2005 ............... 100.000%
Notwithstanding the foregoing, at any time prior to July 1, 2001, Holding may on any 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, if any, thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings (as defined in the Debenture Indenture); provided that at least 65% of the original aggregate principal amount at maturity of Debentures remains outstanding immediately after the occurrence of such redemption. In the event of a Change of Control (as defined in the Debenture Indenture), each holder of Debentures will have the right to require Holding to repurchase all or any part of such holder's Debentures 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 of repurchase is on or after July 1, 2003), plus, in each case, accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. The Debenture Indenture contains covenants substantially similar to that of the Indenture. 56 DESCRIPTION OF NEW NOTES GENERAL The Old Notes were, and the New Notes will be, issued pursuant to an indenture (the "Indenture") between the Company and the Trustee dated as of June 25, 1998. 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) the New Notes will have been registered under the Securities Act, and (ii) the holders of the New Notes will not be entitled to certain rights of holders of the Old Notes under the Registration Rights Agreement. 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 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. As of September 30, 1998, the Company had (i) $16.7 million in other unsecured obligations (including trade payables, accrued liabilities and deferred taxes), all of which ranks pari passu in right of payment with the Notes (ii) no outstanding liabilities ranking junior to the Notes (however, the Debentures effectively rank junior to the Notes), and (iii) no outstanding liabilities ranking senior to the Notes. 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 September 30, 1998, the Company had no outstanding secured obligations, other than outstanding letters of credit in the amount of $0.6 million under the Credit Agreement and $1.9 million outstanding under a capitalized lease. The Indenture will permit the incurrence of additional secured Indebtedness in the future. Currently, each of the Company's subsidiaries, Arcade Europe S.A.R.L. and Scent Seal Inc., are 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. 57 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:
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 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; 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 58 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) 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. 59 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. 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 60 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 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 61 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 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 62 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 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; 63 (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; (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 64 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 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. 65 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." 66 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. 67 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. 68 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 and Remedies" will no longer constitute an Event of Default with respect to the Notes. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the Notes, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, 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 69 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; (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. 70 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 71 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 72 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 73 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 the lender under 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. 74 "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, 75 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. 76 "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 77 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 78 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, 79 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). 80 "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. 81 U.S. FEDERAL INCOME TAX CONSEQUENCES Subject to the qualifications set forth below, the opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P., tax counsel to the Company, with respect to 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 is as follows. The discussion does not address the federal income tax consequences of ownership of Notes not held as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"), or the federal income tax consequences to Holders subject to special treatment under the federal income tax laws, such as dealers in securities or foreign currency, tax-exempt investors, real estate investment trusts, regulated investment companies, banks, thrifts, insurance companies or other financial institutions, persons that hold the Notes as a position in a "straddle", or as part of a "synthetic security" or "hedge", "conversion transaction" or other integrated investment, persons that have a "functional currency" other than the U.S. dollar, or investors in pass-through entities. Moreover, this discussion does not address the effect of any applicable state, local or foreign tax laws or the applicability of U.S. federal estate and gift taxation. This discussion is based upon the Code, existing and proposed regulations thereunder ("Treasury Regulations"), and current administrative rulings and court decisions. All of the foregoing are subject to change, possibly on a retroactive basis, and any such change could affect the continuing validity of this discussion. EACH PERSON CONSIDERING AN INVESTMENT IN THE NOTES IS URGED TO CONSULT ITS OWN TAX ADVISOR AS TO PARTICULAR TAX CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF NOTES OF HOLDING AS WELL AS THE EXCHANGE OF NOTES FOR NEW DEBENTURES PURSUANT TO THE EXCHANGE OFFER, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY PROPOSED CHANGES IN APPLICABLE LAWS. 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 will 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 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 82 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 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 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 83 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; 84 (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 Subsidiaries as of June 30, 1997 and 1998 and for each of the two years in the period ended June 30, 1998, the period from July 1, 1997 through December 15, 1997 and the period from December 16, 1997 through June 30, 1998 included in this Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. As of March 23, 1998, the Company dismissed Coopers & Lybrand L.L.P. (the "Former Independent Accountants") and appointed Price Waterhouse LLP ("Price Waterhouse") as the Company's independent accountants retained to audit the Company's financial statements. The dismissal of the Former lndependent Accountants was approved by the Company's Board of Directors. As of July 1, 1998, Price Waterhouse LLP and Coopers & Lybrand L.L.P. merged their practices into PricewaterhouseCoopers LLP ("PwC"). As a result, PwC is the Company's current independent accountants. The Former Independent Accountant's reports on the Company's financial statements for the past two fiscal years did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. 85 After the consummation of the Acquisition, a review of the Company's accounting practices was undertaken by Price Waterhouse at the request of Acquisition Corp. Price Waterhouse was engaged by Acquisition Corp. to undertake such review subsequent to the Acquisition. In connection with such review, Price Waterhouse informed Acquisition Corp. that certain equipment leases of the Company historically accounted for as operating leases should have been accounted for as capital leases in accordance with GAAP. The Former Independent Accountants, after receiving authorization from the Company, consulted with officers of Acquisition Corp. and Price Waterhouse. The Former Independent Accountants advised Acquisition Corp. that they did not believe that the Company's financial statements should be restated for this issue. Following such disagreement, the Company decided to dismiss the Former Independent Accountants. Other than the matter discussed above, in connection with its audits for the two fiscal years ended June 30, 1997 and through March 23, 1998, there have been no disagreements with the Former Independent Accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of the Former Independent Accountants, would have caused them to make reference thereto in their report on the financial statements for such years. Subsequent to the dismissal of the Former Independent Accountants, PwC audited the Company's financial statements presented in this Prospectus as referenced in their report set forth herein. Such financial statements account for the subject equipment leases as capital leases. 86 INDEX TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
PAGE ---- Introduction to Unaudited Pro Forma Condensed Consolidated Statements of Operations.. P-2 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Three Months Ended September 30, 1997 .................................................... P-4 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year Ended June 30, 1998 ...................................................................... P-5 Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations ........ P-6
P-1 AKI, INC. AND SUBSIDIARIES INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands) 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 (the "Bridge Loans"). 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 totaling $143, of the Industrial and Consumer Products division of the Minnesota Mining and Manufacturing Company ("3M") for approximately $7,250 in cash and the assumption of certain liabilities totaling $182 (the "3M Acquisition"). The following unaudited pro forma condensed consolidated statements of operations of the Company is based upon the historical consolidated statements of operations of the Company or the Predecessor as adjusted to give effect to the Acquisition, the 3M Acquisition and the issuance by the Company of the Senior Notes, together with a capital contribution (the "Equity Contribution") to the Company of the net proceeds from the concurrent issuance by Holding of Senior Discount Debentures and the application of the net proceeds therefrom to repay the Bridge Loans and certain other indebtedness (collectively, the "Refinancing"), as if each event had occurred as of the beginning of the period presented. The historical consolidated balance sheet of the Company as of June 30, 1998 includes the effects of the Acquisition, the 3M Acquisition and the Refinancing as such events occurred prior to June 30, 1998. Pro forma adjustments are described in the accompanying notes and are applied to the historical consolidated statements of operations of the Company and 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 shareholders' investment in the Predecessor. The remaining purchase price has been allocated to asset 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. For the 3M Acquisition, the purchase price has been allocated to assets purchased and liabilities assumed based upon estimates of their respective fair values as determined by management. 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 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. P-2 AKI, INC. AND SUBSIDIARIES INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS--(CONTINUED) (dollars in thousands) As noted above, the Company has acquired the fragrance sampling business of 3M. 3M's fragrance sampling business was predominantly a sales and distribution business as it outsourced the production of the majority of the products it sold. The Company did not assume such outsourcing arrangements and relocated such operations to its Chattanooga facilities as the Company has excess manufacturing capacity at such facilities. In addition, except for several sales and technical employees, the Company did not extend employment to any employees from 3M; the Company's management has determined that additional personnel will be required at its Chattanooga facilities in the selling and technical functions in order to serve the incremental sales volume. As described in the notes to the unaudited pro forma condensed consolidated statement 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 sales volume attributable to the 3M Acquisition. 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 statements of operations do not purport to represent what the Company's results of operations would have actually been if the Acquisition, the 3M Acquisition or the Refinancing had occurred on the date indicated and are not necessarily representative of the Company's results of operations for any future period. The unaudited pro forma condensed 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 Registration Statement. P-3 AKI, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 (dollars in thousands)
PRO FORMA ACQUISITION FOR AKI, INC. ADJUSTMENTS ACQUISITION --------- ----------- ----------- Net sales ........................ $ 21,928 $ -- $ 21,928 Cost of goods sold ............... 13,622 (201)(a) 13,421 -------- ---------- -------- Gross profit ................... 8,306 201 8,507 Selling, general and administrative expenses ......... 3,322 15 (a) 3,337 Amortization of goodwill ......... 304 659 (b) 963 -------- ---------- -------- Income (loss) from operations .................... 4,680 (473) 4,207 Other expenses (income): Interest expense, net ........... 1,451 2,916 (c) 4,367 Management fees to stockholders and affiliate 118 (55)(d) 63 Other, net ...................... 28 -- 28 -------- ---------- -------- Income (loss) before income taxes .................. 3,083 (3,334) (251) Income tax expense (benefit) ..... 1,287 (1,007)(e) 280 -------- ---------- -------- Net income (loss) .............. $ 1,796 $ (2,327) $ (531) ======== ========== ======== STATEMENT OF CASH FLOW DATA: Net cash provided by (used in) operating activities ....... $ (2,237) $ (1,003) $ (3,240) Net cash used in investing activities ..................... (448) -- (448) Net cash provided by (used in) financing activities ....... 3,896 (4,056) (160) PRO FORMA FOR 3M REFINANCING ACQUISITION AND ACQUISITION ADJUSTMENTS REFINANCING ADJUSTMENTS(H) PRO FORMA ----------- ----------- -------------- --------- Net sales ........................ $ -- $ 21,928 $ 2,788 $ 24,716 Cost of goods sold ............... -- 13,421 1,380 14,801 ---------- -------- ------- -------- Gross profit ................... -- 8,507 1,408 9,915 Selling, general and administrative expenses ......... -- 3,337 265 3,602 Amortization of goodwill ......... -- 963 45 1,008 ---------- -------- ------- -------- Income (loss) from operations .................... -- 4,207 1,098 5,305 Other expenses (income): Interest expense, net ........... (1,118)(f) 3,249 -- 3,249 Management fees to stockholders and affiliate -- 63 -- 63 Other, net ...................... -- 28 -- 28 ---------- -------- ------- -------- Income (loss) before income taxes .................. 1,118 867 1,098 1,965 Income tax expense (benefit) ..... 421 (g) 701 413 1,114 ---------- -------- ------- -------- Net income (loss) .............. $ 697 $ 166 $ 685 $ 851 ========== ======== ======= ======== STATEMENT OF CASH FLOW DATA: Net cash provided by (used in) operating activities ....... $ 160 $ (3,080) $ 739 $ (2,341) Net cash used in investing activities ..................... -- (448) -- (448) Net cash provided by (used in) financing activities ....... -- (160) -- (160)
See notes to unaudited pro forma consolidated statements of operations. P-4 AKI, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1998 (dollars in thousands)
PRO FORMA ACQUISITION FOR AKI, INC. ADJUSTMENTS ACQUISITION --------- ----------- ----------- Net sales ........................ $ 71,252 $ -- $ 71,252 Cost of goods sold ............... 47,327 (437)(a) 46,890 ---------- ---------- --------- Gross profit ................... 23,925 437 24,362 Selling, general and administrative expenses ......... 11,313 32 (a) 11,345 Amortization of goodwill ......... 2,646 1,202 (b) 3,848 ---------- ---------- --------- Income (loss) from operations .................... 9,966 (797) 9,169 Other expenses (income): Interest expense, net ........... 13,915 3,616 (c) 17,531 Management fees to stockholders and affiliate 340 (90)(d) 250 Other, net ...................... (36) -- (36) ---------- ---------- --------- Income (loss) before income taxes .................. (4,253) (4,323) (8,576) Income tax expense (benefit) ..... (592) (1,175)(e) (1,767) ---------- ---------- --------- Net income (loss) .............. $ (3,661) $ (3,148) $ (6,809) ========== ========== ========= STATEMENT OF CASH FLOW DATA: Net cash provided by (used in) operating activities ....... $ (3,893) $ 3,481 $ (412) Net cash provided by (used in) investing activities ....... (142,724) 134,153 (8,571) Net cash provided by (used in) financing activities ....... 152,436 (143,936) 8,500 PRO FORMA FOR 3M REFINANCING ACQUISITION AND ACQUISITION ADJUSTMENTS REFINANCING ADJUSTMENTS(H) PRO FORMA ----------- ----------- -------------- --------- Net sales ........................ $ -- $ 71,252 $ 10,579 $ 81,831 Cost of goods sold ............... -- 46,890 5,237 52,127 ---------- --------- -------- --------- Gross profit ................... -- 24,362 5,342 29,704 Selling, general and administrative expenses ......... -- 11,345 1,005 12,350 Amortization of goodwill ......... -- 3,848 182 4,030 ---------- --------- -------- --------- Income (loss) from operations .................... -- 9,169 4,155 13,324 Other expenses (income): Interest expense, net ........... (4,482)(f) 13,049 -- 13,049 Management fees to stockholders and affiliate -- 250 -- 250 Other, net ...................... -- (36) -- (36) ---------- --------- -------- --------- Income (loss) before income taxes .................. 4,482 (4,094) 4,155 61 Income tax expense (benefit) ..... 1,687 (g) (80) 1,564 1,484 ---------- --------- -------- --------- Net income (loss) .............. $ 2,795 $ (4,014) $ 2,591 $ (1,423) ========== ========= ======== ========= STATEMENT OF CASH FLOW DATA: Net cash provided by (used in) operating activities ....... $ 749 $ 337 $ 2,810 $ 3,146 Net cash provided by (used in) investing activities ....... -- (8,571) 7,250 (1,321) Net cash provided by (used in) financing activities ....... (9,157) (657) -- (657)
See notes to unaudited pro forma consolidated statements of operations. P-5 AKI, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands) ACQUISITION ADJUSTMENTS (a) Represents the net reduction in depreciation expense ($186 for the three months ended September 30, 1997 and $405 for the year ended June 30, 1998) as a result of the fair values assigned to property, plant and equipment and estimated useful lives which were extended as determined from appraisals commissioned by the Company in connection with the application of purchase accounting associated with the Acquisition. (b) Adjusts goodwill amortization to $963 for the three months ended September 30, 1997 and $3,848 for the year ended June 30, 1998 based upon goodwill of $153,929 amortized using straight-line method over 40 years. (c) Reflects incremental interest expense and amortization of deferred charges ($2,916 for the three months ended September 30, 1997 and $3,616 for the year ended June 30, 1998) on the Bridge Loans 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 advisory fees agreed to on a prospective basis through the Acquisition agreement ($55 for the three months ended September 30, 1998 and $90 for the year ended June 30, 1998). (e) Reflects incremental income tax benefit ($1,007 for the three months ended September 30, 1997 and $1,175 for the year ended June 30, 1998) relating to pro forma consolidated statement of operations' adjustments in (c) and (d) above. Goodwill is not tax deductible. REFINANCING ADJUSTMENTS (f) Reflects incremental reduction in interest expense and amortization of deferred charges ($1,182 for the three months ended September 30, 1997 and $4,482 for the year ended June 30, 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 ($421 for the three months ended September 30, 1997 and $1,687 for the year ended June 30, 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' historical statements of operations conformed to the periods indicated as well as the adjustments to these historical results for not assuming outsourcing arrangements on a prospective basis and to reflect the costs of producing and selling such products by the Company. FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
3M 3M HISTORICAL ADJUSTMENTS ADJUSTED ---------- ----------- -------- Net sales ............................................ $4,075 $ (1,287)(i) $ 2,788 Cost of goods sold ................................... 3,085 (1,705)(ii) 1,380 ------ ----------- ------- Gross profit ........................................ 990 418 1,408 Selling, general and administrative expenses ......... 1,356 (1,091) (iii) 265 Amortization of goodwill ............................. -- 45 (iv) 45 ------ ----------- ------- Income (loss) before income taxes ................... (366) 1,464 1,098 Income tax expense (benefit) ......................... (132) 545 (v) 413 ------ ----------- ------- Net income (loss) ................................... $ (234) $ 919 $ 685 ====== =========== =======
P-6 AKI, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS--(CONTINUED) (dollars in thousands) FOR THE YEAR ENDED JUNE 30, 1998
3M 3M HISTORICAL ADJUSTMENTS ADJUSTED ---------- ----------- -------- Net sales ............................................ $ 15,679 $ (5,100)(i) $ 10,579 Cost of goods sold ................................... 12,037 (6,800)(ii) 5,237 -------- ----------- -------- Gross profit ........................................ 3,642 1,700 5,342 Selling, general and administrative expenses ......... 5,059 (4,054) (iii) 1,005 Amortization of goodwill ............................. -- 182 (iv) 182 -------- ----------- -------- Income (loss) before income taxes ................... (1,417) 5,572 4,155 Income tax expense (benefit) ......................... (510) 2,074 (v) 1,564 -------- ----------- -------- Net income (loss) ................................... $ (907) $ 3,498 $ 2,591 ======== =========== ========
- -------------- (i) Reflects the decrease in net sales resulting from the loss of a significant customer prior to the 3M Acquisition. (ii) Reflects the decrease in production costs ($988 for the three months ended September 30, 1997 and $3,915 for the year ended June 30, 1998) resulting from the loss of a significant customer prior to the 3M Acquisition noted in (i) above and reflects the decrease in production costs ($717 for the three months ended September 30, 1997 and $2,885 for the year ended June 30, 1998) from the Company not assuming 3M's outsourcing arrangements and consolidating production into the Company's Chattanooga facilities. The decrease in production costs from consolidating production into the Company's Chattanooga facilities 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 based upon the Company's historical results. Due to the Company's existing capacity, fixed costs (primarily depreciation and overhead) will not be affected by such incremental sales. (iii) Reflects the net decrease in selling, general and administrative expenses due to the consolidation of these activities into the Company. Subsequent to the consummation of the 3M Acquisition, the Company added several additional sales and technical 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 have been discontinued as a result of the transfer of the 3M fragrance sampling business to the Company. (iv) Represents amortization expense based upon goodwill of $7,289 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. P-7 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants ........................................................ F-2 Report of Independent Accountants ........................................................ F-3 Consolidated Balance Sheet at June 30, 1997 and 1998, and Unaudited Consolidated Balance Sheet at September 30, 1998 ............................................................. F-4 Consolidated Statements of Operations for the Two Years Ended June 30, 1997 and for the period from July 1, 1997 through December 15, 1997 and for the period from December 16, 1997 through June 30, 1998, and Unaudited Consolidated Statements of Operations for the Three Months Ended September 30, 1997 and 1998 ....................... F-5 Consolidated Statements of Changes in Stockholder(s) Equity for the Two Years Ended June 30, 1997 and for the period from July 1, 1997 through December 15, 1997 and for the period from December 16, 1997 through June 30, 1998, and Unaudited Consolidated Statement of Changes in Stockholder Equity for the Three Months Ended September 30, 1998 .................................................................................... F-6 Consolidated Statements of Cash Flows for the Two Years Ended June 30, 1997 and for the period from July 1, 1997 through December 15, 1997 and for the period from December 16, 1997 through June 30, 1998, and Unaudited Consolidated Statements of Cash Flows for the Three Months Ended September 30, 1997 and 1998 ............................ F-7 Notes to Consolidated Financial Statements ............................................... F-8
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of AKI, Inc. and Subsidiaries In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of changes in stockholder's equity and of cash flows present fairly, in all material respects, the financial position of AKI, Inc. and Subsidiaries (a wholly-owned subsidiary of AKI Holding Corp.), formerly known as Arcade Holding Corporation (the "Predecessor") at June 30, 1998, and the results of their operations and their cash flows for the period from December 16, 1997 through June 30, 1998 in conformity with generally accepted accounting principles. These financial statements are the responsibility of management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Nashville, Tennessee July 31, 1998 F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of AKI, Inc. and Subsidiaries In our opinion, the accompanying consolidated balance sheet 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 Arcade Holding Corporation and Subsidiaries at June 30, 1997, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 1997 and the period from July 1, 1997 through December 15, 1997 in conformity with generally accepted accounting principles. These financial statements are the responsibility of 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. /s/ PricewaterhouseCoopers LLP Nashville, Tennessee July 31, 1998 F-3 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) CONSOLIDATED BALANCE SHEET (dollars in thousands, except share information)
PREDECESSOR SUCCESSOR --------------- ------------------------------------- JUNE 30, 1997 JUNE 30, 1998 SEPTEMBER 30, 1998 --------------- --------------- ------------------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents ................................. $ 303 $ 1,641 $ 1,341 Accounts receivable, net .................................. 10,200 13,577 21,449 Inventory ................................................. 2,786 2,078 3,948 Income tax refund receivable .............................. -- 5,155 132 Prepaid expenses .......................................... 221 378 326 Deferred income taxes ..................................... 424 827 827 -------- --------- --------- TOTAL CURRENT ASSETS ................................... 13,934 23,656 28,059 Property, plant and equipment, net ........................ 18,156 18,936 18,579 Goodwill, net ............................................. 44,293 159,131 158,123 Deferred charges .......................................... 555 5,272 5,229 Deferred income taxes ..................................... -- 3,869 3,532 Other assets .............................................. 204 200 203 -------- --------- --------- TOTAL ASSETS ........................................... $ 77,142 $ 211,064 $ 213,725 ======== ========= ========= LIABILITIES AND STOCKHOLDER(S) EQUITY CURRENT LIABILITIES Current portion of loans payable to stockholder ........... $ 37,892 $ -- $ -- Current portion of capital lease obligation ............... 557 609 623 Current portion of other notes payable .................... 100 1,330 -- Revolving line of credit .................................. 4,338 -- -- Accounts payable, trade ................................... 3,435 4,140 5,934 Accrued income taxes ...................................... 26 100 1,088 Accrued bonuses ........................................... 1,396 650 319 Accrued interest .......................................... -- 168 3,196 Accrued expenses .......................................... 3,147 3,814 2,455 -------- --------- --------- TOTAL CURRENT LIABILITIES .............................. 50,891 10,811 13,615 Long-term portion of capital lease obligation ............. 2,098 1,489 1,328 Senior notes .............................................. 115,000 115,000 Other notes payable, net .................................. 1,301 -- -- Deferred income taxes ..................................... 2,949 4,143 3,692 -------- --------- --------- 57,239 131,443 133,635 Commitments and contingencies (see Note 13) Redeemable preferred stock ................................ 8,678 STOCKHOLDER(S) EQUITY Common stock, $0.01 par, 100,000 shares authorized; 48,000 shares issued and outstanding at June 30, 1997 ..................................................... 1 Preferred stock, $0.01 par, 8,700 shares authorized; no shares issued or outstanding at June 30, 1998 ......... -- -- Common stock, $0.01 par, 100,000 shares authorized; 1,000 shares issued and outstanding at June 30, 1998 ..................................................... -- -- Additional paid-in capital ................................ 4,889 100,862 100,862 Stock purchase warrants ................................... 1,923 Retained earnings (deficit) ............................... 4,565 (5,454) (5,097) Accumulated other comprehensive income .................... (153) (57) 55 Carryover basis adjustment ................................ -- (15,730) (15,730) -------- --------- --------- TOTAL STOCKHOLDER(S) EQUITY ............................ 11,225 79,621 80,090 -------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDER(S) EQUITY ............ $ 77,142 $ 211,064 $ 213,725 ======== ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-4 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands)
PREDECESSOR SUCCESSOR ---------------------------------------------------------- ----------------------------- JULY 1, 1997 THREE MONTHS DECEMBER 16, THREE MONTHS YEAR ENDED JUNE 30, THROUGH ENDED 1997 ENDED ----------------------- DECEMBER 15, SEPTEMBER 30, THROUGH SEPTEMBER 30, 1996 1997 1997 1997 JUNE 30, 1998 1998 ---------- ---------- -------------- --------------- -------------- -------------- (UNAUDITED) (UNAUDITED) Net sales ........................ $73,486 $77,723 $35,186 $21,928 $ 36,066 $24,024 Cost of goods sold ............... 49,862 49,467 22,809 13,622 24,518 15,421 ------- ------- ------- ------- --------- ------- Gross profit .................. 23,624 28,256 12,377 8,306 11,548 8,603 Selling, general and administrative expenses ......... 10,655 13,353 5,712 3,322 5,601 3,121 Amortization of goodwill ......... 1,214 1,214 559 304 2,087 1,008 ------- ------- ------- ------- --------- ------- Income from operations 11,755 13,689 6,106 4,680 3,860 4,474 Other expenses (income): Interest expense to stockholder(s) and affiliate ..................... 6,164 5,196 2,143 1,230 10,785 -- Interest expense, net ........... 598 1,007 503 221 484 3,210 Management fees to stockholders and affiliate 470 470 215 118 125 63 Other, net ...................... 244 (101) 11 28 (47) -- ------- ------- ------- ------- --------- ------- Income (loss) before income taxes ................. 4,279 7,117 3,234 3,083 (7,487) 1,201 Income tax expense (benefit) 2,101 3,135 1,441 1,287 (2,033) 844 ------- ------- ------- ------- --------- ------- Net income (loss) ............. $ 2,178 $ 3,982 $ 1,793 $ 1,796 $ (5,454) $ 357 ======= ======= ======= ======= ========= =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER(S) EQUITY (dollars in thousands, except share information)
ADDITIONAL STOCK COMMON STOCK PAID-IN PURCHASE SHARES DOLLARS CAPITAL WARRANTS -------- --------- ------------ ---------- PREDECESSOR ------------------------------------------ Balances, June 30, 1995 ........... 48,000 $ 1 $ 4,889 $1,923 Net income ........................ -- -- -- -- Other comprehensive income, net of tax: Foreign currency translation adjustment ...................... -- -- -- -- Comprehensive income .............. Preferred stock dividend .......... -- -- -- -- ------ --- -------- ------ Balances, June 30, 1996 ........... 48,000 1 4,889 1,923 Net income ........................ -- -- -- -- Other comprehensive income, net of tax: Foreign currency translation adjustment ...................... -- -- -- -- Comprehensive income .............. Preferred stock dividend .......... -- -- -- -- ------ --- -------- ------ Balances, June 30, 1997 ........... 48,000 1 4,889 1,923 Net income ........................ -- -- -- -- Other comprehensive income, net of tax: Foreign currency translation adjustment ...................... -- -- -- -- Comprehensive income .............. Preferred stock dividend .......... -- -- -- -- ------ --- -------- ------ Balances, December 15, 1997 ....... 48,000 $ 1 $ 4,889 $1,923 ====== === ======== ====== SUCCESSOR Balances, December 16, 1997 ....... -- $-- $ -- $ -- Initial capitalization ............ 1,000 -- 78,363 -- Carryover basis adjustment ........ -- -- -- -- Equity contribution by Holding .... -- -- 22,499 -- Net loss .......................... -- -- -- -- Other comprehensive income, net of tax: Foreign currency translation adjustment ...................... -- -- -- -- Comprehensive income .............. Balances, June 30, 1998 ........... 1,000 -- 100,862 -- Net income (unaudited) ............ -- -- -- -- Other comprehensive income, net of tax: Foreign currency translation adjustment (unaudited) .......... -- -- -- -- Comprehensive income (unaudited) ...................... Balances (unaudited) .............. 1,000 $-- $100,862 $ -- ====== === ======== ====== ACCUMULATED OTHER CARRYOVER RETAINED COMPREHENSIVE BASIS EARNINGS INCOME ADJUSTMENT TOTAL ------------ --------------- ------------- ------------ PREDECESSOR ------------------------------------------------------- Balances, June 30, 1995 ........... $ (361) $ 120 $ $ 6,572 -- Net income ........................ 2,178 -- -- 2,178 Other comprehensive income, net of tax: Foreign currency translation adjustment ...................... -- (200) -- (200) ---------- Comprehensive income .............. 1,978 Preferred stock dividend .......... (618) -- -- (618) -------- ------ ----------- ---------- Balances, June 30, 1996 ........... 1,199 (80) -- 7,932 Net income ........................ 3,982 -- -- 3,982 Other comprehensive income, net of tax: Foreign currency translation adjustment ...................... -- (73) -- (73) ---------- Comprehensive income .............. 3,909 Preferred stock dividend .......... (616) -- -- (616) -------- ------ ----------- ---------- Balances, June 30, 1997 ........... 4,565 (153) -- 11,225 Net income ........................ 1,793 -- -- 1,793 Other comprehensive income, net of tax: Foreign currency translation adjustment ...................... -- (19) -- (19) ---------- Comprehensive income .............. 1,774 Preferred stock dividend .......... (283) -- -- (283) -------- ------ ----------- ---------- Balances, December 15, 1997 ....... $ 6,075 $ (172) $ -- $ 12,716 ======== ====== =========== ========== Balances, December 16, 1997 ....... $ -- $ -- -- $ -- Initial capitalization ............ -- -- -- 78,363 Carryover basis adjustment ........ -- -- (15,730) (15,730) Equity contribution by Holding .... -- -- -- 22,499 Net loss .......................... (5,454) -- -- (5,454) Other comprehensive income, net of tax: Foreign currency translation adjustment ...................... -- (57) -- (57) Comprehensive income .............. (5,511) ---------- Balances, June 30, 1998 ........... (5,454) (57) (15,730) 79,621 Net income (unaudited) ............ 357 -- -- 357 Other comprehensive income, net of tax: Foreign currency translation adjustment (unaudited) .......... -- 112 -- 112 ---------- Comprehensive income (unaudited) ...................... 469 ---------- Balances (unaudited) .............. $ (5,097) $ 55 $ (15,730) $ 80,090 ======== ====== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-6 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
PREDECESSOR ------------------------------------------------------ JULY 1, 1997 THREE MONTHS YEAR ENDED JUNE 30, THROUGH ENDED ----------------------- DECEMBER 15, SEPTEMBER 30, 1996 1997 1997 1997 ----------- ----------- -------------- --------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ................................ $ 2,178 $ 3,982 $ 1,793 $ 1,796 Adjustment to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of goodwill and other intangibles .......................... 4,422 5,084 2,456 1,401 Amortization of debt discount ................... 642 560 233 127 Amortization of loan closing costs .............. 231 258 101 54 Deferred income taxes ........................... (483) (297) (460) (90) Other ........................................... 239 (138) (18) (6) Changes in operating assets and liabilities: Accounts receivable ............................ (1,268) 2,546 1,153 (5,421) Inventory ...................................... (304) (550) 69 (642) Prepaid expenses, deferred charges and other assets .................................. (168) (101) (62) (109) Income taxes ................................... 75 (1,163) 699 1,028 Accounts payable and accrued expenses (227) (1,239) (1,036) (375) -------- -------- -------- ---------- Net cash provided by (used in) operating activities .......................... 5,337 8,942 4,928 (2,237) -------- -------- -------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment ........................... (2,051) (2,462) (807) (448) Proceeds from sale of equipment .................. 55 38 -- -- Refundable deposit on equipment .................. 1,984 -- -- -- Payments for acquisitions, net of cash acquired ........................................ -- -- -- -- -------- -------- -------- ---------- Net cash used in investing activities .......... (12) (2,424) (807) (448) -------- -------- -------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments under capital leases for equipment (646) (2,359) (249) (135) Proceeds on line of credit with stockholder ...... 7,500 -- -- -- Repayments on line of credit with stockholder ..................................... (7,500) -- -- -- Net proceeds (repayments) on line of credit -- 4,338 2,362 6,062 Proceeds from issuance of senior increasing rate notes, net of offering costs ............... -- -- -- -- Payments on senior increasing rate notes ......... -- -- -- -- Proceeds from issuance of senior notes, net of offering costs ............................... -- -- -- -- Proceeds from issuance of common stock ........... -- -- -- -- Redemption of preferred stock .................... -- -- -- -- Repayment of loans payable to stockholder ........ (6,004) (7,004) (1,851) (1,851) Repayment of other notes payable ................. (1,627) (1,200) (50) (25) Dividends paid on preferred stock ................ (618) (616) (155) (155) -------- -------- -------- ---------- Net cash provided by (used in) financing activities .................................... (8,895) (6,841) 57 3,896 -------- -------- -------- ---------- Net increase (decrease) in cash and cash equivalents ...................................... (3,570) (323) 4,178 1,211 Cash and cash equivalents, beginning of period 4,196 626 303 303 -------- -------- -------- ---------- Cash and cash equivalents, end of period .......... $ 626 $ 303 $ 4,481 $ 1,514 ======== ======== ======== ========== SUPPLEMENTAL INFORMATION: Cash paid during the period for: Interest to stockholder(s) ...................... $ 5,573 $ 4,559 $ 1,146 $ 1,140 Interest, other ................................. 604 917 459 130 Income taxes .................................... 2,834 4,594 1,222 349 SIGNIFICANT NON-CASH ACTIVITIES: Assets acquired under capital lease .............. $ 3,555 $ -- $ -- $ -- SUCCESSOR --------------------------------------- DECEMBER 16, 1997 THREE MONTHS THROUGH ENDED JUNE 30, 1998 SEPTEMBER 30, 1998 ------------------- ------------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ................................ $ (5,454) $ (357) Adjustment to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of goodwill and other intangibles .......................... 3,954 2,049 Amortization of debt discount ................... 81 -- Amortization of loan closing costs .............. 3,808 143 Deferred income taxes ........................... (2,016) (114) Other ........................................... (57) 112 Changes in operating assets and liabilities: Accounts receivable ............................ (4,589) (7,872) Inventory ...................................... 543 (1,906) Prepaid expenses, deferred charges and other assets .................................. (452) (57) Income taxes ................................... 767 6,011 Accounts payable and accrued expenses (5,406) 3,132 ----------- --------- Net cash provided by (used in) operating activities .......................... (8,821) 1,855 ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment ........................... (514) (678) Proceeds from sale of equipment .................. -- -- Refundable deposit on equipment .................. -- -- Payments for acquisitions, net of cash acquired ........................................ (141,403) -- ----------- --------- Net cash used in investing activities .......... (141,917) (678) ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments under capital leases for equipment (308) (147) Proceeds on line of credit with stockholder ...... -- -- Repayments on line of credit with stockholder ..................................... -- -- Net proceeds (repayments) on line of credit (6,700) -- Proceeds from issuance of senior increasing rate notes, net of offering costs ............... 119,735 -- Payments on senior increasing rate notes ......... (123,500) -- Proceeds from issuance of senior notes, net of offering costs ............................... 110,158 -- Proceeds from issuance of common stock ........... 98,499 -- Redemption of preferred stock .................... (8,678) -- Repayment of loans payable to stockholder ........ (36,649) -- Repayment of other notes payable ................. (50) (1,330) Dividends paid on preferred stock ................ (128) -- ----------- --------- Net cash provided by (used in) financing activities .................................... 152,379 (1,477) ----------- --------- Net increase (decrease) in cash and cash equivalents ...................................... 1,641 (300) Cash and cash equivalents, beginning of period -- 1,641 ----------- --------- Cash and cash equivalents, end of period .......... $ 1,641 $ 1,341 =========== ========= SUPPLEMENTAL INFORMATION: Cash paid during the period for: Interest to stockholder(s) ...................... $ 11,503 $ -- Interest, other ................................. 214 39 Income taxes .................................... (784) (5,053) SIGNIFICANT NON-CASH ACTIVITIES: Assets acquired under capital lease .............. $ -- $ --
The accompanying notes are an integral part of these consolidated financial statements. F-7 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share information) 1. ORGANIZATION, BUSINESS AND ACQUISITIONS On November 4, 1993, Arcade Holding Corporation (the "Predecessor") was organized for the purpose of acquiring all the issued and outstanding capital stock of Arcade, Inc. ("A, Inc."). A, Inc. 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, the Predecessor acquired all of the issued and outstanding stock of Scent Seal Inc. ("Scent Seal") (see Note 10). 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 3, 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, comprised of $76,000 of cash (see Note 12) and $2,363 of non-cash consideration in the form of an option to purchase Senior Preferred Stock of Acquisition Corp. (see Note 16). Immediately following this equity contribution, Merger Corp. issued $123,500 of senior increasing rate notes (the "Bridge Loans") to an entity with 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 in the form of an option to purchase Senior Preferred Stock of Acquisition Corp. (see Note 16) 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"). Since all companies are under common control and since Holding and Acquisition Corp. have no operations other than those related to the Company, the contribution was accounted for as if it were a pooling of interests. As also discussed in Note 3, the Company acquired the fragrance sampling business of the Industrial and Consumer Products Division of Minnesota Mining and Manufacturing Company ("3M") on June 22, 1998 (the "3M Acquisition") for approximately $7,250 in cash and the assumption of $182 of liabilities. Unless otherwise indicated, all references to years refer to the Predecessor's and AKI's fiscal year, June 30. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Interim Financial Information The interim consolidated balance sheet at September 30, 1998, the interim consolidated statements of operations and of cash flows for the three months ended September 30, 1997 and 1998, respectively, and the interim consolidated statement of changes in stockholder(s) equity for the three months ended September 30, 1998 period 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 financial statements 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 year. F-8 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except share information) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The accompanying unaudited interim consolidated financial statements as of September 30, 1998 and for the three months then ended, present the financial position and results of operations of the Company on the basis of accounting described in Note 3 and, accordingly, are not comparable with the audited Predecessor consolidated financial statements as of June 30, 1997 and for each of the two years ended June 30, 1997 and the period from July 1, 1997 through December 15, 1997, nor with the unaudited interim consolidated financial statements for the three months ended September 30, 1997. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company 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, the Company 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 The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts; in addition, the Company believes it is not exposed to any significant credit risk on cash and cash equivalents. The Company grants credit terms in the normal course of business to its customers and as part of its ongoing procedures, the Company monitors the credit worthiness of its customers. The Company does not believe that it is subject to any unusual credit risk beyond the normal credit risk attendant in its business. A single customer accounted for approximately 12.9% of the Predecessor's net sales in 1996. In 1997, two customers accounted for 12.1% and 11.4% of the Predecessor's net sales, respectively. In the period from July 1, 1997 through December 15, 1997, two customers accounted for 24.2% and 11.1% of the Predecessor's net sales, respectively. In the period from December 16, 1997 through June 30, 1998, one customer accounted for 13.3% of the Company's net sales. Concentration of Purchasing Products accounting for a majority of the Company's net sales utilize specific grades of paper that are produced exclusively for the Company by one domestic supplier. The Company does not have a purchase agreement with the supplier and is not aware of any other suppliers of these specific grades of paper. These products can be manufactured using other grades of paper; however, the Company believes these specific grades of paper provide the Company with an advantage over its competitors. The Company is currently researching methods of replicating the advantages of these specific grades of paper with other less costly grades of paper available from multiple suppliers. Until such methods are developed, a loss of supply of these specific grades of paper and the resulting competitive advantage could cause a possible loss of sales which could adversely affect operating results. 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. F-9 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except share information) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. Depreciation is computed using the straight-line method based on the estimated useful lives of the assets as indicated in Note 6 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 dates. 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 $4,300 and $2,087 at June 30, 1997 and 1998, respectively. Management periodically reviews the value of its goodwill to determine if an impairment has occurred. The potential impairment of recorded goodwill is measured by the undiscounted value of expected future operating cash flows in relation to its net capital investment. Based on its review, management 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 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 $(99), $387, $44 and $52 for each of the two years ended June 30, 1997, the period from July 1, 1997 through December 15, 1997 and the period from December 16, 1997 through June 30, 1998, 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 $1,012, $1,263, $664 and $717 for each of the two years ended June 30, 1997, the period from July 1, 1997 through December 15, 1997 and the period from December 16, 1997 through June 30, 1998, 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. F-10 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except share information) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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. Comprehensive Income The Company adopted the provision of Statement of Financial Accounting Standards No. 130 ("SFAS No. 130") on July 1, 1998. This Statement establishes standards for reporting and displaying comprehensive income and its components in the financial statements. This Statement also requires that comparative information for earlier periods be reclassified. As the Company only has two items of comprehensive income, net income and foreign currency translations, adoption of this statement did not have a material effect upon the Company's financial position or results of operations. 3. SIGNIFICANT ACQUISITIONS 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, comprised of $76,000 of cash and $2,363 of non-cash consideration in the form of an option to purchase Senior Preferred Stock of Acquisition Corp. (see Note 16). Immediately following this equity contribution, Merger Corp. issued $123,500 of Bridge Loans to an entity that has a partial ownership interest in Acquisition Corp. The Bridge Loans had a stated maturity of December 15, 1998 and had an 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 Bridge Loans of $119,735, net of $3,765 of associated debt issuance costs. On June 25, 1998, the Bridge Loans were repaid, without penalty, with the proceeds from the Senior Note offering (see Note 9) and the equity contribution from Holding (see Note 12) (collectively, the "Refinancing"). Contemporaneous with the repayment of the Bridge Loans, the Company wrote-off the unamortized balance of debt issuance costs associated with the Bridge Loans of $1,795 to interest expense. 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 in the form of an option to purchase Senior Preferred Stock of Acquisition Corp. (see Note 16) and the assumption of $56,733 in debt, preferred stock and F-11 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except share information) 3. SIGNIFICANT ACQUISITIONS (CONTINUED) 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 $1 of cash 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 the Predecessor carried over in connection with the Acquisition. As a result, a reduction in stockholders' 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 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 third-party appraisals with respect to property, plant and equipment. In connection with the Acquisition, the Company repaid the outstanding balance and related interest of the Predecessor's loans payable to a shareholder of $37,374, the outstanding balance and related interest of the Predecessor's line of credit of $6,278 and the outstanding balance and related dividends on the Predecessor's preferred stock of $8,806. The following shows the acquisition costs and the 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 in the form of an option to purchase Senior Preferred Stock of Acquisition Corp. (see Note 16) .............. 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 .................................................... 17,782 Property, plant and equipment ........................................... 20,132 Deferred income taxes ................................................... 2,953 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 =========
F-12 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except share information) 3. SIGNIFICANT ACQUISITIONS (CONTINUED) 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") for approximately $7,250 in cash and the assumption of liabilities of approximately $182. The only assets acquired were approximately $143 of equipment. The acquisition was accounted for using the purchase method of accounting and resulted in goodwill of approximately $7,289 which is being amortized on a straight line basis over a period of 40 years. Unaudited pro forma results for the Company assuming the Acquisition, the 3M Acquisition and the Refinancing had occurred as of the beginning of each applicable fiscal year are presented below:
UNAUDITED PRO FORMA RESULTS FOR THE YEAR ENDED ---------------------------- JUNE 30, 1997 JUNE 30, 1998 ------------- ------------- Revenue ........................ $87,771 $ 81,831 Income from operations ......... 15,247 13,324 Interest expense ............... 12,961 13,049 Net loss ....................... (121) (1,423)
4. ACCOUNTS RECEIVABLE The following table details the components of accounts receivable:
JUNE 30, JUNE 30, 1997 1998 -------- -------- Trade accounts receivable .................................... $ 10,362 $ 13,782 Allowance for doubtful accounts .............................. (319) (277) -------- -------- 10,043 13,505 Employee and other related party accounts receivable ......... 121 28 Other accounts receivable .................................... 36 44 -------- -------- $ 10,200 $ 13,577 ======== ========
5. INVENTORY The following table details the components of inventory:
JUNE 30, JUNE 30, 1997 1998 ------ ------ Raw materials Paper ....................... $ 915 $ 556 Other raw materials ......... 956 786 ------ ------ Net raw materials ........... 1,871 1,342 Work in process .............. 915 736 ------ ------ Net inventory ................ $2,786 $2,078 ====== ======
Inventory would have been greater by $45 at June 30, 1997, had it been stated using the FIFO method. There was an insignificant difference between inventory stated using the FIFO or LIFO methods at June 30, 1998. F-13 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except share information) 6. PROPERTY, PLANT AND EQUIPMENT The following table details the components of property, plant and equipment as well as their estimated useful lives:
ESTIMATED JUNE 30, JUNE 30, USEFUL LIVES 1997 1998 ------------ ---- ---- Land .............................. $ 243 $ 256 Building and improvements ......... 15 - 30 years 2,741 1,201 Machinery and equipment ........... 5 - 7 years 23,250 17,146 Furniture and fixtures ............ 3 - 5 years 2,359 1,634 Construction in progress .......... 424 552 --------- -------- 29,017 20,789 Accumulated depreciation .......... (10,861) (1,853) --------- -------- $ 18,156 $ 18,936 ========= ========
Depreciation expense amounted to $3,188, $3,850, $1,888 and $1,853 for each of the two years ended June 30, 1997, the period from July 1, 1997 through December 15, 1997 and the period from December 16, 1997 through June 30, 1998, respectively. Property held under capital lease was included in the respective property, plant and equipment account on the balance sheet as follows:
JUNE 30, JUNE 30, 1997 1998 ------ ------ Machinery and equipment ............... $3,555 $3,000 Less accumulated depreciation ......... (762) (275) ------ ------ $2,793 $2,725 ====== ======
Depreciation of the capital lease totaled $421, $633, $232 and $275 for each of the two years ended June 30, 1997, the period from July 1, 1997 through December 15, 1997 and the period from December 16, 1997 through June 30, 1998, respectively. Future minimum lease payments under the remaining lease are as follows:
PAYMENT INTEREST ------- -------- 1999 ......... $ 774 $165 2000 ......... 774 107 2001 ......... 839 17 ------ ---- $2,387 $289 ====== ====
7. LINE OF CREDIT Prior to March 31, 1996, the Predecessor had a line of credit with a stockholder that provided a revolving loan commitment up to a maximum of $5,000. Interest on amounts borrowed accrued at a floating rate based upon prime. The weighted average interest rate on the outstanding balance of this line of credit was 10.10% for the year ended June 30, 1996. The Predecessor was required to pay commitment fees on the unused portion of the revolving loan commitment at a rate of approximately 0.5% per annum. Such fees totaled $16 for the year ended June 30, 1996. F-14 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except share information) 7. LINE OF CREDIT (CONTINUED) On April 30, 1996, the Predecessor entered into a line of 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 $20,000 and expires on December 31, 2002. Borrowings are limited to a borrowing base consisting of accounts receivable, inventory and property, plant and equipment which serve as collateral for the borrowings. Interest on amounts borrowed accrue at a floating rate based upon either prime or LIBOR (9.50% and 9.25% at June 30, 1997 and 1998, respectively). 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. Such fees totaled $16, $109, $30 and $59 for each of the two years ended June 30, 1997, the period from July 1, 1997 through December 15, 1997 and the period from December 16, 1997 through June 30, 1998, respectively. The Credit Agreement contains certain financial covenants and other restrictions including restrictions on additional indebtedness and restrictions on the payment of dividends. The Predecessor was not in compliance with all applicable covenants at June 30, 1997; therefore, all amounts outstanding under the Credit Agreement were classified as short-term liabilities. The weighted average interest rate on the outstanding balance under the Credit Agreement was 9.31%, 9.50% and 9.25% for the year ended June 30, 1997, the period from July 1, 1997 through December 15, 1997 and from December 16, 1997 through June 30, 1998, respectively. The Company did not draw on the Credit Agreement during the year ended June 30, 1996. All amounts outstanding at June 30, 1997 were repaid in connection with the Acquisition. The Company was also not in compliance with a covenant at June 30, 1998. The Company has received a waiver for this covenant violation effective through September 30, 1998. There was no outstanding balance on the Credit Agreement at June 30, 1998. 8. LOANS PAYABLE TO STOCKHOLDER Loans payable to stockholder consists of the following:
JUNE 30, 1997 ------------ Senior Loan ............................. $ 7,906 Senior Subordinated Loans ............... 30,594 Less unamortized debt discounts ......... (608) --------- 37,892 Less current portion .................... (37,892) --------- $ -- =========
The Predecessor entered into a Senior Loan Agreement and two Subordinated Loan Agreements (collectively, the "Loan Agreements") with a party that had owned the Predecessor's preferred stock and a significant portion of its common stock. The Loan Agreements were collateralized by substantially all the assets of the 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. The Predecessor was not in compliance with all such covenants at June 30, 1997. Therefore, all amounts outstanding under the Loan Agreement at June 30, 1997 were classified as short-term liabilities. However, this debt was subsequently retired upon the acquisition of the Predecessor as discussed in Note 3. All amounts borrowed under the Senior Loan Agreement bore interest at prime plus 1.50% (10.0% at June 30, 1997). F-15 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except share information) 8. LOANS PAYABLE TO STOCKHOLDER (CONTINUED) The 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. In connection with Loan II, the 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. The 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, the Predecessor recorded debt discount of $1,923. In connection with the sale of the Predecessor on December 15, 1997 (see Note 3), all outstanding warrants were purchased from the holder by the buyer of the Predecessor and retired. 9. SENIOR LOANS On June 25, 1998, the Company completed a private placement of $115,000 of Senior Notes (the "Senior Notes"). The Senior Notes are general unsecured obligations of the Company and bear interest at 10.5% per annum, payable semi-annually on January 1 and July 1. The Senior Notes mature on July 1, 2008 and may be redeemed at the option of the Company, in whole or in part, at any time on or after July 1, 2003 at a price equal to 105.25% of the outstanding principal balance plus accrued and unpaid interest. The placement of the Senior Notes yielded the Company net proceeds of $110,158 after deducting offering expenses of $4,842, including $3,450 of underwriting fees paid to an affiliate of the stockholder. The Senior Notes contain certain customary covenants including restrictions on the declaration and payment of dividends and limitations on the incurrence of additional indebtedness. 10. OTHER NOTES PAYABLE In connection with the acquisition of Scent Seal, the Predecessor issued $3,627 in noninterest bearing promissory notes (the "Notes") to an employee of the Predecessor who was previously a Scent Seal stockholder. The 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 was being amortized over the term of the Notes. Under certain provisions of the Scent Seal acquisition agreement, the Company is permitted to reduce the outstanding principal balance of the Notes based upon the ultimate realization of assets acquired and settlement of liabilities assumed. In June 1998, the Company reached a settlement with the holder of the Notes under these provisions which resulted in the reduction of the outstanding principal balance of the Notes of $120. The remaining principal balance of the Notes of $1,330 was repaid in July 1998 in accordance with the terms of the Notes. 11. REDEEMABLE PREFERRED STOCK In connection with the 1993 acquisition of Arcade, the 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 conjunction with the sale of Predecessor on December 15, 1997 (see Note 3), all outstanding preferred stock was redeemed at $1,000 per share plus accrued and unpaid dividends. F-16 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except share information) 12. INITIAL CAPITALIZATION In conjunction with the Acquisition, Acquisition Corp. issued $30,000 of Floating Rate Notes, $50,278 of Senior Preferred Stock and $1,111 of its Common Stock. The Floating Rate Notes were issued with an original issuance discount of $5,389, bear interest at 15% per annum and mature on December 15, 2009. The Senior Preferred Stock accrues dividends at 15% per annum and must be redeemed by December 15, 2012. Interest on the Floating Rate Notes and dividends on Senior Preferred Stock can be settled through the issuance of additional Floating Rate Notes and Senior Preferred Stock, respectively, through maturity. The Floating Rate Notes and Senior Preferred Stock are general, unsecured obligations of Acquisition Corp. The cash proceeds from the issuance of the Floating Rate Notes, Senior Preferred Stock and Common Stock of $76,000 and a Senior Preferred Stock option of $2,363 (see Note 16) were contributed by Acquisition Corp. to the Company in exchange for 1,000 shares of the Company's Common Stock. Subsequent to the initial capitalization of the Company, Acquisition Corp. contributed $1 of cash all of its ownership interest in the Company to Holding. On June 25, 1998, Holding completed a private offering of $50,000 Senior Discount Debentures (the "Debentures"). The Debentures do not accrue or pay interest until July 1, 2003 and were issued with an original issuance discount of $24,038. The original issue discount is being accreted from issuance through July 1, 2003 at an effective rate of 13.5% per annum. After July 1, 2003, the Debentures will accrue interest at a rate of 13.5% per annum, payable semi-annually, commencing January 1, 2004. The Debentures are general, unsecured obligations of Holding. With the proceeds of the Debenture offering, Holding contributed $22,499 of cash to the Company. No additional shares were issued to Holding as a result of this contribution. Acquisition Corp. and Holding have no other operations other than the Company. Absent additional financing by Acquisition Corp. or Holding, the Company's operations represent the only current source of funds available to service the Floating Rate Notes, Senior Preferred Stock and Debentures. 13. COMMITMENTS AND CONTINGENCIES Operating Leases Equipment and office, warehouse and production space under operating leases expire at various dates. Rent expense was $355, $443, $192 and $198 for each of the two years ended June 30, 1997, the period from July 1, 1997 through December 15, 1997 and the period from December 16, 1997 through June 30, 1998, respectively. Future minimum lease payments under these leases are as follows: 1999 ............ $ 243 2000 ............ 162 2001 ............ 138 ----- $ 543 =====
Licensing Agreements Licensing agreements are maintained for certain technologies used in the manufacture of certain products. Under the terms of one licensing agreement, royalty payments are required based on a percentage of net sales of those products manufactured with the specific technology, or a minimum of $500 per year. This agreement expires in 2003 or when a total of $12,500 in cumulative royalty payments has been paid. The Company expensed $893, $761, $437 and $516 under this licensing agreement for each of F-17 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except share information) 13. COMMITMENTS AND CONTINGENCIES (CONTINUED) the two years ended June 30, 1997, the period from July 1, 1997 through December 15, 1997 and from December 16, 1997 through June 30, 1998, respectively, and has paid $3,123 and $4,076 in cumulative royalty payments under this licensing agreement through June 30, 1997 and June 30, 1998, respectively. Under the terms of another licensing agreement, royalty payments are required based on the number of products sold that were manufactured with the specific licensed technology, or a minimum payment per year. These minimum payments are $575 for fiscal 1999 and $625 thereafter through the expiration of the agreement in 2012. The Company expensed $388, $4,475, $241 and $284 under this licensing agreement for each of the two years ended June 30, 1997, the period from July 1, 1997 through December 15, 1997 and the period from December 16, 1997 through June 30, 1998, respectively. Employment Agreements The Company has employment agreements with certain executive officers through June 30, 2001. Such agreements provide for base salaries totaling $770 per year and incentive bonuses of up to 100% of base salaries which are payable if certain management goals are attained. The employment agreements also provide severance benefits of up to one year's base salary if the executives' services are terminated under certain conditions. Litigation The Company 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 the Company's financial condition, results of operations or cash flows. Year 2000/European Monetary Unit The Company is in the process of implementing a strategy to be fully compliant with Year 2000 issues related to its computer systems. Management does not believe that the costs related to completing this process will be material to the results of operations of the Company. The Company has not implemented a similar strategy to address European monetary unit issues related to its computer systems. Management does not expect that the costs related to such a strategy will require material expenditures on the part of the Company. 14. RETIREMENT PLANS A 401(k) defined contribution plan (the "Plan") is maintained for 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. Contributions to the Plan are determined annually by the Company and generally are a matching percentage of employee contributions. Costs associated with the Plan totaled $154, $180, $95 and $113 for each of the two years ended June 30, 1997, the period from July 1, 1997 through December 15, 1997 and the period from December 16, 1997 through June 30, 1998, respectively. Certain hourly employees are covered under a multiemployer defined benefit plan administered under a collective bargaining agreement. Costs (determined by union contract) under the defined benefit plan were $127, $143, $80 and $81 for each of the two years ended June 30, 1997, the period from July 1, 1997 through December 15, 1997 and from December 16, 1997 through June 30, 1998, respectively. F-18 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except share information) 15. INCOME TAXES The Company was included in the consolidated federal income tax return filed by Acquisition Corp. for the period from December 16, 1997 through June 30, 1998. Income taxes related to the Company for this period were determined on a separate entity basis. The Company files separate state income tax returns and calculates its state tax provision on a separate company basis. Any income taxes payable or receivable by the consolidated group are settled or received by the Company. The Predecessor was not part of a consolidated group. For financial reporting purposes, income (loss) before income taxes includes the following components:
JULY 1, 1997 DECEMBER 16, 1997 JUNE 30, THROUGH THROUGH --------------------- DECEMBER 15, JUNE 30, 1996 1997 1997 1998 --------- --------- -------------- ------------------ Income (loss) before income taxes: United States ................... $4,100 $7,609 $3,298 $ (8,169) Foreign ......................... 179 (492) (64) 682 ------ ------ ------ -------- $4,279 $7,117 $3,234 $ (7,487) ====== ====== ====== ========
Significant components of the provision (benefit) for income taxes are as follows:
JULY 1, 1997 DECEMBER 16, 1997 JUNE 30, THROUGH THROUGH ----------------------- DECEMBER 15, JUNE 30, 1996 1997 1997 1998 --------- ----------- -------------- ------------------ Current expense (benefit): Federal .................. $2,158 $ 2,880 $1,623 $ -- Foreign .................. 67 -- -- 104 State .................... 359 552 278 (121) ------ ------- ------ ------- 2,584 3,432 1,901 (17) ------ ------- ------ ------- Deferred expense (benefit): Federal .................. (431) (90) (376) (1,900) Foreign .................. 13 (165) (25) 162 State .................... (65) (42) (59) (278) ------ ------- ------ --------- (483) (297) (460) (2,016) ------ ------- ------ --------- $2,101 $ 3,135 $1,441 $ (2,033) ====== ======= ====== ===========
F-19 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except share information) 15. INCOME TAXES (CONTINUED) The significant components of deferred tax assets and deferred tax liabilities at June 30, 1997 and 1998, were as follows:
JUNE 30, 1997 JUNE 30, 1998 ------------------------ ----------------------- CURRENT NONCURRENT CURRENT NONCURRENT --------- ------------ --------- ----------- Deferred income tax assets: Accrued expenses ......................... $300 $ -- $719 $ -- Allowance for doubtful accounts .......... 124 -- 108 -- Net operating loss carryforwards ......... -- -- -- 2,947 Preferred stock option ................... -- -- -- 922 ---- ---------- ---- -------- 424 -- 827 3,869 Deferred income tax liability: Property, plant and equipment ............ -- 2,949 -- 4,143 ---- ---------- ---- -------- $424 $ (2,949) $827 $ (274) ==== ========== ==== =========
The income tax provision recognized by the Predecessor for the years ended June 30, 1996 and 1997 and the period from July 1, 1997 through December 15, 1997 and by the Company for the period from December 16, 1997 through June 30, 1998 , differs from the amount determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following:
JULY 1, 1997 DECEMBER 16, 1997 JUNE 30, THROUGH THROUGH --------------------- DECEMBER 15, JUNE 30, 1996 1997 1997 1998 --------- --------- -------------- ------------------ Computed tax provision (benefit) at statutory rates ...................... $1,455 $2,420 $1,100 $ (2,546) State income tax provision, net of Federal effect ....................... 194 335 145 (263) Nondeductible expenses, primarily the amortization of goodwill ......... 427 455 193 720 Other, net ............................ 25 (75) 3 56 ------ ------ ------ -------- $2,101 $3,135 $1,441 $ (2,033) ====== ====== ====== ========
In conjunction with the Acquisition, the Company recognized an income tax benefit of $7,327 related to the excess of the redemption price over the strike price of certain non-qualified options of the Predecessor redeemed and retired by the Company. This benefit was recorded as a reduction to goodwill. Due to the Company's current year losses and certain transactions made in conjunction with the Acquisition, the Company has recorded a deferred tax asset of $2,947 reflecting cumulative net operating loss carryforwards available to offset future federal taxable income of $6,500 and future state taxable income of $14,500. These cumulative net operating loss carryforwards expire in varying amounts through 2013. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes that it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. F-20 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except share information) 16. STOCK OPTIONS The Predecessor sponsored a key employee stock option plan under which a maximum of 12,571 shares of the 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 vest ratably over five years and would have expired ten years from the grant date. The 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 the Predecessor's employee stock options equaled the market value of the underlying stock on the date of grant, no compensation expense was recognized. A summary of the Predecessor's stock option activity and related information follows:
JUNE 30, 1996 JUNE 30, 1997 ----------------------- ---------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE --------- ----------- --------- ---------- Outstanding, beginning of year ...................... 12,571 $100 12,571 $100 Granted ............................................ -- -- -- -- Exercised .......................................... -- -- -- -- Forfeited .......................................... -- -- -- -- ------ ---- ------ ---- Outstanding, end of year ............................ 12,571 $100 12,571 $100 ====== ==== ====== ==== Exercisable, at end of year ......................... 3,352 $100 5,866 $100 ====== ==== ====== ==== Weighted average remaining contractual life ......... 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 the Predecessor on December 15, 1997 (see Note 3), all outstanding options became immediately vested and exercisable under the individual stock option agreements. In connection with the Acquisition, the Company purchased and retired 11,201 of the outstanding options of the Predecessor. The remaining 1,370 options, held by an officer of the Company, were exchanged at their fair value for an option to purchase 100,000 shares of Acquisition Corp.'s Senior Preferred Stock (the "Preferred Stock Option") with a stated value of $2,500. The Preferred Stock Option has an exercise price of $137, which represents the cumulative exercise price of the 1,370 options surrendered in exchange for the Preferred Stock Option. The Preferred Stock Option was issued with a Put and Call Option (the "Put and Call Option") which granted the officer the right to compel DLJMBII to purchase the 100,000 shares of Senior Preferred Stock obtainable under the Preferred Stock Option, together with certain common equity interests in Acquisition Corp. held by the officer, for $2,590. The Put and Call Option also granted DLJMBII the right to purchase the equity interests, both common and preferred, of the officer for the same amount. The Put and Call Option had a stated termination of June 30, 1998. The officer agreed to terminate the Put and Call Option and enter into a new put option (the "Put Option") dated June 17, 1998. The Put Option granted the officer an irrevocable option to require Acquisition Corp. to purchase 80,000 shares of the Senior Preferred Stock obtainable under the Preferred Stock Option for $2,000 in F-21 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except share information) 16. STOCK OPTIONS (CONTINUED) cash. As the terms of the Put Option were generally more restrictive than the Put and Call Option, no compensation expense was recognized as a result of the transaction. On July 30, 1998, the officer exercised the Preferred Stock Option and Put Option. To provide Acquisition Corp. the funds to redeem the 80,000 shares of Senior Preferred Stock, Holding issued Acquisition Corp. a dividend of $1,863 in cash on such date. Subsequent to the Acquisition, Acquisition Corp. adopted the 1998 Stock Option Plan ("Option Plan") for certain key employees and directors of Acquisition Corp. and any parent or subsidiary of Acquisition Corp. The Option Plan authorizes the issuance of options to acquire up to 80,000 shares of Acquisition Corp. Common Stock. The terms of each individual options grant are determined by the Board of Directors. The exercise price for each grant is required to be set at least equal to the fair market value per share of Acquisition Corp. provided that the exercise price shall not be less than $1.00 per share. Options may be exercisable for up to ten years. On June 17, 1998, Acquisition Corp. granted an officer of the Company options to purchase 32,500 shares of Acquisition Corp. Common Stock. All options have an exercise price of $1.00 per share and a term of 10 years. Under the terms of the option agreement, 16,250 of the options granted to the officer are subject to time vesting. One-third of these options become exercisable on June 30, 1999 and are thereafter exercisable as to an additional one-third of such options on June 30, 2000 and June 30, 2001. The remaining 16,250 of options become exercisable at various percentages on June 30, 1999 and on June 30, 2000 and on June 30, 2001, based on the achievement of certain financial performance targets for the years then ended. The Company has elected to account for its stock based compensation with employees under the intrinsic value method as permitted under FAS 123. Under the intrinsic value method, because the stock price of the Company's employee stock options equaled the fair value of the underlying stock on the date of grant, no compensation expense was recognized. If the Company had elected to recognize compensation expense based on the fair value of the options at grant date as prescribed by FAS 123, the net loss for the period from December 16, 1997 through June 30, 1998 would have been $(5,455). In making this determination, fair value was estimated on the date of grant using the minimum value method and a risk-free interest rate of 5.4%. The weighted average fair value at date of grant of options granted during 1998 was approximately $0.41 per option. 17. RELATED PARTY TRANSACTIONS The Predecessor made payments to a company controlled by a stockholder of the Predecessor of $692 and $612 for the years ended June 30, 1996 and 1997 and $160 for the period from July 1, 1997 through December 15, 1997, for management fees, bonuses and expense reimbursements. The Predecessor made payments to another stockholder of $120 for each of the years ended June 30, 1996 and 1997 and $55 for the period from July 1, 1997 through December 15, 1997, for management fees. The Successor made payments to an affiliate of DLJMBII of $125 for the period from December 16, 1997 through June 30, 1998, for financial advisory fees. In addition, the Successor had approximately $200 of cash on deposit with a financial institution affiliated with DLJMBII. F-22 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except share information) 18. GEOGRAPHIC INFORMATION The following table illustrates geographic information for revenues and long-lived assets. Revenues are attributed to countries based on origin of shipment, and long-lived assets are based upon the country of domicile.
UNITED STATES FRANCE TOTAL ------------- ------ ----- PREDECESSOR NET SALES: Year ended June 30, 1996 .................................... $ 64,708 $ 8,778 $ 73,486 Year ended June 30, 1997 .................................... 70,660 7,063 77,723 Period from July 1, 1997 through December 15, 1997 .......................................... 32,600 2,586 35,186 LONG-LIVED ASSETS: June 30, 1997 ............................................... 63,004 204 63,208 - --------------------------------------------------------------------------------------------------------------- SUCCESSOR NET SALES: Period from December 16, 1997 through June 30, 1998 ......... $ 29,162 $ 6,904 $ 36,066 LONG-LIVED ASSETS: June 30, 1998 ............................................... 187,250 158 187,408
F-23 AKI, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except share information) 19. UNAUDITED QUARTERLY RESULTS OF OPERATIONS The following is a summary of the unaudited quarterly results of operations for Fiscal 1997 and Fiscal 1998.
PREDECESSOR ------------------------------------------------------------------------------- QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED FULL SEPTEMBER 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997 JUNE 30, 1997 YEAR -------------------- ------------------- ---------------- --------------- ------- FISCAL 1997 Net sales ................ 22,315 20,306 19,746 15,356 77,723 Gross profit ............. 8,367 7,287 7,184 5,418 28,256 Income from operations .............. 4,875 3,307 3,275 2,232 13,689 Interest expense ......... 1,619 1,593 1,481 1,510 6,203 Net income ............... 1,844 1,006 973 159 3,982
PREDECESSOR SUCCESSOR ---------------------------------------- ---------------------------------------------------- OCTOBER 1, 1997 DECEMBER 16, 1997 QUARTER ENDED THROUGH THROUGH QUARTER ENDED QUARTER ENDED FULL SEPTEMBER 30, 1997 DECEMBER 15, 1997 DECEMBER 31, 1997 MARCH 31, 1998 JUNE 30, 1998 YEAR -------------------- ------------------- ------------------- ---------------- --------------- ----------- FISCAL 1998 Net sales ............ 21,928 13,258 2,791 19,191 14,084 71,252 Gross profit ......... 8,306 4,071 813 7,256 3,479 23,925 Income from operations .......... 4,680 1,426 153 3,603 104 9,966 Interest expense ..... 1,451 1,195 759 4,404 6,106 13,915 Net income (loss) 1,796 (3) (443) (887) (4,124) (3,661)
F-24 =============================================================================== 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 .................................. 13 Use of Proceeds ............................... 18 The Exchange Offer ............................ 19 Capitalization ................................ 26 Selected Historical Consolidated Financial Data ....................................... 27 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................. 28 Business ...................................... 37 The Transactions .............................. 47 Management .................................... 48 Security Ownership of Certain Beneficial Owners and Management ...................... 52 Certain Relationships and Related Transactions ............................... 53 Description of Certain Indebtedness ........... 55 Description of New Notes ...................... 57 U.S. Federal Income Tax Consequences .......... 82 Plan of Distribution .......................... 83 Notice to Holders ............................. 84 Legal Matters ................................. 85 Experts ....................................... 85 Index to Unaudited Pro Forma Condensed Consolidated Statements of Operations ................................. P-1 Index to Consolidated Financial Statements ................................. F-1
=============================================================================== =============================================================================== OFFER TO EXCHANGE NEW 10 1/2% 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 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. NEW 10 1/2% SENIOR NOTES DUE 2008 ---------------- The New 10 1/2% 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. Prior to the Exchange Offer there was no public trading market for the Old Notes or the New Notes. 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. As of September 30, 1998, the Company had $16.7 million in other unsecured obligations (including trade payables, accrued liabilities and deferred taxes), all of which ranks pari passu in right of payment with the Notes. 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 September 30, 1998, the Company had no outstanding secured obligations, other than outstanding letters of credit in the amount of $0.6 million under the Credit Agreement and $1.9 million outstanding under a capitalized lease. In addition, as of such date, 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 13 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 June 30, 1998, the Company 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 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 is an affiliate of the Company and, as such, is 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] U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS Subject to the qualifications set forth below, the opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P., tax counsel to the Company, with respect to the anticipated material U.S. 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" (a "Non-U.S. Holder") is as follows. 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, an estate whose income is includable in gross income for U.S. federal income tax purposes regardless of its 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 that 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 Notes 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 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 (b) 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 are 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 from 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 from withholding or to claim the benefits of a treaty, a Non-U.S. Holder must provide properly executed Form 1001 or 4224 (or such successor form as the Internal Revenue Service (the "IRS") designates), as applicable prior to the payment of interest. These forms 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 days in 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 as 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 to 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 from 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 from 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 require information reporting (but not backup withholding) on the payment unless the broker has documentary evidence in its files that the owner is a 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. HOLDERS 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 ......................... iii Prospectus Summary ............................ 1 Risk Factors .................................. 13 Use of Proceeds ............................... 18 Capitalization ................................ 26 Selected Historical Consolidated Financial Data ....................................... 27 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................. 28 Business ...................................... 37 The Transactions .............................. 47 Management .................................... 48 Security Ownership of Certain Beneficial Owners and Management ...................... 52 Certain Relationships and Related Transactions ............................... 53 Description of Certain Indebtedness ........... 55 Description of New Notes ...................... 57 U.S. Federal Income Tax Consequences .......... 82 Plan of Distribution .......................... 83 Notice to Holders ............................. 84 Legal Matters ................................. 85 Experts ....................................... 85 Index to Unaudited Pro Forma Condensed Consolidated Statements of Operations ................................. P-1 Index to Consolidated Financial Statements ................................. F-1
=============================================================================== =============================================================================== NEW 10 1/2% 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 (included as an exhibit to Exhibit 4.1).+ 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.+ 10.4. Employment Agreement dated as of June 17, 1998 between the Company and Roger L. Barnett.+
II-1 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 and October 30, 1998, 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. Stock Purchase Agreement dated as of November 14, 1997, as amended on December 2, 1997 and December 12, 1997, among the Company and DLJMBII and certain related investors.* 10.11. Financial Advisory Agreement dated as of December 12, 1997 between Acquisition Corp. and DLJ.* 10.12. Indenture dated as of June 25, 1998 between the Company and State Street Bank and Trust Company.+ 10.13. Replacement Stock Option Agreement dated as of December 15, 1997 between Acquisition Corp. and Roger L. Barnett.* 10.14. Option Substitution Agreement dated as of December 15, 1997 among the Company, Acquisition Corp., and Roger L. Barnett.* 10.15. Put and Call Agreement dated as of December 15, 1997, as amended on February 2, 1997 and April 1, 1997, among Roger L. Barnett, Acquisition Corp., and DLJMBII.* 10.16. Termination of Put and Call Agreement dated June 17, 1997 among DLJMBII, Roger L. Barnett, and Acquisition Corp.* 12.1. Computation of Earnings to Fixed Charges.* 16.1. Letter from PricewaterhouseCoopers LLP dated as of November 13, 1998 regarding Change in Certifying Accountant.* 23.1. Consent of PricewaterhouseCoopers LLP.* 23.2. Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in Exhibit 5.1).* 24.1. Powers of Attorney.+ 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.* 27.1. Financial Data Schedule for the year ended June 30, 1996.* 27.2. Financial Data Schedule for the year ended June 30, 1997.* 27.3. Financial Data Schedule for the year ended June 30, 1998.* 27.4. Financial Data Schedule for the three months ended September 30, 1997.* 27.5. Financial Data Schedule for the three months ended September 30, 1998.* 99.1. Form of Letter of Transmittal.* 99.2 Form of Notice of Guaranteed Delivery.*
(b) Financial Statement Schedules Schedule II -- Allowance for Doubtful Accounts* - ---------- * Filed herewith. + Previously filed. 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. This undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-3 SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this amendment to the 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 13th day of October 1998. AKI, INC. By: /s/ Kenneth A. Budde ----------------------------------- Kenneth A. Budde Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this amendment to the 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 November 13, 1998 - ------------------------- (principal executive officer) Roger L. Barnett and Director * Chairman of the Board and Director November 13, 1998 - ------------------------- Thompson Dean * Chief Operating Officer November 13, 1998 - ------------------------- Barry W. Miller * Chief Financial Officer (principal November 13, 1998 - ------------------------- financial officer and principal Kenneth A. Budde accounting officer) * Director November 13, 1998 - ------------------------- Hugh R. Kirkpatrick Director November 13, 1998 - ------------------------- Mark Michaels * Director November 13, 1998 - ------------------------- David M. Wittels
* /s/ Roger L. Barnett - ------------------------- Roger L. Barnett Attorney-in-Fact 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(2,3) PERIOD ----- --------- ------------ --------------- ------ 1996 379 337 (249) 467 1997 467 120 (268) 319 1998 319 0 (42) 277
- ---------- (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. (3) Net deductions for the year ended June 30, 1998 were comprised of net recoveries of $58 for the period from July 1, 1997 through December 15, 1997 and net deductions of $100 for the period from December 16, 1997 through June 30, 1998. EX-3.1 2 CERTIFICATE OF INCORPORATION STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 07:00 PM 11/03/1993 933075197 -2354937 CERTIFICATE OF RESTATED CERTIFICATE OF INCORPORATION OF ARCADE HOLDING CORPORATION Michael J. Kluger and Paul Huston, being the President and Secretary, respectively, of Arcade Holding Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Company"), do hereby certify as follows: FIRST: That the Company filed its original Certificate of Incorporation with the Delaware Secretary of State on October 13, 1993 (the "Certificate"). SECOND: That the Company has not yet received any payment for any of its stock. THIRD: That in accordance with Sections 241 and 245 of the General Corporation Law of the State of Delaware, the Board of Directors of the Company, pursuant to the unanimous written consent of all of its members, adopted resolutions authorizing the Company to amend and restate the Certificate in its entirety to read as set forth in Exhibit A attached hereto and make a part hereof (the "Restated Certificate"). IN WITNESS WHEREOF, the undersigned, being the President and Secretary hereinabove named, for the purpose of amending and restating the Certificate of Incorporation of the Company pursuant to the General Corporation Law of the State of Delaware, under penalties of perjury, do each hereby declare and certify that this is the act and deed of the Company and the facts stated herein are true, and accordingly have hereunto signed this Certificate of Restated Certificate of Incorporation this 3rd day of November, 1993. ARCADE HOLDING CORPORATION By: /s/ Michael Kluger ---------------------------------------- President ATTEST: /s/ Paul Huston - --------------------------------- Secretary EXHIBIT A RESTATED CERTIFICATE OF INCORPORATION OF ARCADE HOLDING CORPORATION ARTICLE ONE The name of the corporation is Arcade Holding Corporation. ARTICLE TWO The address of the corporations' registered office in the State of Delaware is 32 Loockerman Square, Suite L-100, in the City of Dover, County of Kent 19901. The name of its registered agent at such address is The Prentice-Hall Corporation System, Inc. ARTICLE THREE The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE FOUR A. AUTHORIZED SHARES The total number of shares of capital stock which the Corporation has authority to issue is 108,000 shares, consisting of: (1) 8,000 shares of Preferred Stock, par value $1.00 per share (the "Preferred Stock"); and (2) 100,000 shares of Common Stock, par value $.01 per share (the "Common Stock"). Certain other capitalized terms used herein are defined in Section 9 hereof. B. COMMON STOCK Section 1. Voting Rights. Except as otherwise required by applicable law, the holders of Common Stock shall be entitled to one vote per share on all matters to be voted on by the stockholders of the Corporation. Section 2. Dividends. Subject to the preferential rights of the holders of Preferred Stock set forth in Part C of this ARTICLE FOUR and to the extent permitted under the General Corporation law of Delaware, dividends may be paid on the Common Stock as and when declared by the Board of Directors of the Corporation Section 3. Liquidation. Subject to the preferential rights of the holders of Preferred Stock set forth in Part C of this ARTICLE FOUR, the holders of the Common Stock shall be entitled to participate ratably on a per share basis in all distributions to the holders of capital stock in any liquidation, dissolution or winding up of the Corporation. C. PREFERRED STOCK Section 1. Dividends. 1A. General Obligation. When and as declared by the Corporation's board of directors and to the extent permitted under the General Corporation Law of Delaware, the Corporation shall pay preferential dividends to the holders of the Preferred Stock as provided in this Section 1. Except as otherwise provided herein, dividends on each share of the Preferred Stock (a "Share") shall accrue on a daily basis at the rate of 7% per annum of the sum of the Liquidation Value thereof plus all accumulated and unpaid dividends thereon, from and including the date of issuance of such Share to and including the date on which the Liquidation Value of such Share (plus all accrued and unpaid dividends thereon) is paid. Such dividends shall accrue whether or not they have been declared and whether or not there are profits, surplus or other funds of the Corporation legally available for the payment of dividends. Such dividends shall be cumulative such that all accrued and unpaid dividends shall be fully paid or declared with funds irrevocably set apart for payment before any dividend, distribution or payment may be made with respect to any Junior Securities. The date on which the Corporation initially issues any Share shall be deemed to be its "date of issuance" regardless of the number of times transfer of such Share is made on the stock records maintained by or for the Corporation and regardless of the number of certificates which may be issued to evidence such Share. 2 1B. Dividend Reference Dates. Each March 31, June 30, September 30 and December 31 of each year, beginning December 31, 1993 shall be a "Dividend Reference Date". To the extent not paid on a Dividend Reference Date, all dividends which have accrued on each Share outstanding during the three-month period (or other period in the case of the initial Dividend Reference Date) ending upon each such Dividend Reference Date shall be accumulated and shall remain accumulated dividends with respect to such Share until paid. On each Dividend Reference Date occurring after December 31, 1994, all dividends which have accrued on each Share outstanding during the three-month period ending upon each such Dividend Reference Date shall be payable in cash. 1C. Distribution of Partial Dividend Payments. Except as otherwise provided herein, if at any time the Corporation pays less than the total amount of dividends then accrued with respect to the Preferred Stock, such payment shall be distributed ratably among the holders of the Preferred Stock based upon the aggregate accrued but unpaid dividends on the Shares of Preferred Stock held by each such holder. Section 2. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, each holder of Preferred Stock shall be entitled to be paid, before any distribution or payment is made upon any Junior Securities, an amount in cash equal to the aggregate Liquidation Value (plus all accrued and unpaid dividends) of all Shares held by such holder, and the holders of Preferred Stock shall not be entitled to any further payment or claim or right to any assets of the Corporation. If upon any such liquidation, dissolution or winding up of the Corporation, the Corporation's assets to be distributed among the holders of the Preferred Stock are insufficient to permit payment to such holders of the aggregate amount which they are entitled to be paid, then the entire assets to be distributed shall be distributed ratably among such holders based upon the aggregate Liquidation Value (plus all accrued and unpaid dividends) of the Preferred Stock held by each such holder. The Corporation shall mail written notice of such liquidation, dissolution or winding up, not less than 60 days prior to the payment date stated therein, to each record holder of Preferred Stock. Neither the consolidation or merger of the Corporation into or with any other entity or entities, nor the sale or transfer by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 2. Section 3. Priority of Preferred Stock. So long as any Preferred Stock remains outstanding, neither the Corporation nor 3 any Subsidiary shall redeem, purchase or otherwise acquire directly or indirectly any Junior Securities, nor shall the Corporation directly or indirectly pay or declare any dividend or make any distribution upon any Junior Securities except for dividends payable in shares of Common Stock issued upon the outstanding shares of Common Stock and except for cash dividends payable after the Loan Repayment Date upon the outstanding shares of Common Stock of up to 50% of Consolidated Net Income for the year preceding the year in which such dividend is to be paid so long as there is no Event of Noncompliance in existence at the time of payment of such cash dividend and no failure in existence at such time to pay in cash the full amount of accrued and unpaid dividends on the Preferred Stock (other than the amount accrued and unpaid as of December 31, 1994) on any Dividend Reference Date after January 1, 1995; provided that the Corporation may purchase shares of Common Stock from present or former employees of the Corporation and its Subsidiaries with the consent of the holders of at least 51% of the Preferred Stock. Section 4. Redemptions. 4A. Scheduled Redemption. On December 31, 2001 (the "Scheduled Redemption Date"), the Corporation shall redeem all outstanding Shares at a price per Share equal to the Liquidation Value thereof plus accrued and unpaid dividends thereon. 4B. Optional Redemptions. The Corporation may at any time redeem all or any portion of Preferred Stock then outstanding. On any such redemption, the Corporation shall pay a price per Share equal to the Liquidation Value thereof plus all accrued and unpaid dividends thereon. 4C. Redemption Payment. For each Share which is to be redeemed, the Corporation shall be obligated on the Redemption Date to pay to the holder thereof (upon surrender by such holder at the Corporation's principal office of the certificate representing such Share) an amount in immediately available funds equal to the Liquidation Value of such Share (plus all accrued and unpaid dividends thereon). If the funds of the Corporation legally available for redemption of Shares on any Redemption Date are insufficient to redeem the total number of Shares to be redeemed on such date, those funds which are legally available shall be used to redeem the maximum possible number of Shares ratably among the holders of the Shares to be redeemed based upon the aggregate Liquidation Value of such Shares (plus all accrued and unpaid dividends thereon) held by each such holder. At any time thereafter when additional funds of the Corporation are legally available for the redemption of Shares, such funds shall immediately be used to redeem the balance of the Shares which the 4 Corporation has become obligated to redeem on any Redemption Date but which it has not redeemed. 4D. Notice of Redemption. The Corporation shall mail written notice of each redemption of Preferred Stock (other than a redemption at the request of a holder or holders of Preferred Stock) to each record holder of such class not more than 60 nor less than 30 days prior to the date on which such redemption is to be made. Upon mailing any notice of redemption which relates to a redemption at the Corporation's option, the Corporation shall become obligated to redeem the total number of Shares specified in such notice at the time of redemption specified therein. In case fewer than the total number of Shares represented by any certificate are redeemed, a new certificate representing the number of unredeemed Shares shall be issued to the holder thereof without cost to such holder within three business days after surrender of the certificate representing the redeemed Shares. 4E. Determination of the Number of Each Holder's Shares to be Redeemed. The number of Shares of Preferred Stock to be redeemed from each holder thereof in redemptions hereunder shall be the number of Shares determined by multiplying the total number of Shares to be redeemed times a fraction, the numerator of which shall be the total number of Shares then held by such holder and the denominator of which shall be the total number of Shares then outstanding. 4F. Dividends After Redemption. No Share is entitled to any dividends accruing after the date on which the Liquidation Value of such Share (plus all accrued and unpaid dividends thereon) is paid to the holder thereof. On such date all rights of the holder of such Share shall cease, and such Share shall be deemed to be not outstanding. 4G. Redeemed or Otherwise Acquired Shares. Any Shares which are redeemed or otherwise acquired by the Corporation shall be cancelled and shall not be reissued, sold or transferred. 4H. Other redemptions or Acquisitions. Neither the Corporation nor any Subsidiary shall redeem or otherwise acquire any Preferred Stock, except as expressly authorized herein or pursuant to a purchase offer made pro-rata to all holders of Preferred Stock on the basis of the number of Shares owned by each such holder. 5 4I. Special Redemptions. (i) The term "Change in Ownership" shall mean any sale or issuance or series of sales or issuances of the Corporation's capital stock by the Corporation or any holders thereof, immediately after which (x) the owners (immediately after the closing under the Purchase Agreement) of Common Stock or of rights to acquire Common Stock, the senior executive officers of the Corporation or their respective Permitted Transferees in the aggregate no longer possess the voting power (under ordinary circumstances) to elect a majority of the Corporation's board of directors or (y) such owners, the senior executive officers of the Corporation or their respective Permitted Transferees in the aggregate no longer hold record and beneficial ownership of a majority of outstanding Common Stock; provided, however, that a Change in Ownership that occurs solely as a result of the State Board of Administration of Florida, Liberty Investment Partners IV, Limited Partnership and/or their respective Permitted Transferees disposing of shares of Common Stock and/or rights to acquire Common Stock shall not constitute a Change in Ownership for purposes of paragraphs 4I(i) and (ii). (ii) If a Change in Ownership has occurred or the Corporation obtains knowledge that a Change in Ownership is to occur, the Corporation shall give prompt written notice of such Change in Ownership describing in reasonable detail the definitive terms and date of consummation thereof to each holder of Preferred Stock, but in any event such notice shall not be given later than five days after the occurrence of such Change in Ownership. The holder or holders of a majority of the Preferred Stock then outstanding may require the Corporation to redeem all or any portion of the Preferred Stock owned by such holder or holders at a price per Share equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon) by giving written notice to the Corporation of such election prior to the later of (a) 20 days after receipt of the Corporation's notice and (b) 20 days prior to the consummation of the Change in Ownership (the "Expiration Date"). The Corporation shall give prompt written notice of any such election to all other holders of Preferred Stock within five days after the receipt thereof, and each such holder shall have until the later of (a) the Expiration Date or (b) ten days after receipt of such second notice to request redemption (by giving written notice to the Corporation) of all or any portion of the Preferred Stock owned by such holder. Upon receipt of such election(s), the Corporation shall be obligated to redeem the aggregate number of Shares specified therein on the later of (a) the occurrence of the Change in Ownership or (b) five days after the Corporation's receipt of such election(s). If in any case a proposed Change in Ownership does not occur, all requests for redemption in connection therewith shall be automatically rescinded. (iii) The term "Fundamental Change" shall mean (a) a sale or transfer of all or substantially all of the assets of the Corporation and its Subsidiaries on a consolidated basis (measured by either book value in accordance with generally accepted accounting principles consistently applied or fair market value 6 determined in the reasonable good faith judgment of the Corporation's board of directors) in any transaction or series of transactions (other than sales in the ordinary course of business) and (b) any merger or consolidation to which the Corporation is a party, except for (A) a Qualified Merger of (B) a Reincorporation Merger. The term "Qualified Merger" shall mean a merger in which the Corporation is the surviving corporation and, after giving effect to such merger, (x) the rights, privileges and preferences of the Preferred Stock are not adversely affected thereby in any manner, (y) the owners (immediately after the closing under the Purchase Agreement) of Common Stock or of rights to acquire Common Stock, the senior executive officers of the Corporation or their respective Permitted Transferees in the aggregate continue to possess the voting power (under ordinary circumstances) to elect a majority of the Corporation's board of directors (unless this clause (y) is not true solely as a result of the State Board of Administration of Florida, Liberty Investment Partners IV, Limited Partnership and/or their respective Permitted Transferees disposing of shares of Common Stock and/or rights to acquire Common Stock in such merger) and (z) such owners, the senior executive officers of the Corporation or their respective Permitted Transferees in the aggregate continue to hold record and beneficial ownership of a majority of outstanding Common Stock (unless this clause (a) is not true solely as a result of the State Board of Administration of Florida, Liberty Investment Partners IV, Limited Partnership and/or their respective Permitted Transferees disposing of shares of Common Stock and/or rights to acquire Common Stock in such merger). The term "Reincorporation Merger" shall mean a merger of the Corporation into a Subsidiary of the Corporation or a merger of the Corporation into a newly formed corporation solely to change the state of incorporation so long as (1) the rights, privileges and preferences of the Preferred Stock are not adversely affected thereby in any manner, (2) the Preferred Stock is not exchanged for cash, securities or other property in connection therewith other than preferred stock of the surviving corporation having identical rights and (3) the holders of the Common Stock immediately prior to such merger own all of the common stock of the surviving corporation immediately after such merger. (iv) If a Fundamental Change is proposed to occur, the Corporation shall give written notice of such Fundamental Change describing in reasonable detail the definitive terms and date of consummation thereof to each holder of Preferred Stock not more than 60 days nor less than 20 days prior to the consummation thereof. The holder or holders of a majority of the Preferred Stock then outstanding may require the Corporation to redeem all or any portion of the Preferred Stock owned by such holder or holders at a price per Share equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon) by giving written notice to the Corporation of such election prior to the later of (a) 20 days prior to the consummation of the Fundamental Change or (b) 20 days after receipt of notice from the Corporation. The Corporation shall give prompt written notice of such election to all other holders of Preferred Stock (but in any event within five days prior to the consummation of the Fundamental Change), and each such holder shall have until two days after the receipt of such notice 7 to request redemption (by written notice given to the Corporation) of all or any portion of the Preferred Stock owned by such holder. Upon receipt of such election(s), the Corporation shall be obligated to redeem the aggregate number of Shares specified therein upon the consummation of such Fundamental Change. If any proposed Fundamental Change does not occur, all requests for redemption in connection therewith shall be automatically rescinded. (v) Redemptions made pursuant to this paragraph 4I shall not relieve the Corporation of its obligation to redeem Preferred Stock on the Scheduled Redemption Date pursuant to paragraph 4A. Section 5. Events of Noncompliance. 5A. Definition. An Event of Noncompliance shall be deemed to have occurred if: (i) the Corporation fails to pay on four consecutive Dividend Reference Dates, the full amount of accrued and unpaid dividends on the Preferred Stock (other than the amount accrued and unpaid as of December 31, 1994), whether or not such payment is legally permissible or is prohibited by any agreement to which the Corporation is subject, when each of such four consecutive Dividend Reference Dates is after January 1, 1995; (ii) the Corporation fails to make any redemption payment with respect to the Preferred Stock which it is obligated to make hereunder, whether or not such payment is legally permissible or is prohibited by any agreement to which the Corporation is subject; (iii) The Corporation breaches or otherwise fails to perform or observe any other covenant or agreement set forth herein or in the Purchase Agreement and the holders of at least 51% of the Preferred Stock give the Corporation written notice thereof, provided that no Event of Noncompliance shall be deemed to have occurred under this subparagraph (iii) if either (a) the Corporation has exercised, and continues to exercise, best efforts to expeditiously cure the Event of Noncompliance (if cure is possible) and such cure occurs within 30 days after the occurrence of such Event of Noncompliance or (b) the Event of Noncompliance is not material to the financial conditions, operating results, operations or assets of the Corporation and its Subsidiaries, taken as a whole, and does not materially adversely affect the rights of holders or Preferred Stock; (iv) any representation or warranty contained in the Purchase Agreement is false or misleading on the date made or furnished and the facts or circumstances which cause such representation or warranty to be false or misleading are materially adverse to the financial condition, operating results, operations or assets of the Corporation and its Subsidiaries, taken as a whole, and the holders of at least 51% of the Preferred Stock give the Corporation written notice thereof; 8 (v) the Corporation or any subsidiary makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts generally as they become due; or an order, judgment or decree is entered adjudicating the Corporation or any Subsidiary bankrupt or insolvent; or any order for relief with respect to the Corporation or any Subsidiary is entered under the Federal Bankruptcy Code; or the Corporation or any Subsidiary petitions or applies to any tribunal for the appointment of a custodian, trustee, receiver or liquidator of the Corporation or any Subsidiary or of any substantial part of the assets of the Corporation or any Subsidiary, or commences any proceeding (other than a proceeding for the voluntary liquidation and dissolution of a Subsidiary) relating to the Corporation or any Subsidiary under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction; or any such petition or application is filed, or any such proceeding is commenced, against the Corporation or any Subsidiary and either (a) the Corporation or any such Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein or (b) such petition, application or proceeding is not dismissed within 60 days; (vi) a judgment in excess of $500,000 is rendered against the Corporation or any Subsidiary and, within 60 days after entry thereof, such judgment is not discharged or execution thereof stayed pending appeal, or within 60 days after the expiration of any such stay, such judgment is not discharged; or (vii) the Corporation or any Subsidiary defaults in the performance of any obligation or agreement if the effect of such default is to cause an amount exceeding $500,000 to become due prior to its stated maturity. 5B. Consequences of Certain Events of Noncompliance. (i) If an Event of Noncompliance has occurred and is continuing, the dividend rate on the Preferred Stock shall increase immediately by an increment of two percentage points. Any increase of the dividend rate resulting from the operation of this paragraph shall terminate as of the close of business on the date on which no Event of Noncompliance exists, subject to subsequent increases pursuant to this paragraph. (ii) If an Event of Noncompliance has occurred and is continuing, the holder or holders of a majority of the Preferred Stock then outstanding may demand (by written notice delivered to the Corporation) immediate redemption of all or any portion of the Preferred Stock owned by such holder or holders at a price per Share equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon). The Corporation shall give prompt written notice of such election to the other holders of Preferred Stock (but in any event within five days after receipt of the initial demand for redemption), and each such other holder may demand immediate redemption of all or any portion of such holder's Preferred Stock by giving written notice thereof to the Corporation within seven days after receipt of the Corporation's notice. The 9 Corporation shall redeem all Preferred Stock as to which rights under this paragraph have been exercised within 15 days after receipt of the initial demand for redemption. (iii) If any Event of Noncompliance under paragraph 5A(i) or 5A(ii) has occurred and is continuing, the number of directors constituting the Corporation's board of directors shall, at the request of a majority of the Preferred Stock then outstanding, be increased by one member, and the holders of Preferred Stock shall have the special right, voting separately as a single class (with each Share being entitled to one vote) and to the exclusion of all other classes of the Corporation's stock, to elect an individual to fill such newly created directorship, to fill any vacancy of such directorship and to remove any individual elected to such directorship. The newly created directorship shall constitute a separate class of directors, and the director elected by the holders of the Preferred Stock shall be entitled to cast a number of votes on each matter considered by the board of directors (including for purposes of determining the existence of a quorum) equal to the sum of the number of voted entitled to be cast by all of the other directors plus one. The special right of the holders of Preferred Stock to elect members of the board of directors may be exercised at the special meeting called pursuant to this subparagraph (iii), at any annual or other special meeting of stockholders and, to the extent and in the manner permitted by applicable law, pursuant to a written consent in lieu of a stockholders meeting. Such special right shall continue until such time as there is no longer any Event of Noncompliance in existence, at which time such special right shall terminate subject to revesting upon the occurrence and continuation of any Event of Noncompliance which gives rise to such special right hereunder. At any time when such special right has vested in the holders of Preferred Stock, a proper officer of the Corporation shall, upon the written request of the holder of at least 10% of the Preferred Stock then outstanding, addressed to the secretary of the Corporation, call a special meeting of the holders of Preferred Stock for the purpose of electing a director pursuant to this subparagraph. Such meeting shall be held at the earliest legally permissible date at the principal office of the Corporation, or at such other place designated by the holders of at least 10% of the Preferred Stock then outstanding. If such meeting has not been called by a proper officer of the Corporation within 10 days after personal service of such written request upon the secretary of the Corporation or within 20 days after mailing the same to the secretary of the Corporation at its principal office, then the holders of at least 10% of the Preferred Stock then outstanding may designate in writing one of their number to call such meeting at the expense of the Corporation, and such meeting may be called by such Person so designated upon the notice required for annual meetings of stockholders and shall be held at the Corporation's principal office, or at such other place designated by the holders of at least 10% of the Preferred Stock then outstanding. Any holder of Preferred Stock so designated shall be given access to the stock record books of the Corporation for the purpose of 10 causing a meeting of stockholders to be called pursuant to this paragraph. At any meeting or at any adjournment thereof at which the holders of Preferred Stock have the special right to elect a director, the presence, in person or by proxy, of the holders of a majority of the Preferred Stock then outstanding shall be required to constitute a quorum for the election or removal of any director by the holders of the Preferred Stock exercising such special right. The vote of a majority of such quorum shall be required to elect or remove any such director. Any director so elected by the holders of Preferred Stock shall continue to serve as a director until the date on which no Event of Noncompliance under paragraph 5A(i) or 5A(ii) exists. After such date, the number of directors constituting the board of directors of the Corporation shall decrease to such number as constituted the whole board of directors of the Corporation immediately prior to the occurrence of the Event or Events of Noncompliance giving rise to the special right to elect directors. (iv) If any Event of Noncompliance exists, each holder of Preferred Stock shall also have any other rights which such holder is entitled to under any contract or agreement at any time and any other rights which such holder may have pursuant to applicable law. Section 6. Voting Rights. Except as otherwise provided herein and as otherwise required by law, the Preferred Stock shall have no voting rights; provided that each holder of Preferred Stock shall be entitled to notice of all stockholders meetings at the same time and in the same manner as notice is given to the stockholders entitled to vote at such meeting. Section 7. Registration of Transfer. The Corporation shall keep at its principal office a register for the registration of Preferred Stock. Upon the surrender of any certificate representing Preferred Stock at such place, the Corporation shall, at the request of the record holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of Shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of Shares as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate, and dividends shall accrue on the Preferred Stock represented by such new certificate from the date to which dividends have been fully paid on such Preferred Stock represented by the surrendered certificate. 11 Section 8. Replacement. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing Shares of any class of Preferred Stock, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the holder is a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of Shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate, and dividends shall accrue on the Preferred Stock represented by such new certificate from the date to which dividends have been fully paid on such lost, stolen, destroyed or mutilated certificate. Section 9. Definitions. "Common Stock" means, collectively, the Corporation's Common Stock and any capital stock of any class of the Corporation hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Corporation. "Consolidated Net Income" shall mean for any period the consolidated net after-tax income (or loss) of the Company and its Subsidiaries for such period determined in accordance with GAAP consistently applied; provided that in determining Consolidated Net Income hereunder, gains and losses from the sale or disposition of assets outside of the ordinary course of business and extraordinary items (determined in accordance with GAAP consistently applied) shall be excluded. "GAAP" means United States generally accepted accounting principles, consistently applied. "Junior Securities" means any of the Corporation's capital stock or equity securities other than the Preferred Stock. "Liquidation Value" of any Share as of any particular date shall be equal to $1,000. "Loan Repayment Date" means the date upon which the entire outstanding indebtedness and all other amounts due and owing under the Senior and Subordinated Loan Agreements between the Company's Subsidiary, Arcade, Inc., and the State Board of Administration of Florida, each dated as of November 4, 1993, have been paid in full, and all rights of Arcade, Inc. to borrow funds under such Loan Agreements have been terminated. 12 "Permitted Transferees" shall have the meaning set forth in the Stockholders Agreement. "Person" means an individual, a partnership, a corporation, an association, a joint stock company, limited liability company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Purchase Agreement" means the Stock and Warrant Purchase Agreement, dated as of November 4, 1993 by and among the Corporation and certain investors, as such agreement may from time to time be amended in accordance with its terms. "Redemption Date" as to any Share means the date specified in the notice of any redemption at the Corporation's option or at the holder's option or the applicable date specified herein in the case of any other redemption. "Stockholders Agreement" means the Stockholders Agreement, dated as of November 4, 1993 by and among the Corporation and certain investors and other Persons, as such agreement may from time to time be amended in accordance with its terms. "Subsidiary" means, with respect to any Person, any partnership, corporation, association, joint stock company, limited liability company, trust, joint venture, unincorporated organization or other business entity of which (i) if a corporation, a majority of the total voting power of shares of 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 that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a partnership, limited liability company, joint stock company, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a partnership, limited liability company, joint stock company, association or other business entity if such Person or Persons shall be allocated a majority of partnership, limited liability company, joint stock company, association or other business entity gains or losses or shall be or control the managing director or a general partner of such partnership, limited liability company, joint stock company, association or other business entity. Section 10. Amendment and Waiver. No amendment, modification or waiver shall be binding or effective with respect to any provision of this ARTICLE FOUR without the prior written consent of the holders of a majority of the Preferred Stock outstanding at the time such action is taken; provided that no such action shall change (a) the rate at which or 13 the manner in which dividends on the Preferred Stock accrue or the times at which such dividends become payable or the amount payable on redemption of the Preferred Stock or the times at which redemption of Preferred Stock is to occur, without the prior written consent of the holders of at least 90% of the Preferred Stock then outstanding or (b) the percentage required to approve any change described in clause (a) above, without the prior written consent of the holders of at least 90% of the Preferred Stock; and provided further that no change in the terms hereof may be accomplished by merger or consolidation of the Corporation with another corporation or entity unless the Corporation has obtained the prior written consent of the holders of the applicable percentage of the class of classes of the Preferred Stock then outstanding. Section 11. Notices. Except as otherwise expressly provided hereunder, all notices referred to herein shall be in writing and shall be personally delivered or delivered by registered or certified mail, return receipt requested and postage prepaid, or by reputable overnight courier service, charges prepaid, and shall be deemed to have been given five business days after being so mailed or sent (i) to the Corporation, at its principal executive offices and (ii) to any stockholder, at such holder's address as it appears in the stock records of the Corporation (unless otherwise indicated by any such holder). ARTICLE FIVE The corporation is to have perpetual existence. ARTICLE SIX The By-Laws of the Corporation shall not be amended, modified or repealed unless approved by, in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of not less than 75% of the outstanding shares of Common Stock. ARTICLE SEVEN Meetings of stockholders may be held within or without the State of Delaware, as the by-laws of the corporation may provide. The books of the corporation may be kept outside the State of Delaware at such place or places as may be designated from time to time by the board of directors or in the by-laws of the 14 corporation. Election of directors need not be by written ballot unless the by-laws of the corporation so provide. ARTICLE EIGHT To the fullest extent permitted by the General Corporation Law of the State of Delaware as the same exists or may hereafter by amended, a director of this corporation shall not be liable to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director. Any repeal or modification of this ARTICLE EIGHT shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. ARTICLE NINE The corporation expressly elects not to be governed by Section 203 of the General Corporation Law of the State of Delaware. ARTICLE TEN The corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation in the manner now or hereafter prescribed herein and by the laws of the State of Delaware, and all rights conferred upon stockholders herein are granted subject to this reservation; provided however, that this Certificate of Incorporation shall not be amended, modified or repealed unless approved by, in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of not less than 75% of the outstanding shares of Common Stock. 15 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 11:00 AM 02/08/1995 950029554 - 2354937 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF ARCADE HOLDING CORPORATION Arcade Holding Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Company"). DOES HEREBY CERTIFY: FIRST: That the Board of Directors of the Company, pursuant to the unanimous written consent of all of its members, adopted resolutions amending and restating Article Four, Part A, Article Four, Part C, Section 1B and Article Four, Part C, Section 5A(i) of the Restated Certificate of Incorporation of the Company to read in their entirety as follows: ARTICLE FOUR, PART A The total number of shares of capital stock which the Corporation has authority to issue is 108,700 shares, consisting of: (1) 8,700 shares of Preferred Stock, par value $1.00 per share (the "Preferred Stock"); and (2) 100,000 shares of Common Stock, par value $0.1 per share (the "Common Stock"). Certain other capitalized terms used herein are defined in Section 9 hereof. ARTICLE FOUR, PART C, SECTION 1B 1B. Dividend Reference Dates. Each March 31, June 30, September 30 and December 31 of each year, beginning December 31, 1993 shall be a "Dividend Reference Date". To the extent not paid on a Dividend Reference Date, all dividends which have accrued on each Share outstanding during the three-month period (or other period in the case of the initial Dividend Reference Date) ending upon each such Dividend Reference Date shall be accumulated and shall remain accumulated dividends with respect to such Share until paid. On each Dividend Reference Date occurring on or prior to December 31, 1994, all dividends which have accrued on each Share outstanding during the three-month period ending upon each such Dividend Reference Date (or other period in the case of the initial Dividend Reference Date) shall be paid, in lieu of cash dividends, by the issuance on each such Dividend Reference Date of additional Shares of Preferred Stock (including fractional Shares) having an aggregate Liquidation Value at the time of such payment equal to the amount of the dividend to be paid on such Dividend Reference Date. On each Dividend Reference Date occurring after December 31, 1994, all dividends which have accrued on each Share outstanding during the three-month period ending upon each such Dividend Reference Date shall be payable in cash. ARTICLE FOUR, PART C, SECTION 5A(i) (i) the Corporation fails to pay, in the manner provided under Section 1B of this Part C, on any Dividend Reference Date occurring on or prior to December 31, 1994, the full amount of accrued and unpaid dividends on the Preferred Stock or the Corporation fails to pay,in the manner required under Section 1B of this Part C, on any four consecutive Dividend Reference Dates occurring after December 31, 1994 the full amount of accrued and unpaid dividends on the Preferred Stock (other than the amount accrued and unpaid as of December 31, 1994), whether or not such payment is legally permissible or is prohibited by any agreement to which the Corporation is subject, when each of such four consecutive Dividend Reference Dates is after January 1, 1995; SECOND: That thereafter, pursuant to resolution of its Board of Directors, the amendments were submitted to the stockholders of the corporation for their approval, which approval was given by written consent pursuant to Section 228 of the General Corporation Law of the State of Delaware. THIRD: That said amendments were duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. -2- IN WITNESS WHEREOF, Arcade Holding Corporation has caused this Certificate of Amendment to be signed by its Secretary this 8th day of February, 1995. ARCADE HOLDING CORPORATION /s/ JOSEPH WYGODA ------------------------------------- Joseph Wygoda, Secretary -3- STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 12:00 PM 12/15/1997 971429235 - 2354937 CERTIFICATE OF OWNERSHIP AND MERGER MERGING AHC I MERGER CORP. INTO ARCADE HOLDING CORPORATION (PURSUANT TO SECTION 253 OF THE GENERAL CORPORATION LAW OF DELAWARE) AHC I Merger Corp., a Delaware corporation (the "Corporation"), does hereby certify: FIRST: That the Corporation is incorporated pursuant to the General Corporation Law of the State of Delaware (the"DGCL"). SECOND: That the Corporation owns all of the outstanding shares of each class of the capital stock of Arcade Holding Corporation, a Delaware corporation ("Holding"). THIRD: That the Corporation, by the following resolutions of its Board of Directors, duly adopted on the 15th day of December, 1997, authorized and approved the merger of the Corporation with and into Holding on the terms and conditions set forth in such resolutions: WHEREAS, it is proposed that the Corporation be merged with and into its wholly-owned subsidiary, Holding, with Holding being the surviving corporation. NOW, THEREFORE, BE IT RESOLVED, that, subject to the prior approval of the sole stockholder of the Corporation, the Corporation merge itself with and into Holding, its wholly-owned subsidiary, with Holding being the surviving corporation, pursuant to Section 253 of the DGCL (the "Merger"), and pursuant to and upon the consummation of the Merger, Holding will assume all of the Corporation's liabilities and obligations; FURTHER RESOLVED, that the Merger be submitted to AHC I Acquisition Corp., a Delaware corporation and the sole stockholder of the Corporation ("AHC I"), for its approval therof, and that the sole director of the Corporation hereby recommends that the sole stockholder approve the Merger; FURTHER RESOLVED, that immediately upon the consummation of the Merger, each share of capital stock of Holding outstanding prior to the Merger shall be cancelled and automatically cease to be outstanding and each share of the capital stock of the Corporation therefore outstanding shall by virtue of the Merger be converted into and exchangeable for one share of common stock of the surviving entity in the Merger (such that Holding, as the surviving entity in the Merger, shall have 1,000 shares issued and outstanding following the Merger, all of which will be held by AHC I), and following the consummation of the Merger, certificates evidencing the ownership of the capital stock in the surviving entity will be issued upon the surrender of the certificates previously evidencing the ownership of the outstanding capital stock of the Corporation; FURTHER RESOLVED, that immediately upon the consummation of the Merger, Holding, as the surviving corporation of the Merger, shall change its corporate name to Arcade Marketing, Inc., and upon the effective date of the Merger, the name of Holding shall be so changed. FURTHER RESOLVED, that the Chairman of the Board, the President, the Chief Financial Officer, any Vice President, the Treasurer, the Secretary and any Assistant Secretary (each a "Proper Officer") of the Corporation, any one of whom may act without the joinder of any of the others, be, and they hereby are, authorized, empowered, and directed, for, on behalf and in the name of the Corporation, to make, execute, certify and deliver and acknowledge a Certificate of Ownership and Merger (herein so called) setting forth these resolutions and the date of adoption thereof and to cause the same to be filed in the office of the Secretary of State of Delaware and to do or cause to be done any and all such other acts and things as they, or any of them, may deem necessary or advisable to make effective or implement the intent and purposes of the foregoing resolutions, and any such document so executed or act or thing done or caused to be done by them, or any of them, shall be conclusive evidence of their or his authority in so doing; and FURTHER RESOLVED, that each Proper Officer of the Corporation, any one of whom may act without the joinder of any of the others, be, and they hereby are, authorized, empowered, and directed, for and on behalf and in the name of the Corporation, to take any further action and to do all things that they, or any of them, may deem necessary, appropriate or advisable to effect the Merger, including, without limitation, preparing and filing such regulatory applications, notices, or other documents as may be required by the appropriate regulatory authorities, and any such action taken by any Proper Officer shall be conclusive evidence of their of his authority in so doing. FOURTH: That the Merger was approved on the 15th day of December, 1997, by the written consent of AHC I, the sole stockholder of the Corporation. 2 IN WITNESS WHEREOF, the undersigned has caused this Certificate of Ownership and Merger to be signed this 15th day of December, 1997. AHC I MERGER CORP. By: /s/ DAVID WITTELS --------------------------------- David Wittels Vice President and Assistant Secretary STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 03:45 PM 12/15/1997 971429440 - 2354937 CERTIFICATE OF OWNERSHIP AND MERGER MERGING ARCADE INC. INTO ARCADE MARKETING, INC. (FORMERLY ARCADE HOLDING CORPORATION) (PURSUANT TO SECTION 253 OF THE GENERAL CORPORATION LAW OF DELAWARE) Arcade Marketing, Inc. (formerly Arcade Holding Corporation), a Delaware corporation (the "Corporation"), does hereby certify: FIRST: That the Corporation is incorporated pursuant to the General Corporation Law of the State of Delaware (the "DGCL"). SECOND: That the Corporation owns all of the outstanding shares of each class of the capital stock of Arcade, Inc., a Tennessee corporation, incorporated pursuant to the Tennessee Business Corporation Act. THIRD: That the Corporation, by the following resolutions of its sole director, duly adopted on the 15th day of December, 1997, authorized and approved the merger of Arcade into the Corporation on the terms and conditions set forth in such resolutions: WHEREAS, it is proposed that Arcade Inc., a Tennessee corporation and a wholly-owned subsidiary of the Corporation ("Arcade"), be merged with and into the Corporation, with the Corporation being the surviving corporation. NOW, THEREFORE, BE IT RESOLVED, that the Corporation merge its wholly-owned subsidiary, Arcade, into itself pursuant to Section 253 of the DGCL and Section 48-21-105 of the Tennessee Business Corporation Act (the "Merger"), and pursuant to and upon consummation of the Merger, assume all of Arcade's liabilities and obligations and cancel each share of capital stock of Arcade (heretofore outstanding so that such shares shall automatically cease to be outstanding; FURTHER RESOLVED, that the Merger is intended to qualify as a tax-free liquidation of Arcade by means of a merger, pursuant to Sections 332 and 337 of the Internal Revenue Code of 1986, as amended; FURTHER RESOLVED, that the Chairman of the Board, the President, the Chief Financial Officer, any Vice President, the Treasurer, the Secretary and any Assistant Secretary (each a "Proper Officer") of the Corporation, any one of whom may act without the joinder of any of the others, be, and they hereby are, authorized, empowered, and directed, for and on behalf and in the name of the Corporation, to make, execute, certify and deliver and acknowledge Articles of Merger (herein so called) and a Certificate of Ownership and Merger (herein so called), which Certificate of Ownership and Merger shall set forth these resolutions and the date of adoption thereof, and to cause the Articles of Merger and Certificate of Ownership and Merger to be filed in the office of the Secretary of State of Tennessee and the Secretary of State of Delaware, respectively, and to do or cause to be done any and all such other acts and things as they, or any of them, may deem necessary or advisable to make effective or implement the intent and purposes of the foregoing resolutions, and any such document so executed or act or thing done or caused to be done by them, or any of them, shall be conclusive evidence of their or his authority in so doing; and FURTHER RESOLVED, that each Proper Officer of the Corporation, any one of whom may act without the joinder of any of the others, be, and they hereby are, authorized, empowered, and directed, for and on behalf and in the name of the Corporation, to take any further action and to do all things that they, or any of them, may deem necessary, appropriate or advisable to effect the Merger, including, without limitation, preparing and filing such regulatory applications, notices, or other documents as may be required by the appropriate regulatory authorities, and any such action taken by any Proper Officer shall be conclusive evidence of their or his authority in so doing. [The remainder of this page is intentionally left blank] 2 IN WITNESS WHEREOF, the Corporation has caused this Certificate of Ownership and Merger to be signed this 15th day of December, 1997. ARCADE MARKETING, INC. By: /s/ David Wittels -------------------------------- David Wittels Vice President and Assistant Secretary STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 12:30 PM 06/22/1998 981240017 - 2354937 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF ARCADE MARKETING, INC. Arcade Marketing, Inc., a Delaware corporation ("Corporation"), pursuant to the provisions of the General Corporation Law of the State of Delaware (the "DGCL"), does hereby certify that: FIRST: The name of the Corporation is Arcade Marketing, Inc. SECOND: The First Article of the Restated Certificate of Incorporation of the Corporation is hereby amended to read it its entirety as follows: "The name of the Corporation is AKI, Inc." THIRD: The aforesaid amendment to the Restated Certificate of Incorporation of the Corporation was duly adopted in accordance with the provisions of Section 242 of the DGCL and has been consented to in writing by the stockholder's in accordance with the provisions of Section 228 of the DGCL. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.] EX-5.1 3 LEGAL OPINION OF AKIN, GUMP AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. AUSTIN ATTORNEYS AT LAW BRUSSELS DALLAS A REGISTERED LIMITED LIABILITY PARTNERSHIP HOUSTON INCLUDING PROFESSIONAL CORPORATIONS LONDON 590 MADISON AVENUE LOS ANGELES 20TH FLOOR MOSCOW NEW YORK, NY 10022 NEW YORK (212) 872-1000 PHILADELPHIA FAX (212) 872-1002 SAN ANTONIO WWW.AKINGUMP.COM WASHINGTON November 12, 1998 AKI, Inc. 1815 East Main Street Chattanooga, Tennessee 37404 RE: AKI, INC. 10 1/2% SENIOR NOTES DUE 2008 Ladies and Gentlemen: We have acted as counsel to AKI, Inc., a Delaware corporation (the "Company"), in connection with the Company's offer to exchange (the "Exchange Offer") $1,000 principal amount of 10 1/2% Senior Notes due 2008 (the "New Notes") of the Company for each $1,000 principal amount of its issued and outstanding 10 1/2% Senior Notes due 2008 (the "Old Notes") pursuant to a Registration Statement on Form S-4 (the "Registration Statement") filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"). The Old Notes have been, and the New Notes will be, issued pursuant to the provisions of an Indenture, dated as of June 25, 1998 (the "Indenture"), by and between the Company and IBJ Schroder Bank & Trust Company, as trustee (the "Trustee"). As such counsel, we have examined and are familiar with originals or copies, certified or otherwise identified to our satisfaction, of such corporate documents of the Company, certificates of public officials and certificates of officers of the Company and such other documents and agreements and records and papers as we have deemed necessary or appropriate in order to render this opinion. Capitalized terms used herein but not otherwise defined herein shall have the meaning ascribed to such terms in the Indenture. In our examination of the above referenced documents, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the AKI, Inc. November 12, 1998 Page 2 conformity to original documents of all documents submitted to us as certified or photostatic copies. Based on the foregoing and subject to the qualifications set forth herein, we are of the opinion that the Company has duly authorized the New Notes and, when issued, executed and authenticated in accordance with the terms of the Indenture and delivered in exchange for the Old Notes in accordance with the terms of the Exchange Offer, the New Notes will be the legally valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, subject (i) to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights generally and (ii) to general principles of equity, (including, without limitation, standards of materiality, good faith, fair dealing and commercial reasonableness), whether such principles are considered in a proceeding at law or in equity. We express no opinion concerning: (A) the enforceability of any waiver of rights or defenses contained in the Indenture or (B) any right to indemnification that may be limited by public policy considerations or court decisions. This law firm is a registered limited liability partnership organized under the laws of the State of Texas. Our opinion relates only to the laws of the State of New York and the federal law of the United States of America. We express no opinion of the law of any other jurisdiction. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and to the reference to this firm under the caption "Legal Matters" in the Prospectus forming a part of the Registration Statement. In giving such consent, we do not hereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Securities and Exchange Commission thereof. Very truly yours, /s/ Akin, Gump, Strauss, Hauer & Feld, L.L.P. EX-8.1 4 LEGAL OPINION OF AKIN, GUMP AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. AUSTIN ATTORNEYS AT LAW BRUSSELS DALLAS A REGISTERED LIMITED LIABILITY PARTNERSHIP HOUSTON INCLUDING PROFESSIONAL CORPORATIONS LONDON 590 MADISON AVENUE LOS ANGELES 20TH FLOOR MOSCOW NEW YORK, NY 10022 NEW YORK (212) 872-1000 PHILADELPHIA FAX (212) 872-1002 SAN ANTONIO WWW.AKINGUMP.COM WASHINGTON November 12, 1998 AKI, Inc. 1815 East Main Street Chattanooga, Tennessee 37404 RE: AKI, INC. 10 1/2% SENIOR NOTES DUE 2008 Dear Gentlemen: We have acted as counsel to AKI, Inc., a Delaware corporation (the "Company"), in connection with the registration of an aggregate principal amount of $115,000,000 of 10 1/2% Senior Notes due 2008 (the "New Notes"), pursuant to the Company's Registration Statement on Form S-4, File No. 333-60989, (the "Registration Statement"), filed by the Company under the Securities Act of 1933, as amended (the "Securities Act"), and the proposed exchange offer by the Company of the New Notes to the holders of the Company's outstanding 10 1/2% Senior Notes due 2008, previously sold pursuant to Rule 144A (the "Old Notes"). Unless otherwise defined herein, capitalized terms used in this opinion shall have the meaning set forth in the Registration Statement. Our opinion is premised upon the accuracy of all factual statements made in the Exchange Offer and the underlying documents cited therein, and upon the completion of the transaction in the manner contemplated in the Exchange Offer. In addition, our opinion is based upon the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury regulations (including proposed regulations) promulgated thereunder, 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. Any change in the facts or law upon which we rely could change our conclusion and render our opinion inapplicable. As such counsel, we have examined the Registration Statement and have made such other factual and legal investigations as we considered necessary or appropriate for the purposes of this opinion. In that connection, we have examined originals, or copies certified or otherwise identified to our satisfaction, of such documents, corporate records and other instruments as we have deemed AKI, Inc. November 12, 1998 Page 2 necessary for the purpose of rendering the opinion set forth below. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to authentic originals of all documents submitted to us as certified or photostatic copies. Based upon such examinations and investigations, and subject to the qualifications set forth in the "U.S. Federal Tax Consequences" section of the Exchange Offer, our opinion with respect to the anticipated U.S. federal income tax consequences applicable to the exchange of Old Notes for New Notes in the Exchange Offer; and the ownership and disposition of New Notes by holders who acquire the New Notes pursuant to the Exchange Offer under currently applicable federal tax law, is as set forth in the Prospectus under the heading "U.S. Federal Income Tax Consequences." This opinion is based on the relevant law in effect (or, in the case of proposed regulations, proposed) and the relevant facts that exist as of the date hereof. We have no obligation to advise the Company or any other person of changes of law or fact that occur after the date of effectiveness of the Registration Statement. This opinion represents our best legal judgment but has no binding effect on the IRS. Accordingly, there can be no assurance that the IRS will not successfully challenge our opinion. We hereby consent to the filing of this opinion as Exhibit 8.1 to the Registration Statement and to the reference to this firm under the caption "U.S. Federal Income Tax Consequences" in the prospectus forming a part of the Registration Statement. In giving such consent, we do not hereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Securities and Exchange Commission. We do not consent to any reference to this opinion letter in any other document. We express no opinion with respect to the merits of an investment in the Company or participation in the Exchange Offer. Very truly yours, /s/ AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. EX-10.7 5 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 ?10.1 Additional Senior Term Loan ?3.1 Affiliate ?10.1 Agreement ?10.1 Asset Disposition ?10.1 Bankruptcy Code ?10.1 Base Rate ?1.2(A)(1) Base Rate Loans ?1.2(A)(1) Borrower Preamble Borrowing Base ?1.1(B) Borrowing Base Certificate ?1.1(B) Business Day ?10.1 Closing Date ?10.1 Collateral ?10.1 Contingent Obligation ?3.4 Default ?10.1 Event of Default ?6.1 Expiry Date ?10.1 Funding Date ?7.2 GAAP ?10.1 Heller Preamble Holdings ?10.1 Indebtedness ?10.1 Interest Period ?1.2(A)(2) Lender Guarantee ?1.1(C) Liberty ?10.1 LIBOR Rate ?1.2(A)(2) LIBOR Rate Breakage Fee ?1.3(C) LIBOR Rate Loans ?1.2(A)(2) Lien ?10.1 Loan(s) ?1.1(A) Loan Documents ?10.1 Loan Party ?10.1 Material Adverse Effect ?10.1 Maximum Revolving Loan Balance ?1.1(B) Note(s) ?10.1 Obligations ?10.1 Permitted Encumbrances ?3.2(A) Person ?10.1 Refinanced Subordinated Indebtedness ?3.1(G) Related Transactions ?10.1 Related Transactions Documents ?10.1 Responsible Officer ?10.1 Restricted Junior Payments ?3.5 Revolving Loan Commitment ?1.1(A) Revolving Loans ?1.1(A) SBA ?10.1 Security Documents ?10.1 Seller Notes ?10.1 Senior Term Loan ?10.1 Senior Term Loan Agreement ?10.1 Senior Term Loan Documents ?10.1 Senior Term Loan Notes ?10.1 Subordinated Indebtedness ?10.1 Subordinated Loan Documents ?10.1 Subsidiary ?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 2 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 1payments 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. 3 "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. 4 (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 5 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 6 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 7 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. 8 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 9 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 10 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. 11 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 12 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 13 therefor and the aggregate amount of such Liens is 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 14 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 15 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: 16 (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 17 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 18 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 19 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 20 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. 21 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. 22 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 23 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 24 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 25 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. 26 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, 27 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. 28 (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. 29 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 30 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 31 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 32 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 33 (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, 34 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. 35 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 36 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 37 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 38 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 39 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; 40 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 41 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 42 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 43 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, 44 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. 45 "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. 46 "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 47 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 Subsidiaries 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. 48 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: /s/ Craig Gallehugh ------------------------ Title: Vice President ARCADE, INC. By: /s/ Gordon Jones --------------------------- Title: Chief Operating Officer 49 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 50 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 1 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: 2 (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. 3 (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: 4 (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 5 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 6 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 7 (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) 8 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 9 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 10 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 11 (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 12 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. 13 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 14 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. 15 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. 16 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 17 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 18 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. 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. 19 [Remainder of this page intentionally left blank.] 20 IN WITNESS WHEREOF, the parties have executed this Amendment as of the date set forth above. HELLER FINANCIAL, INC., a Delaware corporation By: /s/ Craig Gallehugh -------------------------- Title: Vice President ARCADE, INC., a Tennessee corporation By: /s/ Gordon Jones -------------------------- Title: Chief Operating Officer ARCADE HOLDING CORPORATION, a Delaware corporation By: /s/ David Wittels -------------------------- Title: Vice President 21 SECOND AMENDMENT TO CREDIT AGREEMENT This SECOND AMENDMENT TO CREDIT AGREEMENT ("Amendment") is made and entered into this 30th day of October, 1998 by and between AKI, Inc., formerly known as Arcade, Inc. ("Borrower") and Heller Financial, Inc. ("Lender"). WHEREAS, Lender and Borrower are parties to a certain Credit Agreement dated April 30, 1996 and all amendments thereto (as such agreement has from time to time been amended, supplemented or otherwise modified, the "Agreement"); and WHEREAS, the parties desire to amend the Agreement as hereinafter set forth; NOW THEREFORE, in consideration of the mutual conditions and agreements set forth in the Agreement and this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. Capitalized terms used in this Amendment, unless otherwise defined herein, shall have the meaning ascribed to such terms in the Agreement. 2. Amendments. Subject to the conditions set forth below, the Agreement is amended as follows: (a) Subsection 4.3 is amended by deleting such subsection in its entirety and inserting the following in lieu thereof: "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 September 30, 1998 $12,000,000 January 1, 1998 through December 31, 1998 $16,000,000 (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 March 31, 1999 $18,000,000 April 1, 1999 through April 30, 1999 $19,000,000 May 1, 1999 through June 30, 1999 $20,000,000 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)." (b) Subsection 4.5 is amended by deleting such subsection in its entirety and inserting the following in lieu thereof: "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 in the case of the period January 1, 1998 through September 30, 1998, EBIDAT for such period multiplied by 4/3 less, 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 September 30, 1998 8.7 January 1, 1998 through December 31, 1998 8.3 (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 March 31, 1999 8.0 April 1, 1999 through June 30, 1999 7.2 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)." 3. Conditions. The effectiveness of this Amendment is subject to the following conditions precedent (unless specifically waived in writing by Lender): (a) Borrower shall have executed and delivered this Amendment, and such other documents and instruments as Lender may require shall have been executed and/or delivered to Lender; (b) All proceedings taken in connection with the transactions contemplated by this Amendment and all documents, instruments and other legal matters incident thereto shall be satisfactory to Lender and its legal counsel; and (c) No Default or Event of Default shall have occurred and be continuing. 2 4. Representations and Warranties. To induce Lender to enter into this Amendment, Borrower represents and warrants to Lender that the execution, delivery and performance of this Amendment has been duly authorized by all requisite corporate action on the part of Borrower and that this Amendment has been duly executed and delivered by Borrower. 5. Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. 6. References. Any reference to the Agreement contained in any document, instrument or agreement executed in connection with the Agreement shall be deemed to be a reference to the Agreement as modified by this Amendment. 7. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall constitute an original, but all of which taken together shall be one and the same instrument. 8. Ratification. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions of the Agreement and shall not be deemed to be a consent to the modification or waiver of any other term or condition of the Agreement. Except as expressly modified and superseded by this Amendment, the terms and provisions of the Agreement are ratified and confirmed and shall continue in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed under seal and delivered by their respective duly authorized officers on the date first written above. HELLER FINANCIAL, INC. AKI, INC. By: /s/ Mary Harrigan By: /s/ Kenneth A. Budde -------------------------- ----------------------------- Title: Senior Vice President Title: Chief Financial Officer AKI HOLDING CORP. By: /s/ Kenneth A. Budde ----------------------------- Title: Chief Financial Officer 3 EX-10.8 6 SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT dated as of December 15, 1997 among AHC I ACQUISITION CORP. AHC I MERGER CORP. and SCRATCH & SNIFF FUNDING, INC. TABLE OF CONTENTS PAGE ---- ARTICLE I DEFINITIONS SECTION 1.01. DEFINITIONS .............................................. 1 SECTION 1.02. ACCOUNTING TERMS AND DETERMINATIONS ...................... 12 ARTICLE 2 PURCHASE AND SALE OF SECURITIES; TERMS OF SECURITIES SECTION 2.01. COMMITMENT TO PURCHASE . . ............................... 12 SECTION 2.02. TAKEDOWN PROCEDURE . . ................................... 13 SECTION 2.03. FEES ........................ ............................ 14 SECTION 2.04. TERMINATION AND REDUCTION OF COMMITMENT .................. 14 SECTION 2.05. INTEREST. ....................... ................. . . .. 14 SECTION 2.06. MATURITY OF NOTES; PREPAYMENT OF NOTES.................... 15 SECTION 2.07. FEE DUE IN CERTAIN CIRCUMSTANCES ......................... 16 ARTICLE 3 REPRESENTATIONS AND WARRANTIES SECTION 3.01. CORPORATE EXISTENCE AND POWER ............................ 16 SECTION 3.02. AUTHORIZATION, EXECUTION AND ENFORCEABILITY .............. 16 SECTION 3.03. GOVERNMENTAL AUTHORIZATION . ............................. 17 SECTION 3.04. CONTRAVENTION ............................. . . . ........ 17 SECTION 3.05. FINANCIAL INFORMATION .................................... 17 SECTION 3.06. LITIGATION ................................ .............. 18 SECTION 3.07. ENVIRONMENTAL MATTERS .................................... 18 SECTION 3.08. TAXES .................................................... 20 SECTION 3.09. SUBSIDIARIES .......................... . ......... ...... 20 SECTION 3.10. NOT AN INVESTMENT COMPANY ................................ 20 SECTION 3.11. FULL DISCLOSURE . . . . ............................. .... 20 SECTION 3.12. CAPITALIZATION .............................. . .......... 20 SECTION 3.13. SOLICITATION; ACCESS TO INFORMATION ...................... 21 SECTION 3.14. NON-FUNGIBILITY .......................................... 21 SECTION 3.15. PERMITS .................................................. 21 SECTION 3.16. REPRESENTATIONS IN OTHER FINANCING DOCUMENTS AND IN MATERIAL ACQUISITION DOCUMENTS ........................ 21 SECTION 3.17. PRIOR ACTIVITIES . . . . . . ............................. 22 SECTION 3.18. COMPLIANCE WITH ERISA .................................... 22 Page ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PURCHASER SECTION 4.01. Purchase for Investment; Authority; Binding Agreement.......22 ARTICLE 5 CONDITIONS PRECEDENT TO PURCHASE SECTION 5.01. Conditions to Purchaser's Obligation at First Takedown .... 23 SECTION 5.02. Conditions to Purchaser's Obligations at Each Takedown .... 25 ARTICLE 6 COVENANTS SECTION 6.01. Information ................................................26 SECTION 6.02. Payment of Obligations......................................28 SECTION 6.03. Insurance ..................................................28 SECTION 6.04. Conduct of Business and Maintenance of Existence ...........28 SECTION 6.05. Compliance with Laws .......................................29 SECTION 6.06. Inspection of Property, Books and Records ..................29 SECTION 6.07. Investment Company Act .....................................29 SECTION 6.08. Financial Covenants ................................. . . ..29 SECTION 6.09. Limitation on Debt .........................................30 SECTION 6.10. Restricted Payments; Voluntary Prepayments . . .........30 SECTION 6.11. Investments ......................................... ......30 SECTION 6.12. Negative Pledge ............................................31 SECTION 6.13. Transactions with Affiliates ...............................31 SECTION 6.14. Consolidations, Mergers and Sales of Assets; Ownership of Subsidiaries ...........................................32 SECTION 6.15. Limitations on Activities by Holdings ......................32 SECTION 6.16. Use of Proceeds ............................................33 SECTION 6.17. Restrictions on Certain Amendments .........................33 SECTION 6.18. Permanent Financing ........................................33 SECTION 6.19. Appointment of Director ....................................34 ARTICLE 7 EVENTS OF DEFAULT SECTION 7.01. Events of Default Defined; Acceleration of Maturity; Waiver of Default...........................................34 ii PAGE ARTICLE 8 LIMITATION ON TRANSFERS SECTION 8.01. Restrictions on Transfer.................................. 37 SECTION 8.02. Restrictive Legends ...................................... 37 SECTION 8.03. Notice of Proposed Transfers.............................. 38 ARTICLE 9 MISCELLANEOUS SECTION 9.01. Notices .................................................. 39 SECTION 9.02. No Waivers; Amendments ................................... 39 SECTION 9.03. Indemnification .......................................... 40 SECTION 9.04. Expenses ................................................. 42 SECTION 9.05. Payment .................................................. 43 SECTION 9.06. Successors and Assigns ................................... 43 SECTION 9.07. Brokers .................................................. 43 SECTION 9.08. New York Law; Submission to Jurisdiction; Waiver of Jury Trial ..................................... 43 SECTION 9.09. Severability ............................................. 44 SECTION 9.10. Counterparts ............................................. 44 iii SECURITIES PURCHASE AGREEMENT AGREEMENT dated as of December 15,1997 among AHC I MERGER CORP., AHC I ACQUISITION CORP. and SCRATCH & SNIFF FUNDING, INC, The parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01, Definitions. The following terms, as used herein, have the following meanings: "Acquisition" means the acquisition by the Company of all capital stock of Arcade Holdings. "Additional Notes" has the meaning set forth in Section 2.05(c). "Affiliate" means, with respect to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such 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, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means this Agreement, as amended from time to time in accordance with its terms. "APPROVED ACCOUNTANTS" MEANS (i) Coopers & Lybrand LLP, (ii) any other of the so-called "Big Six" accounting firms, or (iii) any other independent certified public accountant of nationally recognized standing reasonably approved by the Purchaser. "Arcade" means Arcade Inc., a Tennessee corporation. "Arcade Corporate Documents" means the articles of incorporation and bylaws of Arcade and the certificate of incorporation and bylaws of Arcade Holdings. "Arcade Holdings" means Arcade Holding Corporation, a Delaware corporation. "Asset Sale" means any sale, lease or other disposition (including any such transaction effected by way of merger or consolidation and any consignment arrangement or other similar arrangements) by the Company or any of its Subsidiaries of any asset, including without limitation any sale-leaseback transaction, but excluding (i) dispositions of inventory and used, obsolete, surplus or worn out equipment in the ordinary course of business, (ii) dispositions to the Company or a wholly-owned Subsidiary of the Company (including without limitation any such disposition effected by the Mergers), (iii) cash payments otherwise permitted under this Agreement; (iv) the sale or discount of overdue accounts receivable arising in the ordinary course of business, but only in connection with the compromise or collection thereof, provided that any disposition not excluded pursuant to clauses (i) through (iv) shall constitute an Asset Sale only if, and solely to the extent that, the Net Cash Proceeds therefrom, together with the Net Cash Proceeds from all other such dispositions effected by the Company and its Subsidiaries after the date hereof, exceed $1,000,000. "Assumption" means an instrument of assumption in substantially the form of Exhibit D pursuant to which Arcade Holdings assumes the obligations of the Company under the other Financing Documents. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Business Acquisition" means (i) an Investment by the Company or any of its Subsidiaries in any other Person pursuant to which such Person shall become a Subsidiary or shall be merged into or consolidated with the Company or any of its Subsidiaries or (ii) an acquisition by the Company or any of its Subsidiaries of the property and assets of any Person (other than the Company or any of its Subsidiaries) that constitute a substantial part of the assets of such Person or of any division or other business unit of such Person. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law to close, 2 "Cash Equivalents" means (i) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof), (ii) time deposits and certificates of deposit of any domestic commercial bank (including a domestic branch of a foreign bank) which has, or whose obligations are guaranteed by an affiliated commercial bank which has capital and surplus in excess $500,000,000 having maturities of one year or less from the date of acquisition, (iii) repurchase obligations with a term of not more than 7 days for underlying securities of the types described in clause (i) entered into with any bank meeting the qualifications specified in clause (ii) above, (iv) commercial paper rated at least A-I or the equivalent thereof by Standard & Poor's Ratings Services or at least P-I or the equivalent thereof by Moody's Investors Service, Inc., maturing within one year after the date of acquisition, (v) investments in money market funds substantially all of whose assets are comprised of securities of the types described in clauses (i) through (iv) above, and (vi) obligations denominated in a currency other than dollars which are of a credit quality and maturity comparable to those referred to in clauses (i) through (iv) above that are customarily used for short-term investment of excess cash in the markets in which the Company and its Subsidiaries operate. "Change of Control" means such time as (a) DLJMB and any of its Affiliates that are Initial Investors has sold, transferred or otherwise disposed of, to any Person other than the Initial Investors, any of their Affiliates or any member of the management of the Company an aggregate of more than 25% of the outstanding Common Stock; or (b) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act of 1934, as amended), other than any person or group the majority of whose shares of common stock or other equity interests are beneficially owned by the DLJMB or any of its Affiliates, has become the beneficial owner, by way of merger, consolidation or otherwise, of 25% or more of the voting power of all classes of voting securities of Holdings; or (c) a sale or transfer of all or substantially all of the assets of the Company to any Person or group has been consummated; or (d) Arcade ceases to be a wholly-owned Subsidiary of the Company (other than pursuant to the Mergers); or (e) the company ceases to be a wholly-owned Subsidiary of Holdings (other then pursuant to the Mergers). Notwithstanding the foregoing, in the event that Hoak Communications Partners, L.P. or any of its affiliates shall make an equity investment in Holdings, no transfer or other disposition of shares of Common Stock from DLJMB to Hoak Communications Partners, L.P. or any of its affiliates shall constitute a "Change of Control". "Closing" means the Closing as defined in the Purchase Agreement. 3 "Commission" means the Securities and Exchange Commission. "Commitment" means the obligation of Purchaser to purchase Notes hereunder in an aggregate principal amount not to exceed $125,000,000. "Common Stock" means the authorized common stock, par value $.01 per share, of Holdings. "Company" means AHC I Merger Corp., a Delaware corporation, and its successors (including, without limitation, Arcade Holdings). "Company Corporate Documents" means the certificate of incorporation and bylaws of the Company, "Consolidated EBITDA" means, for any period of four consecutive fiscal quarters, consolidated net income of the Company and its Consolidated Subsidiaries for such period plus to the extent deducted in determining such consolidated net income, the aggregate amount of (i) consolidated interest expense, (ii) income tax expense, (iii) depreciation, amortization and other similar non-cash charges, (iv) any severance costs incurred in connection with the Scent Seal acquisition and other severance costs payable to former employees of Arcade and its subsidiaries, (v) stockholder expenses and (vi) extraordinary legal costs, in each case for such period; provided that for any period of four consecutive fiscal quarters ended prior to December 31, 1998, Consolidated EBITDA shall be Consolidated EBITDA for the portion of such period from and including the date of the Closing to and including the last day of such period, annualized on a simple arithmetic basis. "Consolidated Debt" means, at any date, the Debt of the Company and its Consolidated Subsidiaries, determined on a consolidated basis as of such date. "Consolidated Net Worth" means, at any date, the consolidated stockholders' equity of the Company and its Consolidated Subsidiaries determined as of such date. "Consolidated Subsidiary" means, at any date with respect to any Person, any Subsidiary or other entity, the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date. "Corporate Documents" means each of the Arcade Corporate Documents, the Company Corporate Documents and the Holdings Corporate Documents. 4 "Debt" of any Person means, at any date, (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities and accrued operating expenses, in each case incurred in the ordinary course of business) or which is evidenced by a note, bond, debenture or similar instrument, (b) all obligations of such Person under Financing Leases, (c) all obligations (contingent or otherwise) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (d) all Derivatives Obligations of such Person, (e) all Guarantee Obligations of such Person in respect of Debt of any other Person and (f) all liabilities of the types described in clauses (a) through (e) above secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof provided, however, that the amount of such Debt of any Person described in this clause (f) shall, for purposes of this Agreement, on any date, be deemed to be equal to the lesser of (i) the aggregate unpaid amount of such Debt on such date and (ii) the fair market value of the property or asset subject to the relevant Lien on such date, as determined by such Person in good faith. "Debt Incurrence" means, after the Closing, any incurrence by Holdings or any of its Subsidiaries of any Debt (including without limitation pursuant to the Permanent Financing), other than Debt permitted under Section 6.09(a) through (c), inclusive, or Section 6.15. "Default" means any Event of Default or any event or condition which, with the giving of notice or lapse of time or both, would, unless cured or waived, become an Event of Default. "Derivatives Obligations" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. "DLJMB" means DLJ Merchant Banking II, Inc., and its successors. "DLJSC" means Donaldson, Lufkin & Jenrette Securities Corporation, a Delaware corporation, and its successors. "dollars" or "$" mean lawful currency of the United States of America. 5 "Engagement Letter"- means an engagement letter between Holdings and DUSC pursuant to which Holdings shall engage DUSC as exclusive investment banker for Holdings and its Subsidiaries for a period of five years from the Closing. "Environmental Laws" means any and all applicable statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, codes, plans, injunctions, permits, concessions, grants, franchises, licenses and governmental restrictions, relating to human health, the environment or to emissions, discharges or releases of pollutants, contaminants, Hazardous Materials or wastes into the environment, including ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Materials or wastes or the clean-up or other remediation thereof. "Equity Issuance" means, after the Closing, the issuance of any equity securities by Holdings or any of its Subsidiaries (including without limitation any equity securities issued pursuant to the exercise of stock options or warrants or the Permanent Financing), but excluding equity securities issued to Holdings or any Subsidiary. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the Company, Holdings, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Company, Holdings or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "Escrow Agreement" means that certain Escrow Agreement dated as of December 15 among Holding, the Sellers, Victor J. Barnett and Michael Kluger, as representatives of the Sellers, and The Chase Manhattan Bank, as escrow agent. "Event of Default" has the meaning set forth in Section 7.01. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Expiration Date" has the meaning set forth in Section 2,01(b). "Financing Documents" means this Agreement, the Notes, the Assumption, the Subscription Agreement, the Holdings Notes and the Revolver. 6 "Financing Lease" means any lease of property, real or personal, the obligations of the lessee in respect of which are required in accordance with international accounting standards to be capitalized on a balance sheet of the lessee. "Guarantee Obligation" means as to any Person (the "guaranteeing person"), any obligation of (a) the guaranteeing person or (b) another Person (including, without limitation, any bank under any letter of credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Debt, leases, dividends or other obligations (the "primary obligations") of any third Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith. "Hazardous Materials" means (i) asbestos; (ii) polychlorinated biphenyls; (iii) petroleum, its derivatives, by-products and other hydrocarbons; and (iv) any other toxic, radioactive, caustic or otherwise hazardous substance regulated under Environmental Laws. "Hazardous Materials Contamination" means existing contamination of the improvements, buildings, facilities, soil, groundwater, air or other elements on or of the real property owned, operated or leased by the Company or any of its Subsidiaries by Hazardous Materials at concentrations that exceed those allowed 7 by Environmental Laws, or on or of any other property as a result of Hazardous Materials present in concentrations that exceed those allowed by Environmental Laws, generated on, emanating from or disposed of in connection with the relevant property. "Holder" means any Holder of any Note, "Holdings" means AHC I Acquisition Corp., a Delaware corporation, and its successors. "Holdings Corporate Documents" means the certificate of incorporation and bylaws of Holdings. "Holdings Notes" means unsecured senior notes of Holdings which (i) require no payment of principal and no cash payment of interest prior to June 12, 2000 and (ii) the holders of which will not be entitled to enforce or otherwise exercise remedies with respect thereto prior to June 12, 2000. "Holdings Preferred Stock" means the 15% Senior Preferred Stock Due 2012 of Holdings, par value $0.01 per share, the terms of which do not require redemption for cash or dividend payments in cash prior to June 12, 2000. "Initial Investors" means the Persons indicated on Schedule I hereto as holders of Common Stock. "Interest Payment Date" each March 15, June 15, September 15 and December 15 (or, if any such date is not a Business Day, the next succeeding Business Day), beginning with March 15, 1998. "Interest Rate" has the meaning set forth in Section 2.05(b). "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Investment" means any investment in any Person, whether by means of share purchase, capital contribution, loan, time deposit, Guarantee Obligation or otherwise (it being understood that demand deposits do not constitute an investment in a Person). "Lien" means, any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any 8 conditional sale or other title retention agreement) and any other arrangement having substantially the same economic effect as any of the foregoing. "Majority Holders" means (i) at any time prior to the issuance of the Notes, Purchaser and (ii) at any time thereafter, the holders of voting rights with respect to waivers, amendments and other actions permitted or required to be taken by Holders under the terms of the Notes constituting a majority of such voting rights attributable to the aggregate outstanding amount of Notes at such time. "Material Acquisition Documents" means the Purchase Agreement, the Escrow Agreement and the Common Stock Purchase Agreements and the Minority Investors' Stockholders' Agreement (each as defined in the Purchase Agreement) and the Merger Agreements. "Material Adverse Effect" means a material adverse affect on the business, consolidated financial position or consolidated results of operations of the Company and its Consolidated Subsidiaries, taken as a whole. "Maturity Date" means December 15, 1998. "Mergers" means the merger of the Company with and into Arcade Holdings and the merger of Arcade with and into the Company pursuant to the Merger Agreements. "Merger Agreements" means the Certificates of Ownership and Merger filed with the Secretary of State of Delaware and the Articles of Merger and the Plan of Merger filed with the Secretary of State of Tennessee. "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA (i) to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the erisa Group during such five year period and (ii) which is covered by Title IV of ERISA. "Net Cash Proceeds" means, with respect to any transaction, an amount equal to the cash proceeds received by Holdings or any of its Subsidiaries from or in respect of such transaction (including any cash proceeds received as income or other proceeds of any non-cash proceeds of such transaction), less (i) any expenses (including commissions) reasonably incurred by Holdings or such Subsidiary in respect of such transaction, (ii) the amount of any Debt secured by a 9 Lien on a related asset and discharged from the proceeds of such transaction and (iii) any taxes paid or payable by Holdings or such Subsidiary with respect to such transaction (as reasonably estimated by the Company's chief financial officer in good faith) and (iv) solely if such transaction is an Asset Sale, any portion of such cash proceeds which Holdings or any of its Subsidiaries determines in good faith should be reserved for post-closing adjustments with respect to such Asset Sale (to the extent Holdings or such Subsidiary delivers to the Holders a certificate as to such determination), it being understood and agreed that on the first date on which all such post-closing adjustments shall have been determined, the amount (if any) by which the reserved amount of cash proceeds with respect to all Asset Sales exceeds actual post-closing adjustments payable by Holdings or any of its Subsidiaries shall constitute "Net Cash Proceeds" on such date. "Notes" means the Company's Senior Increasing Rate Notes substantially in the form set forth as Exhibit A hereto, including any Additional Notes. "Obligor" means any of the Company and Arcade. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Pemanent Financing" means any Debt Incurrence or Equity Issuance following the date hereof for the purpose of refinancing the Notes. "Permits" means all domestic and foreign licenses, permits and approvals required for the full operation of the Company and its Subsidiaries, including provincial, state, federal, city and county permits and approvals. "Person" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, government (or any agency or political subdivision thereof) or other entity of any kind. "PIK Amount" has the meaning set forth in Section 2.05(c). "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. 10 "Prime Rate" means, for any day, a rate per annum equal to the rate of interest publicly announced by The Bank of New York (or its successor) from time to time in The City of New York as its prime, reference or base rate, it being understood that such rate is one of such bank's base rates and serves as a basis upon which effective rates of interest are calculated for those loans making reference thereto and may not be the lowest of such bank's base rates. "Purchase Agreement" means the Stock Purchase Agreement dated as of November 14, 1997 among Holdings, Arcade Holdings and the Sellers party thereto. "Purchaser" means Scratch & Sniff Funding, Inc., a Delaware corporation, and its successors. "Restricted Payment" means (i) any dividend or other distribution on any shares of the capital stock of the Company or Holdings (except dividends payable solely in shares of capital stock of the same class of the same issuer) or (ii) any payment on account of the purchase, redemption, retirement or acquisition of (a) any shares of the capital stock of the Company or Holdings or (b) any option, warrant or other right to acquire shares of the capital stock of the Company or Holdings. "Revolver" means a revolving credit agreement (i) to be entered into by the Company with a bank reasonably satisfactory to Purchaser or (ii) a revolving credit agreement with Heller Financial, Inc. (or its Affiliate) to be continued by the Company on terms and conditions reasonably satisfactory to the Purchaser. "Scent Seal" means Scent Seal, Inc., a California corporation, and its successors. "Scent Seal Note" means that certain Conditional Promissory Note and Security Agreement by and between Arcade, Scent Seal and Elaine Trebek-Kares, as in effect on the date hereof. "Securities Act" means the Securities Act of 1933, as amended. "Sellers" shall mean those parties identified on the signature page of the Purchase Agreement as "Sellers". "Subscription Agreement" means the Subscription Agreement dated as of the date hereof between the Purchaser and Holdings, as amended from time to time. 11 "Subsidiary" means, with respect to any Person, any corporation or other entity of which a majority of the capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person. "Takedown" has the meaning set forth in Section 2.02(a). "Transfer" means any disposition of Notes that would constitute a sale thereof under the Securities Act. "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities (within the meaning of Section 4001(a)(16) of ERISA) under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "U.S. GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America. SECTION 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with U,S. GAAP applied on a consistent basis (except for changes concurred in by the Company's independent public accountants). ARTICLE 2 PURCHASE AND SALE OF SECURITIES; TERMS OF SECURITIES SECTION 2.01. Commitment to Purchase. (a) Subject to the terms and conditions set forth herein and in reliance on the representations and warranties of the Obligors contained herein and in the other Financing Documents, the 12 Company may at its option issue and sell, and Purchaser agrees to purchase, Notes in an aggregate principal amount not to exceed $125,000,000. The purchase price for the Notes shall be 100% of the principal amount thereof. (b) The Commitment will terminate on the earliest of (i) the termination of the Purchase Agreement in accordance with the terms thereof prior to the consummation of the Acquisition, (ii) the delivery by the Company of a notice of termination of Purchaser's Commitment obligation, (iii) the consummation of the Acquisition (if such date occurs prior to the date of the first Takedown), (iv) the date on which Holdings or any of its Subsidiaries commences the marketing of any securities with respect to which DLJSC or any of its Affiliates is not the sole manager or agent or lead underwriter, as the case may be and (v) March 31, 1998 (such earliest date, the "Expiration Date"); provided that if at any time on or after the date hereof an Event of Default shall have occurred and be continuing, Purchaser may at its option terminate the Commitment by notice to the Company, such termination to be effective upon the giving of such notice; and provided further that the Commitment shall automatically terminate, without notice to the Company or any other action on the part of Purchaser, upon the occurrence of any of the events specified in Sections 7.01(e) and 7.01(f) with respect to the Company. SECTION 2.02. Takedown Procedure. (a) The Company shall give Purchaser notice not later than 11:00 A.M. (New York City time) two Business Days prior to each proposed purchase and sale of Notes hereunder (each such purchase and sale, a "Takedown"), which notice shall specify the principal amount of Notes to be purchased and sold at such Takedown (which amount shall be a minimum amount of $ 1,000,000 or any larger multiple of $250,000) and the date of such Takedown (which shall be a Business Day). There shall not be more than three Takedowns hereunder. (b) On the date of each Takedown, Purchaser shall deliver by wire transfer, to the account number of the Company specified by the Company in writing no later than 2:00 P.M. (New York City time) two Business Days prior to the date of such Takedown, immediately available funds in an amount equal to the aggregate purchase price of the Notes to be purchased by Purchaser hereunder on such date, less the aggregate amount of fees payable by the Company to Purchaser on such date pursuant to Section 2.03 and expenses payable to Purchaser on such date pursuant to SECTION 9.04. (c) At each Takedown, against payment as set forth in subsection (b) of this Section 2.02, the Company shall deliver to Purchaser a single Note representing the aggregate principal amount of Notes to be purchased at such Takedown registered in the name of Purchaser, or, if requested by Purchaser, 13 separate Notes in such other denominations and registered in such name or names as shall be designated by Purchaser by notice to the Company at least two Business Days prior to the date of such Takedown. SECTION 2.03. Fees. (a) The Company shall pay Purchaser a commitment fee in the amount of $1,250,000, which fee shall be fully earned upon the execution and delivery of this Agreement by the parties hereto and shall be payable in full in cash on the date of the consummation of the Acquisition (regardless of whether the Takedown has occurred on or prior to such date). (b) On the date of each Takedown hereunder, the Issuer shall pay to Purchaser a takedown fee in an amount equal to 2.00% of the aggregate principal amount of the Notes being purchased at such Takedown, SECTION 2.04. Termination and Reduction of Commitment. (a) The Commitment shall terminate on the Expiration Date. (b) On the date of each Takedown, the Commitment shall be reduced by an amount equal to the aggregate principal amount of the Notes being purchased at such Takedown. SECTION 2,05. Interest. (a) Interest on each Note shall be payable quarterly in arrears, on each Interest Payment Date of each year in which such Note remains outstanding, commencing with the first Interest Payment Date after the date of issuance thereof, on the principal sum of such Note outstanding. Interest on each Note shall be calculated at the rates per annurn set forth below, and shall accrue from and including the most recent Interest Payment Date to which interest has been paid on such Note (or if no interest has been paid on such Note, from the date of issuance thereof) to but excluding the date on which payment in full of the principal sum of such Note has been made. (b) The interest rate applicable to each Note (the "Interest Rate") shall be a floating rate per annum equal to the greater of (A) 10.00% per annum and (b) the sum of (i) the Prime Rate in effect from time to time plus (ii) 2.25% plus (iii) an additional percentage amount, equal to 1.00% from and including the Interest Payment Date falling on June 12, 1998 and increasing by 0.50% effective on each Interest Payment Date thereafter until the principal amount of such Note is paid in full; provided that in no event shall such interest rate exceed the lesser of (x) 17.00% per annum and (y) the maximum rate permitted by applicable law. Interest on each Note will be calculated on the basis of a 365-day year and paid for the actual number of days elapsed. 14 (c) If and to the extent that the amount of interest payable on any Interest Payment Date is greater than the amount of interest on the Notes which would have been payable on such Interest Payment Date if the Interest Rate in effect at all times during the three-month period then ended had been 15.00% per annum (the amount of such excess being hereinafter referred to as the "PIK Amount" for such period), then the Company may, at its option, in lieu of payment of the PIK Amount of interest in cash, pay interest on such Interest Payment Date through the issuance of additional Notes ("Additional Notes"). Such Additional Notes issued on any Interest Payment Date shall, subject to the remaining provisions of this subsection (c), be in an aggregate principal amount equal to the PIK Amount for such Interest Payment Date, shall otherwise be identical to the outstanding Notes and shall be issued to the Holders of the Notes at the time outstanding in proportions such that each Holder shall receive the same ratio of cash interest to Additional Notes on such Interest Payment Date. Such Additional Notes shall be issued only in denominations of $1,000 and multiples thereof. Any interest otherwise payable in Additional Notes which cannot be so paid because an Additional Note would have a denomination less than $ 1,000 (or not be a multiple hereof) shall be paid in cash. SECTION 2.06. Maturity of Notes; Prepayment of Notes. (a) The Notes shall mature on the Maturity Date. (b) The Company at its option may, upon three (3) Business Days' written notice to the Holders, at any time, prepay all or any part of the principal amount of the Notes at a redemption price equal to 100.00% of the principal amount of the Notes so prepaid together with accrued and unpaid interest to the date of prepayment; provided that if after giving effect to any such prepayment any Notes remain outstanding, the aggregate outstanding principal amount thereof shall be not less than $1,000,000. (c) The Company shall, within five days of receipt by Holdings or any of its Subsidiaries of the Net Cash Proceeds of any Asset Sale, Debt Incurrence or Equity Issuance, prepay a principal amount of the Notes equal to the amount of such Net Cash Proceeds (less any amounts not required to be paid as a result of the requirement in subsection (d) of this Section 2.06 that all such prepayments be made in multiples of $1,000), at a redemption price equal to 100.00% of the principal amount of the notes so prepaid together with accrued and unpaid interest to the date of prepayment. (d) Any prepayment of the Notes pursuant to Section 2.06(b) shall be in a minimum amount of at least $1,000,000, unless less than $ 1,000,000 of the Notes remain outstanding, in which case all of the Notes must be prepaid. Any prepayment of the Notes pursuant to Section 2.06(c) shall be in a minimum 15 amount which is a multiple of $1,000 times the number of Holders at the time of such prepayment. (e) Any partial prepayment shall be made so that the Notes then held by each Holder shall be prepaid in a principal amount which shall bear the same ratio, as nearly as may be, to the total principal amount being prepaid as the principal amount of such Notes held by such Holder shall bear to the aggregate principal amount of all Notes then outstanding. In the event of a partial prepayment, upon presentation of any Note the Company shall execute and deliver to or on the order of the Holder, at the expense of the Company, a new Note in principal amount equal to the remaining outstanding portion of such Note. SECTION 2.07. Fee Due in Certain Circumstances. If the Company at any time or from time to time repays, prepays or otherwise redeems any Notes in whole or in part, whether at its option or as required by the terms of the Financing Documents and whether before, on or after the Maturity Date, with or in anticipation of funds raised directly or indirectly by any means other than a transaction in which DLJSC has acted as the sole agent or the lead underwriter, the Company shall pay to the Purchaser a fee equal to 3.00% of par plus accrued interest of the Notes so repaid, prepaid or redeemed. ARTICLE 3 REPRESENTATIONS AND WARRANTIES Each of the Company and Holdings represents and warrants to Purchaser (both before and after giving effect to the Acquisition and the Mergers) as set forth below: SECTION 3.01. Corporate Existence and Power. Each Obligor is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of organization, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted and as proposed to be conducted after the Acquisition. SECTION 3.02. Authorization, Execution and Enforceability, The execution, delivery and performance by each Obligor of the Financing Documents and Material Acquisition Documents to which it is a party and the issuance of the Notes by the Company have been duly and validly authorized and are within its corporate powers. Each of the Financing Documents (other than the Notes) and Material Acquisition Documents has been duly executed and delivered by each Obligor party thereto and constitutes its valid and binding agreement, enforceable 16 in accordance with its terms, subject to applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally and equitable principles of general applicability. When executed and delivered by the Company in accordance with the terms hereof. the Notes will constitute valid and binding obligations of the Company, enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally and equitable principles of general applicability. SECTION 3.03. Governmental Authorization. The execution and delivery by the Obligors of each of the Financing Documents and Material Acquisition Documents to which it is a party did not and will not, the issuance and sale of the Notes by the Company will not, and the consummation of the transactions contemplated hereby and thereby will not, require any action by or in respect of, or filing with, any governmental body, agency or governmental official except (i) as specified in Sections 3.9 and 4.3 of the Purchase Agreement and the filing of the Merger Agreements and (ii) other actions and filings which, if not taken or made, would not reasonably be expected to affect in any manner the validity or enforceability of the Financing Documents or the Material Acquisition Documents. SECTION 3.04. Contravention. The execution and delivery by the Obligors of the Financing Documents and the Material Acquisition Documents did not and will not, the issuance and sale of the Notes by the Company will not, and the consummation of the transactions contemplated hereby and thereby will not, contravene or constitute a default under or violation of any provision of (i) applicable law or regulation, (ii) the Corporate Documents, (iii) any agreement under which Debt may be incurred, (iv) any material agreement (other than any agreement described in clause (iii), or (v) any judgment, injunction, order, decree or other instrument binding upon it or any of its assets, or result in the creation or imposition of any Lien on any asset of Holdings or any of its Subsidiaries. SECTION 3.05. Financial Information. (A) The consolidated balance sheets of the Company and its Consolidated Subsidiaries as of June 30, 1995, June 30, 1996 and June 30, 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for each fiscal year then ended, reported on by Coopers & Lybrand LLP, fairly present, in conformity with U.S., GAAP, the consolidated financial position of the Company and its Consolidated Subsidiaries as of each such date and their consolidated results of operations, changes in stockholders' equity and cash flows for each such period. 17 (b) The unaudited consolidated balance sheet of the Company and its Consolidated Subsidiaries as of September 30, 1997 and the related unaudited consolidated statements of operations and cash flows for the three months then ended, fairly present, in conformity with U.S., GAAP (except as set forth on Schedule 3,05(b)), applied on a basis consistent with the financial statements referred to in Section 3.05(a), the consolidated financial position of the Company and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for the three months then ended (subject to normal year-end adjustments). (c) There has occurred no material adverse change, or development that could reasonably be expected to result in a material adverse change, in the business, condition (financial or otherwise), operations, performance, properties or prospects of the Company and its Subsidiaries since September 30, 1997. SECTION 3.06. Litigation. Except as set forth on Schedule 3.06, there is no action, suit or proceeding pending or, to the knowledge of the Company and Holdings threatened against any Obligor or any of their respective Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could have a Material Adverse Effect or which challenges the validity of any Financing Document or of the Acquisition. SECTION 3.07. Environmental Matters. Except as provided on Schedule 3.07: (a) Except to the extent the following would not result in a Material Adverse Effect, (i) other than generation in compliance with all applicable Environmental Laws, no Hazar dous Materials are located on any properties now or previously owned, leased or operated by the Company or any of its Subsidiaries or have been released into the environment, or deposited, discharged, placed or disposed of at, on, under or near any of such properties, (ii) no portion of any such property is being used, or has been used at any previous time, for the disposal, storage, treatment, processing or other handling of Hazardous Materials (other than processing or handling incidental to the generation of Hazardous Materials in compliance with all applicable Environmental Laws), nor (iii) is any such property now or previously owned, leased or operated by the Company or any of its Subsidiaries affected by any Hazardous Materials Contamination. (b) Except to the extent the following would not result in a Material Adverse Effect, no asbestos or asbestos-containing materials are present on any of the properties now or previously owned, leased or operated by the Company or any of its Subsidiaries. 18 (c) Except to the extent the following would not result in a Material Adverse Effect, no polychlorinated biphenyls are located on or in any properties now or previously owned, leased or operated by the Company or any of its Subsidiaries, in the form of electrical transformers, fluorescent light fixtures with ballasts, cooling oils or any other device or form. (d) Except to the extent the following would not result in a Material Adverse Effect, no underground storage tanks are located on any properties now or previously owned, leased or operated by the Company or any of its Subsidiaries, or were located on any such property and subsequently removed or filled. (e) Except as to the extent the following (or the matters referred to in any of the following) would not result in a Material Adverse Effect, no notice, notification, demand, request for information, complaint, citation, summons, investigation, administrative order, consent order and agreement, litigation or settlement with respect to Hazardous Materials or Hazardous Materials Contamination is in existence or, to the Company's knowledge, proposed, threatened or anticipated with respect to or in connection with the operation of any properties now or previously owned, leased or operated by the Company or any of its Subsidiaries. Except as to the extent the following would not result in a Material Adverse Effect, all such properties and their existing and prior uses comply and at all times have complied with any applicable Environmental Laws and there is no condition on any of such properties which is in violation of any applicable Environmental Laws, and neither the Company nor any of its Subsidiaries has received any communication from or on behalf of any governmental authority that any such condition exists which has not been resolved. (f) There has been no environmental investigation, study, audit, test, review or other analysis conducted of which the Company has knowledge in relation to the current or prior business of the Company or any property or facility now or previously owned, leased or operated by the Company or any of its subsidiaries which has not been delivered to the Lenders at least five days prior to the date hereof. (g) For purposes of this Section 3.07, the terms "Company" and "Subsidiary" shall include any business or business entity (including a corporation) which is, in whole or in part, a predecessor of the Company or any Subsidiary, 19 SECTION 3.08. Taxes. All income tax returns and all other material tax returns which are required to be filed by or on behalf of the Company and its Subsidiaries have been filed and all taxes shown as due on such returns have been paid or adequate reserves have been established on the books of the Company. The charges, accruals and reserves on the books of the Company and in respect of taxes or other governmental charges have been established in accordance with U.S. GAAP. SECTION 3.09. Subsidiaries. Other than those listed on Schedule 3.09, the Company has no Subsidiaries. SECTION 3.10. Not an Investment Company. The Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 3.11. Full Disclosure. The information heretofore furnished by the Company or Holdings to Purchaser for purposes of or in connection with the Financing Documents or any transaction contemplated hereby does not, and all such information hereafter furnished by the Company or Holdings to Purchaser will not (in each case taken together and on the date as of which such information is furnished), contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein, in the light of the circumstances under which they are made, not misleading. The Company and Holdings have disclosed to Purchaser any and all facts which materially and adversely affect or may affect (to the extent the Company and Holdings can now reasonably foresee), the business, operations or financial condition of the Company or the ability of the Company to perform its obligations under the Financing Documents or to complete the Permanent Financing, SECTION 3.12. Capitalization. (a) At the date of the first Takedown and after giving effect to the Acquisition and the Mergers, the capitalization of Holdings will be as set forth on Schedule 3.12(a). All of the issued and outstanding shares of Common Stock are validly issued, fully paid and nonassessable and free and clear of any Lien or other right or claim and the holders thereof are not entitled to any preemptive or other similar rights, (b) At the date of the first Takedown and after giving effect to the Acquisition and the Mergers, the capitalization of the Company will be as set forth on Schedule 3.12(b). All of the issued and outstanding shares of capital stock of the Company are validly issued, fully paid and nonassessable and free and clear of any Lien or other right or claim and the holder thereof is not entitled to any preemptive or other similar rights, There are no subscriptions, options, warrants, rights, convertible securities, exchangeable securities or other 20 agreements or commitments of any character pursuant to which the Company is required to issue any shares of its capital stock, SECTION 3,13. Solicitation; Access to Information. No form of general solicitation or general advertising was used by the Company or, to the best of its knowledge, any other Person acting on behalf of the Company, in connection with the offer and sale of the Notes. Neither the Company nor any Person acting on behalf of the Company has, either directly or indirectly, sold or offered for sale to any Person any of the Notes or any other similar security of the Company except as contemplated by this Agreement, and the Company represents that neither the Company nor any person acting on its behalf other than Purchaser and its Affiliates will sell or offer for sale to any Person any such security to, or solicit any offers to buy any such security from, or otherwise approach or negotiate in respect thereof with, any Person or Persons so as thereby to bring the issuance or sale of any of the Notes within the provisions of Section 5 of the Securities Act. SECTION 3.14. Non-fungibility. When the Notes are issued and delivered pursuant to this Agreement, the Notes will not be of the same class (within the meaning of Rule 144A under the Securities Act) as securities which are (i) listed on a national securities exchange registered under Section 6 of the Exchange Act or (ii) quoted in a U,S. automated inter-dealer quotation system. SECTION 3.15. Permits. Except to the extent any of the following would not reasonably be expected to result in a Material Adverse Effect: (a) the Company and its Subsidiaries have all Permits as are reasonably necessary for the conduct of their respective businesses as it has been carried on; (b) all such Permits are in full force and effect, and each of the Company and its Subsidiaries has fulfilled and performed all material obligations with respect to such Permits; (c) no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination by the issuer thereof or which results in any other impairment of the rights of the holder of any such Permit; and (d) each of the Company and its Subsidiaries has no reason to believe that any governmental body or agency is considering limiting, suspending or revoking any such Permit. SECTION 3.16. Representations in Other Financing Documents and in Material Acquisition Documents. (a) Each of the representations and warranties of any Obligor set forth in any of the other Financing Documents is true and correct in all material respects as of each date on which such representations and warranties are made or deemed made. 21 (b) Each of the representations and warranties set forth in any of the Material Acquisition Documents is true and correct in all material respects as of each date on which such representations and warranties are made or deemed made. SECTION 3.17. Prior Activities. Holdings has not engaged in any activities or incurred any liabilities other than in connection with its incorporation and the Material Acquisition Documents, and the transactions contemplated thereby, SECTION 3.18. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PURCHASER SECTION 4.01. Purchase for Investment; Authority; Binding Agreement. Purchaser represents and warrants to the Company that: (a) Purchaser is an Accredited Investor within the meaning of Rule 501 (a) under the securities Act and the Notes to be acquired by it pursuant to this Agreement are being acquired for its own account and Purchaser will not offer, sell, transfer, pledge, hypothecate or otherwise dispose of the Notes unless pursuant to a transaction either registered under, or exempt from registration under, the Securities Act; 22 (b) the execution, delivery and performance of this Agreement and the purchase of the Notes pursuant hereto are within Purchaser's corporate powers and have been duly and validly authorized by all requisite corporate action; (c) this Agreement has been duly executed and delivered by Purchaser; (d) this Agreement constitutes a valid and binding agreement of Purchaser enforceable in accordance with its terms; and (e) Purchaser has such knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investment in the Notes and Purchaser is capable of bearing the economic risks of such investment. ARTICLE 5 CONDITIONS PRECEDENT TO PURCHASE SECTION 5.01. Conditions to Purchaser's Obligation at First Takedown. The obligation of Purchaser to purchase the Notes to be issued and sold by the Company at the first Takedown hereunder is subject to the satisfaction of the following conditions contemporaneously with such Takedown: (a) (i) Each of the conditions to the parties' obligations under the Material Acquisition Documents shall have been satisfied or, with the prior written consent of Purchaser, waived, (ii) the Acquisition and the Mergers shall have been completed on the terms set forth in the Material Acquisition Documents and (iii) the aggregate amount of funds required by the Company with respect to the Acquisition (including without limitation for the payment of fees, commissions and expenses) shall not exceed $204,000,000. (b) Each of the Material Acquisition Documents, the Financing Documents and the corporate documents shall be in full force and effect and no term or condition thereof shall have been amended, waived or otherwise modified without the prior written consent of Purchaser. (c) Holdings shall have received (i) aggregate cash proceeds of not less than $30,000,000 from the issuance and sale to DLJMB of the Holdings Notes, (ii) aggregate cash proceeds of not less than $45,000,000 from the issuance and 23 sale to the Initial Investors of the Holdings Preferred Stock and (iii) aggregate cash proceeds of not less than $1,000,000 from the issuance and sale to the Initial Investors and management of the Company and existing stockholders of the Company of Common Stock, (d) Purchaser shall have received the financial statements referred to in Section 3.05 hereof. (e) Purchaser shall have received evidence reasonably satisfactory to it that all governmental, shareholder and third party consents and approvals reasonably necessary in connection with the Acquisition and the other transactions contemplated by the Financing Documents and by the Material Acquisition Documents (including without limitation any Hart-Scott-Rodino filings) have been received and all applicable waiting periods shall have expired without any action being taken by any competent authority that could restrain, prevent or impose any materially adverse conditions on the Acquisition or such other transactions or that could seek or threaten any of the foregoing, and no law or regulation shall be applicable which in the judgment of Purchaser could have any such effect, (f) There shall exist no action, suit, investigation, litigation or proceeding pending or overtly threatened in any court or before any arbitrator or any governmental instrumentality that purports to affect any Financing Document, any Material Acquisition Document or the Acquisition or any of the other transactions contemplated thereby or hereby, which, if adversely determined, could reasonably be expected to have a material adverse effect on any Financing Document, and Material Acquisition Document or the Acquisition or any of the other transactions contemplated thereby or hereby. (g) Purchaser shall have received evidence reasonably satisfactory to it that on the date of the Takedown, and after giving effect to the Acquisition and the Mergers, there shall be no outstanding Debt of Holdings or any of its Subsidiaries except the Notes, the Holdings Notes, and the Scent Seal Note, and no agreement providing for the incurrence of Debt in the future other than the Permanent Financing and the Revolver. (h) Purchaser shall have received evidence satisfactory to it that on the date of the Takedown, and after giving effect to the Acquisition and the Merger, there shall be no outstanding preferred stock of Holdings or its Subsidiaries except the Holdings Preferred Stock. 24 (i) Purchaser shall have received opinions, dated on or prior to the date of the Takedown, of (i) Weil, Gotshal & Manges LLP, special counsel for the Company and Holdings, substantially in the form of Exhibit B hereto, and (ii) Davis Polk & Wardwell, special counsel for the Purchaser, substantially in the form of Exhibit C. (j) Holdings and DLJSC shall have executed the Engagement Letter. (k) All fees and expenses due and payable to Purchaser or DLJSC hereunder, under the Engagement Letter or otherwise in connection with the transactions contemplated hereby, shall have been paid in full. (1) There shall have occurred no material adverse change in the business, condition (financial or otherwise), operations, performance, properties or prospects of the Company and its Subsidiaries, taken as a whole, since September 30, 1997. (m) There shall not have occurred any disruption or adverse change in the financial or capital markets generally which could reasonably be expected to materially adversely affect the purchase of the Notes or the refinancing thereof, SECTION 5.02. Conditions to Purchaser's Obligations at Each Takedown. The obligation of Purchaser to purchase the Notes to be issued and sold by the Company at each Takedown hereunder is subject to the satisfaction of the following conditions contemporaneously with such Takedown: (a) Purchaser shall have received the Notes to be issued at such Takedown, duly executed by the Company in the denominations and registered in the names specified in or pursuant to Section 2.02(c). (b) The representations and warranties of the Obligors contained in the Financing Documents and the representations and warranties set forth in the Material Acquisition Documents shall each be true and correct in all material respects on and as of the date of such Takedown as if made on and as of such time, except to the extent such representation and warranties specifically relate to an earlier date, in which case they shall be true and correct in all material respects as of such earlier date, and each of the Company and Holdings shall have performed and complied with all covenants and agreements required by the Financing Documents to be performed by it or complied with by it at or prior to such Takedown. 25 (c) There shall not exist any Default. (d) Solely if such Takedown is the first Takedown and the Scent Seal Note shall remain outstanding immediately after such Takedown and the application of the proceeds of the Notes purchased pursuant thereto, the aggregate principal amount of the Notes being purchased at such Takedown shall not exceed $125,000,000 minus the outstanding principal amount of the Scent Seal Note immediately prior to such Takedown and accrued and unpaid interest thereon, ARTICLE 6 COVENANTS The Company (and, in the case of Sections 6.10, 6.13, 6.15, 6.17, 6.18 and 6.19, Holdings) agree that, from and after the date of the Takedown and so long as any Notes remain outstanding and unpaid or any other amount is owing to Purchaser or the Holders hereunder, and for the benefit of Purchaser and the Holders: SECTION 6,01. Information. The Company will deliver to Purchaser: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of income and cash flows and stockholders' equity for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Approved Accountants; (b) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Company, a consolidated balance sheet of the Company and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of income and cash flows and stockholders' equity for such quarter and for the portion of the Company's fiscal year ended at the end of such quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the Company's previous fiscal year, all certified (subject to footnote presentation and normal year-end adjustments) as to fairness of presentation, U.S. GAAP and consistency by a responsible financial officer of the Company; 26 (c) as soon as available and in any event within 30 days after the end of each month of each fiscal year of the Company, a consolidated balance sheet of the Company and its Consolidated Subsidiaries and the related consolidated statements of income for such month and for the portion of the fiscal year ended at the end of such month and of cash flows for the portion of the fiscal year ended at the end of such month; (d) simultaneously with the delivery of each set of financial statements referred to in clauses (a), (b) and (c) above, a certificate of a responsible financial officer or the chief accounting officer of the Company (i) setting forth in reasonable detail the calculations (if any) required to establish whether the Company was in compliance with the requirements of Sections 6.08 through 6.12, inclusive, on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Company is taking or proposes to take with respect thereto; (e) simultaneously with the delivery of each set of financial statements referred to in clause (a) above, a statement of the firm of independent public accountants which reported on such statements confirming the calculations set forth in the officer's certificate delivered simultaneously therewith pursuant to clause (d) above; (f) within five days after any officer of the Company obtains knowledge of a Default, a certificate of a responsible officer of the Company setting forth the details thereof and the action which the Company is taking or proposes to take with respect thereto; (g) promptly upon the filing thereof, copies of all applications, registration statements or reports which Holdings or any of its Subsidiaries shall have filed with the Commission or any national stock exchange; (h) promptly following the commencement thereof, notice and a description in reasonable detail of any litigation or proceeding to which Holdings or any of its Subsidiaries is a party in which the amount involved is $1,000,000 or more; (i) promptly following the occurrence thereof, notice and a description in reasonable detail of any material adverse change in the business, operations, 27 property, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole; (j) from time to time such additional information regarding the financial position or business of Holdings and its Subsidiaries as Purchaser may reasonably request; and (k) within 30 days after the initial Takedown, a consolidating pro forma balance sheet of Holdings as of September 30, 1997, giving effect to the Acquisition and the Merger and the other transactions contemplated by the Financing Documents and the Material Acquisition Documents and reflecting estimated accounting adjustments in connection therewith, prepared by the Approved Accountants. SECTION 6.02. Payment of Obligations. The Company will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. SECTION 6.03. Insurance. The Company shall, and shall cause each of its Subsidiaries to, keep its insurable properties adequately insured at all times by financially sound and reputable insurers; maintain such other insurance, to such extent and against such risks, including fire and other risks insured against by extended coverage, as is customary with companies in the same or similar businesses operating in the same or similar locations, including (i) public liability insurance against claims for personal injury or death or property damage occurring upon, in, about in connection with the use of any properties owned, occupied or controlled by it and (ii) business interruption insurance; and maintain such other insurance as may be required by law, SECTION 6.04. Conduct of Business and Maintenance of Existence. The Company will continue, and will cause each Subsidiary to continue, to engage in business of the same general type as now conducted by the Company and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect their respective corporate existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business, except that (i) the Company may discontinue any immaterial line of business of the Company 28 and its Subsidiaries if the Board of Directors of the Company determines that such discontinuation is in the best interests of the Company and not disadvantageous to the holder of any Note and (ii) nothing in this Section 6.04 shall prohibit the merger or consolidation of any wholly-owned Subsidiary of the Company with or into any other wholly-owned Subsidiary of the Company (including, without limitation, the Mergers). SECTION 6.05. Compliance with Laws. (a) The Company will comply, and cause each Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws and the rules and regulations thereunder). (b) The Company will take all actions to ensure that the obligations of the Company under the Financing Documents are at all times valid, binding and enforceable against the Company in accordance with their terms under all applicable laws. SECTION 6.06. Inspection of Property, Books and Records. The Company will keep, and will cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Subsidiary to permit, representatives of Purchaser at the expense of the Company, upon reasonable prior notice, to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective executive officers and independent public accountants at such reasonable times and as often as may reasonably be desired; provided, however, the Purchaser shall notify the Company prior to any contact with such independent public accountants and give the Company the opportunity to participate in such discussions. SECTION 6.07. Investment Company Act. The Company will not be or become an open-end investment trust, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act of 1940, as amended. SECTION 6.08. Financial Covenants. (a) At any date on or after March 31, 1998 (i) Consolidated Net Worth at such date plus (ii) the aggregate amount (if any) by which Consolidated Net Worth has been reduced as a result of 29 purchase price adjustments related to the Acquisition on or prior to such date will not be less than $70,000,000, (b) At any date on or after March 31, 1998, the ratio of (i) Consolidated Debt at such date to (ii) Consolidated EBITDA for the period of four consecutive fiscal quarters most recently ended on or prior to such date shall not exceed 6.50:1.00. SECTION 6.09. Limitation on Debt. Neither the Company nor any Subsidiary will create, incur, assume or suffer to exist any Debt, except: (a) Debt of the Company evidenced by the Notes; (b) Debt under the Revolver; provided that the aggregate outstanding principal amount of such Debt shall at no time exceed $20,000,000; (c) Debt owing to the Company or a Subsidiary; (d) Debt of Scent Seal evidenced by the Scent Seal Note; and (e) other Debt the terms and conditions of which shall have been approved by the Majority Holders and the Net Cash Proceeds of which are applied in accordance with Section 2.06. SECTION 6. 10. Restricted Payments; Voluntary Prepayments. (a) Neither Holdings nor any Subsidiary of Holdings will declare or make any Restricted Payment other than payments to repurchase Common Stock owned by any employee of the Company or any of its Subsidiaries in connection with such employee's termination of employment or as permitted or contemplated under any shareholders agreement; provided that the aggregate amount of such payments shall not exceed $1,000,000 multiplied by the number of the next succeeding anniversary of the date of the Takedown. (b) Holdings will not, and will not permit any of its Subsidiaries to, directly or indirectly, optionally redeem, retire, purchase, acquire, defease or otherwise make any cash payment in respect of the Holdings Notes. SECTION 6.11. Investments. The Company will not, and will not permit any of its Subsidiaries to, make or acquire any Investment in any Person other than (i) Investments in existence on the date hereof and consisting of the capital stock of direct or indirect wholly-owned Subsidiaries, (ii) Investments in Cash 30 Equivalents, (iii) Investments in the form of loans and advances to Persons which are wholly-owned Subsidiaries on the date hereof, (iv) loans and advances to employees of the Company and its Subsidiaries in the ordinary course of business (including, without limitation, for travel, entertainment and relocation expenses) not to exceed $1,000,000 at any one time outstanding, (v) Investments received in connection with the bankruptcy or reorganization of suppliers and customers and in settlement of delinquent obligations of, and other disputes with, customers and suppliers arising in the ordinary course of business and (vi) Investments made after the date hereof in Persons which are direct or indirect wholly-owned Subsidiaries immediately after such Investment is made; provided that the consideration paid by the Company for any such Investments consists solely of Common Stock. Without limiting the generality of the foregoing, Holdings will not make, or permit any of its Subsidiaries to make, any Business Acquisition other than (i) the Acquisition and (ii) any Business Acquisition by the Company with respect to which the consideration paid consists solely of Common Stock. SECTION 6.12. Negative Pledge. (a) The Company will not create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) existing Liens (other than Liens described in clause (b) below) to be terminated not later than the date of the first Takedown; (b) (i) Liens in existence on the date hereof on assets subject to such Liens on the date hereof securing the Scent Seal Note or (ii) Liens securing Debt and other obligations incurred under the Revolver; (c) other Liens approved by the Majority Holders securing Debt permitted by Section 6.09(e); and (d) Liens arising in the ordinary course of its business which (i) do not secure Debt, (ii) do not secure any obligation in an amount exceeding $1,000,000 and (iii) do not in the aggregate materially detract from the value of the assets of the Company and its Subsidiaries, taken as a whole, or materially impair the use thereof in the operation of its business; and (e) Liens in cash collateral not exceeding $600,000 securing certain operating lease obligations in existence on the date hereof. 31 SECTION 6.13, Transactions with Affiliates. The Company will not, and will not permit any Subsidiary to, directly or indirectly, pay any funds to or for the account of, make any investment (whether by acquisition of stock or indebtedness, by loan, advance, transfer of property, guarantee or other agreement to pay, purchase or service, directly or indirectly, any Debt, or otherwise) in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or participate in, or effect any transaction in connection with any joint enterprise or other joint arrangement with, any Affiliate, except on terms to the Company or such Subsidiary no less favorable than terms that could be obtained by the Company or such Subsidiary from a Person that is not an Affiliate, as determined, in the case of any transaction with a value of $500,000 or more, in good faith by the Board of Directors of the Company; provided that no determination of the Board of Directors shall be required with respect to any such transactions entered into in the ordinary course of business or in connection with the execution or performance of the Company's obligations under the Engagement Letter; and provided further that this Section shall not apply to any transaction with Purchaser or any of its Affiliates. SECTION 6.14. Consolidations, Mergers and Sales of Assets; Ownership of Subsidiaries. (a) Neither the Company nor any of its Subsidiaries will consolidate or merge with or into any other Person; provided that any wholly-owned Subsidiary of the Company may merge or consolidate with or into any other wholly-owned Subsidiary (including without limitation pursuant to the Mergers). The Company will not, and will not permit its Subsidiaries to, sell, lease or otherwise transfer, directly or indirectly, any substantial part of the assets of the Company and its Subsidiaries, taken as a whole, to any other Person. (b) The Company will at all times continue to own, directly or indirectly, 100% of the capital stock of each Person which is a wholly-owned Subsidiary of the Company on the date hereof. SECTION 6.15. Limitations on Activities by Holdings. Holdings will not, directly or indirectly, engage in any business or conduct any activity other than the making and holding of its Investment in the Company and activities necessary to perform its obligations under the Financing Documents and the Material Acquisition Documents to which it is a party or reasonably incidental thereto. Without limiting the generality of the foregoing, Holdings will not (i) incur or suffer to exist any Debt, other than Debt under the Holdings Notes and other Debt of Holdings incurred to repurchase Common Stock held by any employees of the Company or any of its Subsidiaries, in an aggregate principal amount not to exceed at any date $1,000,000 multiplied by the number of the next succeeding 32 anniversary of the date of the Takedown, (ii) incur or suffer to exist any Lien on any of its assets or (iii) consolidate or merge with or into any other Person. Holdings shall preserve, renew and keep in full force and effect its corporate existence and any rights, privileges and franchises necessary or desirable in the conduct of its business, and shall comply in all material respects with all material applicable laws, ordinances, rules, regulations, and requirements of governmental authorities, provided that Holdings may terminate any such right, privilege or franchise (other than its corporate existence) if its board of directors in good faith determines that such termination is in the best interests of Holdings and not materially disadvantageous to the Holders. SECTION 6.16. Use of Proceeds. The proceeds from the issuance and sale of the Notes by the Company pursuant to this Agreement at the first Takedown shall be used to pay the purchase price of the Acquisition and related fees and expenses and may also be used to refinance in full the Scent Seal Note. The proceeds from the issuance and sale of the Notes by the Company pursuant to this Agreement at any Takedown other than the first Takedown shall be used solely to refinance in full the Scent Seal Note and to pay purchase price adjustments to be paid to the Sellers under the Acquisition Documents, SECTION 6.17. Restrictions on Certain Amendments. (a) Neither the Company nor Holdings will amend or waive, or suffer to be amended or waived, any Corporate Document, any Financing Document (other than the Revolver) or any Material Acquisition Document from the respective forms thereof delivered to Purchaser pursuant to Section 5.01 without the prior written consent of Purchaser. (b) The Company will not agree to any amendment or other modification of the Revolver the effect of which would be to impose any additional restriction on the Permanent Financing. SECTION 6.18. Permanent Financing. (a) Holdings will, and will cause its Subsidiaries to, take all actions which, in the reasonable judgment of DLJSC, are necessary or desirable to obtain Permanent Financing as soon as practicable through (x) bank financing on terms usual and customary for similar financings and/or (y) through issuance of securities at such interest rates and other terms as are, in the reasonable opinion of DLJSC, prevailing for new issues of securities of comparable size and credit rating in the capital markets at the time such Permanent Financing is consummated and obtained in comparable transactions made on an arm's-length basis between unaffiliated parties; provided that, if in the reasonable judgment of DLJSC, equity securities of Holdings need to be provided for the consummation of Permanent Financing on the terms set forth above, the 33 terms of the Permanent Financing shall provide for the issuance of such equity securities (which may include warrants to purchase such equity securities). The respective amounts to be financed through bank financing or through the issuance of securities shall be as determined by the Company, but shall be in an amount at least sufficient to repay or redeem the Notes in full in accordance with their terms. The Company hereby covenants and agrees that the proceeds from the Permanent Financing shall be used to the extent required to redeem in full the Notes in accordance with their terms. (b) Holdings covenants that it will, and will cause its Subsidiaries to, enter into such agreements as in the reasonable judgment of DLJSC are customary in connection with the Permanent Financing, make such filings under the Securities Act, the Exchange Act, the Trust Indenture Act of 1939, as amended, and state securities laws as in the reasonable judgment of DLJSC shall be required to permit consummation of the Permanent Financing and take such steps as in the reasonable judgment of DLJSC are necessary or desirable to cause such filings to become effective or in the reasonable judgment of DLJSC are otherwise required to consummate the Permanent Financing. SECTION 6.19. Appointment of Director. If an Event of Default shall have occurred and be continuing the Company and Holdings shall provide Purchaser with the right to appoint in its sole discretion one additional director to the Board of Directors of each of the Company and Holdings, which additional director shall serve as such only for so long as an Event of Default shall continue; provided that such right shall terminate at such time as Purchaser is no longer the holder of at least 50% of the aggregate outstanding principal amount of the Notes. ARTICLE 7 EVENTS OF DEFAULT SECTION 7.0 1. Events of Default Defined; Acceleration of Maturity; Waiver of Default. In case one or more of the following (each, an "Event of Default"), whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body, shall have occurred and be continuing: (a) default in the payment of all or any part of the principal or premium, if any, on any of the Notes as and when the same shall become due and payable either at maturity, upon any redemption, by declaration or otherwise; or 34 (b) default in the payment of any installment of interest upon any of the Notes or any fees payable under this Agreement or any amount payable under Section 2.07 as and when the same shall become due and payable, and continuance of such default for a period of five days; or (c) failure on the part of the Company or Holdings duly to observe or perform any of the covenants contained in Sections 6.07 through 6.20 of the Agreement; or (d) failure on the part of the Company or Holdings duly to observe or perform any other of the covenants or agreements contained in the Financing Documents, if such failure shall continue for a period of 30 days after the date on which written notice thereof shall have been given to the Company at the option of any holder of a Note; or (e) Holdings or any of its Subsidiaries shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect in any jurisdiction or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; or (f) an involuntary case or other proceeding shall be commenced against Holdings or any of its Subsidiaries seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against Holdings or any of its Subsidiaries under the bankruptcy laws as now OR hereafter in effect in any jurisdiction; or (g) there shall be a default in respect of any Debt of Holdings or any of its Subsidiaries whether such Debt now exists or shall hereafter be created (excluding the Notes but including Debt owing to the Company or a Subsidiary) if such default results in acceleration of the maturity of such Debt or enables the holder of such Debt to accelerate the maturity thereof (without giving effect to 35 any waiver or amendment of the terms of such Debt which might otherwise eliminate such default); or Holdings or any of its Subsidiaries shall fail to pay at maturity any such Debt whether such Debt now exists or shall hereafter be created; or (h) final judgments for the payment of money which in the aggregate at any one time exceed $1,000,000 (not paid or covered by insurance or indemnification agreements with respect to which the relevant insurer or indemnify party, as the case may be, has acknowledged coverage) shall be rendered against Holdings or any of its Subsidiaries by a court of competent jurisdiction and shall remain undischarged for a period (during which execution shall not be effectively stayed) of 60 days after such judgment becomes final; or (i) any representation, warranty, certification or statement made or deemed made by Holdings or any of its Subsidiaries in any Financing Document or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with any Financing Document shall prove to have been untrue in any material respect when made or deemed made; or (j) a Change of Control has occurred; or (k) or any of the Financing Documents shall for any reason fail to constitute the valid and binding agreement of any Obligor party thereto (other than pursuant to the cessation of the existence of such Obligor pursuant to a transaction permitted under Section 6.14 of this Agreement), or any Obligor shall so assert in writing; or (1) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $250,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $1,000,000; 36 then, and in each and every such case (other than under clauses (e) and (f) with respect to the Company), unless the principal of all the Notes shall have already become due and payable, the Majority Holders (or, if at such time Purchaser no longer holds least 50% of the aggregate outstanding principal amount of the Notes, Holders of at least 33 1/3% of the aggregate outstanding principal amount of the Notes), by notice in writing to the Company, may declare the entire principal amount of the Notes together with accrued and unpaid interest thereon to be, and upon the Company's receipt of such notice the entire principal amount of the Notes together with accrued and unpaid interest thereon shall become, immediately due and payable. If an Event of Default specified in clauses (e) or (f) with respect to the Company occurs, the principal of and accrued and unpaid interest on the Notes will be immediately due and payable without any declaration or other act on the part of the Holders. ARTICLE 8 LIMITATION ON TRANSFERS SECTION 8.01. Restrictions on Transfer. From and after the date of the Takedown and their respective dates of issuance, in the case of Additional Notes, none of the Notes shall be transferable except upon the conditions specified in Sections 8.02 and 8.03, which conditions are intended to ensure compliance with the provisions of the Securities Act in respect of the Transfer of any of such Notes or any interest therein. Purchaser will cause any proposed transferee of any Notes (or any interest therein) held by it to agree to take and hold such Notes (or any interest therein) subject to the provisions and upon the conditions specified in this Section 8.01 and in Sections 8.02 and 8.03 SECTION 8.02. Restrictive Legends. (a) Each Note issued to Purchaser or to a subsequent transferee shall (unless otherwise permitted by the provisions of Section 8.02(b) or Section 8.03) include a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD, UNLESS IT HAS BEEN REGISTERED UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE AND THEN ONLY IN COMPLIANCE WITH THE RESTRICTIONS ON 37 TRANSFER SET FORTH IN THE SECURITIES PURCHASE AGREEMENT DATED AS OF DECEMBER 15,1997, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER OF THIS SECURITY AT ITS PRINCIPAL EXECUTIVE OFFICE. (b) Any Holders of Notes registered pursuant to the Securities Act and qualified under applicable state securities laws may exchange such Notes on transfer for new securities that shall not bear the legend set forth in paragraph (a) of this Section 8.02. SECTION 8.03. Notice of Proposed Transfers. (a) Five Business Days prior to any proposed Transfer (other than Transfers of Notes (i) registered under the Securities Act, (ii) to an Affiliate of DLJSC or a general partnership in which DLJSC or an Affiliate of DLJSC is one of the general partners or (iii) to be made in reliance on Rule 144A under the Securities Act) of any Notes, the holder thereof shall give written notice to the Company of such holder's intention to effect such Transfer, setting forth the manner and circumstances of the proposed Transfer, and shall be accompanied by (i) an opinion of counsel reasonably satisfactory to the Company addressed to the Issuer to the effect that the proposed Transfer of such Notes may be effected without registration under the Securities Act, (ii) such representation letters in form and substance reasonably satisfactory to the Company to ensure compliance with the provisions of the Securities Act and (iii) such letters in form and substance reasonably satisfactory to the Company from each such transferee stating such transferee's agreement to be bound by the terms of this Agreement. Such proposed Transfer may be effected only if the Company shall have received such notice of transfer, opinion of counsel, representation letters and other letters referred to in the immediately preceding sentence, whereupon the holder of such Notes shall be entitled to Transfer such Notes in accordance with the terms of the notice delivered by the holder to the Company. Each Note transferred as above provided shall bear the legend set forth in Section 8.02(a) except that such Note shall not bear such legend if the opinion of counsel referred to above is to the further effect that neither such legend nor the restrictions on Transfer in Sections 8.01 through 8.03 are required in order to ensure compliance with the provisions of the Securities Act. (b) Five Business Days prior to any proposed Transfer of any Notes to be made in reliance on Rule 144A under the Securities Act ("Rule 144A"), the holder thereof shall give written notice to the Company of such holder's intention to effect such Transfer, setting forth the manner and circumstances of the proposed Transfer and certifying that such Transfer will be made (i) in full 38 compliance with Rule 144A and (ii) to a transferee that (A) such holder reasonably believes to be a "qualified institutional buyer" within the meaning of Rule 144A and (B) is aware that such Transfer will be made in reliance on Rule 144A. Such proposed Transfer may be effected only if the Company shall have received such notice of transfer, whereupon the holder of such Notes shall be entitled to Transfer such Notes in accordance with the terms of the notice delivered by the holder to the Company. Each Note transferred as above provided shall bear the legend set forth in Section 8.02(a). ARTICLE 9 MISCELLANEOUS SECTION 9.01. Notices. All notices, demands and other communications to any party hereunder shall be in writing (including telecopier or similar writing) and shall be given to such party at its address set forth on the signature pages hereof, or such other address as such party may hereinafter specify for the purpose. Each such notice, demand or other communication shall be effective (i) if given by telecopy, when such telecopy is received at the telecopy number specified on the signature page hereof, or (ii) if given by overnight courier, addressed as aforesaid or by any other means, when delivered at the address specified in this Section. SECTION 9.02. No Waivers; Amendments. (a) No failure or delay on the part of any party in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to any party at law or in equity or otherwise. (b) Any provision of this Agreement may be amended, supplemented or waived if, but only if, such amendment, supplement or waiver is in writing and is signed by the Company, Holdings and the Majority Holders; provided, that without the consent of each Holder of any Note affected thereby, an amendment, supplement or waiver may not (a) reduce the aggregate principal amount of Notes whose Holders must consent to an amendment, supplement or waiver, (b) reduce the rate or extend the time for payment of interest on any Note, (c) reduce the principal amount of or extend the stated maturity of any Note or alter the redemption provisions with respect thereto or (d) make any Note payable in 39 money or property other than as stated in the Notes. In determining whether the Holders of the requisite principal amount of Notes have concurred in any direction, consent, or waiver as provided in this Agreement or in the Notes, Notes which are owned by the Company or any other obligor on or guarantor of the Notes, or, except for DLJSC and its Subsidiaries (other than DLJMB, the Company and its Subsidiaries) by any Person controlling, controlled by, or under common control with any of the foregoing, shall be disregarded and deemed not to be outstanding for the purpose of any such determination; and provided further that no such amendment, supplement or waiver which affects the rights of Purchaser and its Affiliates otherwise than solely in their capacities as Holders of Notes shall be effective with respect to them without their prior written consent. SECTION 9.03. Indemnification. The Company (the "Indemnifying Party") agrees to indemnify and hold harmless Purchaser, its Affiliates, and each Person, if any, who controls Purchaser, or any of its affiliates, within the meaning of the Securities Act or the Exchange Act (a "Controlling Person"), and the respective partners, agents, employees, officers and directors of Purchaser, its Affiliates and any such Controlling Person (each an "Indemnified Party" and collectively, the "Indemnified Parties"), from and against any and all losses, claims, damages, liabilities and expenses (including, without limitation and as incurred, reasonable costs of investigating, preparing or defending any such claim or action, whether or not such Indemnified Party is a party thereto), arising out of, or in connection with any activities contemplated by this Agreement or any other services rendered in connection herewith, including, but not limited to, losses, claims, damages, liabilities or expenses arising out of or based upon any untrue statement or any alleged untrue statement of a material fact or any omission or any alleged omission to state a material fact in any of the disclosure or offering or confidential information documents (the "Disclosure Documents") pertaining to any of the transactions or proposed transactions contemplated herein, including any eventual refinancing or resale of the Notes, provided that the Indemnifying Party will not be responsible for any claims, liabilities, losses, damages or expenses that are determined by final judgment of a court of competent jurisdiction to result from such Indemnified Party's gross negligence, willful misconduct or bad faith. The Indemnifying Party also agrees that Purchaser shall have no liability (except for breach of provisions of this Agreement) for claims, liabilities, damages, losses or expenses, including legal fees, incurred by the Indemnifying Party in connection with this Agreement unless they are determined by final judgment of a court of competent jurisdiction to result from (a) Purchaser's gross negligence, willful misconduct or bad faith, (b) Purchaser's use of Disclosure Documents not approved by the Indemnifying Party or (c) the failure of Purchaser to furnish to any purchaser of securities any Disclosure 40 Document furnished to Purchaser by the Indemnifying Party which corrected any untrue statement of a material fact or omission to state a material fact contained in a Disclosure Document previously furnished to such purchaser by Purchaser. If any action shall be brought against an Indemnified Party with respect to which indemnity may be sought against the Indemnifying Party under this Agreement, such Indemnified Party shall promptly notify the Indemnifying Party in writing and the Indemnifying Party shall, if requested by such Indemnified Party or if the Indemnifying Party desires to do so, assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party and payment of all reasonable fees and expenses. The failure to so notify the Indemnifying Party shall not affect any obligations the Indemnifying Party may have to such Indemnified Party under this Agreement or otherwise unless the Indemnifying Party is materially adversely affected by such failure. Such Indemnified Party shall have the right to employ separate counsel in such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party, unless: (i) the Indemnifying Party has failed to assume the defense and employ counsel or (ii) the named parties to any such action (including any impleaded parties) include such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by 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, 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, provided, however, that the Indemnifying Party shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be responsible hereunder for the reasonable fees and expenses of more than one such firm of separate counsel, in addition to any local counsel, which counsel shall be designated by Purchaser. The Indemnifying Party shall not be liable for any settlement of any such action effected without the written consent of the Indemnifying Party (which shall not be unreasonably withheld) and the Indemnifying Party agrees to indemnify and hold harmless each Indemnified Party from and against any loss or liability by reasons of settlement of any action effected with the consent of the Indemnifying Party. In addition, the Indemnifying Party will not, without the prior written consent of Purchaser, settle or compromise or consent to the entry of any judgment in or otherwise seek to terminate any pending or threatened action, claim, suit or proceeding in respect of which indemnification or contribution may be sought 41 hereunder (whether or not any Indemnified Party is a party thereto) unless such settlement, compromise, consent or termination includes an express unconditional release of Purchaser and the other Indemnified Parties, reasonably satisfactory in form and substance to Purchaser, from all liability arising out of such action, claim, suit or proceeding. If for any reason the foregoing indemnity is unavailable (otherwise than pursuant to the express terms of such indemnity) to an Indemnified Party or insufficient to hold an Indemnified Party harmless, then in lieu of indemnifying the Indemnified Party, the Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party as a result of such claims, liabilities, losses, damages, or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Indemnifying Party on the one hand and by Purchaser on the other from the transactions contemplated by this Agreement or (ii) if the allocation provided by clause (i) is not permitted under applicable law, in such proportion as is appropriate to reflect not only the relative benefits received by the Indemnifying Party on the one hand and Purchaser on the other, but also the relative fault of the Indemnifying Party and Purchaser as well as any other relevant equitable considerations. Notwithstanding the provisions of this Section 9.03, the aggregate contribution of all Indemnified Parties shall not exceed the amount of fees actually received by Purchaser pursuant to this Agreement. It is hereby further agreed that the relative benefits to the Indemnifying Party on the one hand and Purchaser on the other with respect to the transactions contemplated hereby shall be determined by reference to, among other things, whether any untrue or alleged untrue statement of material fact or the omission or alleged omission to state a material fact related to information supplied by the Indemnifying Party or by Purchaser and the party's relative intent, knowledge, access to information and opportunity to correct or prevent such statement or 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. The indemnification, contribution and expense reimbursement obligations set forth in this Section 9.03 (i) shall be in addition to any liability the Indemnifying Party may have to any Indemnified Party at common law or otherwise, (ii) shall survive the termination of this Agreement and the payment in full of the Notes and (iii) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of Purchaser or any other Indemnified Party. 42 SECTION 9.04. Expenses, The Company agrees to pay all out-of-pocket costs, expenses and other payments in connection with the purchase and sale of the Notes as contemplated by this Agreement including without limitation (i) reasonable fees and disbursements of special counsel and any local counsel for Purchaser incurred in connection with the preparation of this Agreement, (ii) all reasonable out-of-pocket expenses of Purchaser, including reasonable fees and disbursements of counsel, in connection with any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (iii) if an Event of Default occurs, all reasonable out-of-pocket expenses incurred by Purchaser and each holder of Notes, including reasonable fees and disbursements of a single counsel for all Holders (which counsel shall be selected by Purchaser if Purchaser is a holder of Notes when such Event of Default occurs), in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. SECTION 9.05. Payment. The Company agrees that, so long as Purchaser shall own any Notes purchased by it from the Company hereunder, the Company will make payments to Purchaser of all amounts due thereon by wire transfer by 1:00 P.M. (New York City time) on the date of payment to such account as is specified beneath Purchaser's name on the signature page hereof or to such other account or in such other similar manner as Purchaser may designate to the Company in writing. SECTION 9.06. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the Company, Holdings and Purchaser and their respective successors and assigns; provided that the Company may not assign or otherwise transfer its rights or obligations under this Agreement to any other Person without the prior written consent of the Majority Holders. All provisions hereunder purporting to give rights to DLJMB, DLJSC and its Affiliates or to Holders are for the express benefit of such Persons. SECTION 9.07. Brokers. The Company represents and warrants that, except FOR DLJSC, it has not employed any broker, finder, financial advisor or investment banker who might be entitled to any brokerage, finder's or other fee or commission in connection with the Acquisition or the sale of the Notes. SECTION 9.08. New York Law; Submission to Jurisdiction; Waiver of Jury Trial. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. EACH PARTY HERETO HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT 43 COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 9.09. 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. SECTION 9.10. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original with the same effect as if the signatures thereto and hereto were upon the same instrument. 44 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers, as of the date first above written. AHC I MERGER CORP. By /s/ David Wittels ------------------------ Name: David Wittels Title: Vice President Address:c/o DLJ Merchant Banking Partners II, L.P. 277 Park Avenue New York, New York 10172 Attention: David Wittels AHC I ACQUISITION CORP. By /s/ David Wittels ------------------------ Name: David Wittels Title: Vice President Address:c/o DLJ Merchant Banking Partners II, L.P. 277 Park Avenue New York, New York 10172 Attention: David Wittels SCRATCH & SNIFF FUNDING, INC. By /s/ Paul Tompson ------------------------ Name: Title: Address:c/o DLJ Merchant Banking Partners II, L.P. 277 Park Avenue New York, New York 10172 Attention: David Wittels 45 EXHIBIT A FORM OF NOTE THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD, UNLESS IT HAS BEEN REGISTERED UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE AND THEN ONLY IN COMPLIANCE WITH THE RESTRICTIONS ON TRANSFER SET FORTH IN THE SECURITIES PURCHASE AGREEMENT DATED AS OF DECEMBER 15,1997, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER OF THIS SECURITY AT ITS PRINCIPAL EXECUTIVE OFFICE. No. $ AHC I MERGER CORP. Senior Increasing Rate Note AHC I MERGER CORP., a Delaware corporation (together with its successors, the "Company"), for value received hereby promises to pay to Scratch & Sniff Funding, Inc. and registered assigns the principal sum of by wire transfer of immediately available funds to the Holder's account at such bank in the United States as may be specified in writing by the Holder to the Company, on December 15, 1998 in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest on the unpaid principal amount hereof on the dates and at the rate or rates provided for in the Securities Purchase Agreement (as hereinafter defined). Reference is made to the Securities Purchase Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. This Note is one of a duly authorized issue of Senior Increasing Rate Notes of the Company (the "Notes") referred to in the Securities Purchase Agreement dated as of December 15, 1997 among the Company, AHC I Acquisition Corp, and Scratch & Sniff Funding, Inc, (as the same may be amended from time to time in accordance with its terms, the "Securities Purchase Agreement"). The Notes are transferable and assignable to one or more purchasers (in minimum denominations of $5,000,000 or larger multiples of $1,000,000), in accordance with the limitations set forth in the Securities Purchase Agreement. The Company agrees to issue from time to time replacement Notes in the form hereof to facilitate such transfers and assignments. Scratch & Sniff Funding, Inc., acting solely for this purpose as agent for the Company, shall keep at its principal office a register (the "Register") in which shall be entered the names and addresses of the registered holders of the Notes and particulars of the respective Notes held by them and of all transfers of such Notes. References to the "Holder" or "Holders" shall mean the Person listed in the Register as the payee of any Note. The ownership of the Notes shall be proven by the Register absent manifest error. This Note shall be deemed to be a contract under the laws of the State of New York, and for all purposes shall be construed in accordance with the laws of said State. The parties hereto, including all guarantors or endorsers, hereby waive presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note, except as specifically provided herein, and assent to extensions of the time of payment, or forbearance or other indulgence without notice. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. Dated: ----------------------------------- AHC I MERGER CORP. By: ------------------------ Name: Title: 2 EX-10.10 7 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (the "Agreement"), dated as of November 14, 1997, is made among AHC I Acquisition Corp., a Delaware corporation ("Purchaser"), Arcade Holding Corporation, a Delaware corporation (the "Company"), and the parties identified on the signature page hereto as "Sellers" (each a "Seller" and collectively, "Sellers"). RECITALS A. Sellers currently collectively own all of the issued and outstanding shares (the "Shares") of the common stock, $.01 par value (the "Common Stock"), of the Company. B. State Board of Administration of Florida ("SBA") owns all of the issued and outstanding shares of the preferred stock, $1.00 par value (the "Preferred Stock"), of the Company. Liberty Partners Holdings 4, L.L.C. ("Liberty Holdings") is the holder of an Arcade Holding Corporation Common Stock Purchase Warrant dated November 4, 1993 (the "Warrant") entitling Liberty Holdings to purchase shares of the common stock of the Company. C. The Company is a party to an Executive Stock Option Agreement (an "Option Agreement") with certain executives of the Company or its subsidiary who are Sellers under this Agreement (the "Option Holders"), the terms of which provide for the immediate vesting of all options to purchase shares of common stock of the Company ("Options") thereunder upon, and forfeitability of any unexercised Options not exercised prior to or in connection with, the sale contemplated hereunder. D. Arcade, Inc., a Tennessee corporation ("Arcade"), is a wholly-owned subsidiary of the Company. Each of Scent Seal, Inc., a California corporation ("Scent Seal"), and Arcade Europe SARL, a company organized under the laws of France ("Arcade Europe"), is a wholly-owned subsidiary of Arcade. Arcade, Scent Seal and Arcade Europe are collectively referred to herein as the "Subsidiaries". E. The Subsidiaries are engaged in the business of developing, manufacturing, marketing and distributing olfactory sampling products and related items (the "Business"). NOW, THEREFORE, in consideration of the foregoing Recitals (which are hereby incorporated by reference), the agreements hereafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE 1. PURCHASE AND SALE OF SHARES; OPTIONS; WARRANTS; REDEMPTION OF PREFERRED; DEBT CLOSING, 1.1 Agreement to Purchase and Sell. On the Closing Date (as defined in Section 1.8) and upon the terms and subject to the conditions set forth in this Agreement, Sellers shall sell, assign, transfer, convey and deliver the Shares to Purchaser free and clear of all Liens (as hereinafter defined) and Purchaser shall purchase the Shares from Sellers. 1.2 Treatment of Options. On the Closing Date and upon the terms and subject to the conditions set forth in this Agreement, each Option that is vested or would vest upon consummation of the transactions contemplated by this Agreement immediately prior to the Closing (as defined in Section 1.8) shall be cancelled and terminated without delivery of any shares of capital stock of the Company and Purchaser shall pay each Option Holder in exchange for each such Option the price to be paid for each Share hereunder (as the same may be adjusted) less the Option Price (as defined in the Option Agreements) applicable to such Option (any payments paid by Purchaser to the Option Holders pursuant to this Section 1.2 are referred to herein as the "Option Payments"). Each Option Holder shall be deemed to be a "Seller" hereunder with respect to the Options. 1.3 Treatment of Warrants. On the Closing Date and upon the terms and subject to the conditions set forth in this Agreement, Liberty Holdings shall deliver to Purchaser, and Purchaser shall purchase from Liberty Holdings, the Warrant for a purchase price equal to the purchase price to be paid for each Share hereunder (as the same may be adjusted) multiplied by the number of shares of Common Stock issuable upon exercise of the Warrant, less the aggregate exercise price payable under the Warrant (the payment paid by Purchaser to Liberty Holdings pursuant to this Section 1.3 is referred to herein as the "Warrant Payment"). Liberty Holdings shall be deemed to be a "Seller" hereunder with respect to the Warrant. 1.4 Purchase Price. Subject to the terms and conditions set forth herein and to adjustment as provided in Section 1.5, at the Closing, Purchaser shall: (i) pay the Sellers, the Option Holders and the Warrant Holder in the aggregate the Pre-Closing Adjusted Purchase Price (as hereinafter defined), less the Escrow Amount (as hereinafter defined) (the "Closing Payment"). The Closing Payment shall be allocated among the Sellers in accordance with Exhibit A attached hereto; and (ii) deposit $5,000,000 in the aggregate (the "Escrow Amount") into an escrow (the "Escrow") established pursuant to an escrow agreement substantially in the form attached hereto as Exhibit B (the "Escrow Agreement") among Purchaser, Sellers and a party, reasonably acceptable to purchaser and that would qualify as a successor escrow agent pursuant to the escrow agreement, selected by Sellers to act as escrow agent (the "Escrow Agent"), which Escrow Amount shall simultaneously with the -2- Closing without any further action by any Person (as defined in Section 8.12) become subject to the terms and conditions of the Escrow Agreement. All payments to be made by Purchaser hereunder shall be made in cash by wire transfer of immediately available funds to the account designated by the recipient thereof in writing at least two business days prior to the Closing. 1.5 Purchase Price Adjustment. (a) Pre-Closing Statement. (i) At least two business days prior to the Closing Date, the Company shall furnish to Purchaser a statement of the Company (the "Pre- Closing Statement"), prepared as of a date which is no more than five business days prior to the Closing Date, reflecting the Company's good faith estimate of the Net Indebtedness (as hereinafter defined), the Redemption Payments and the Transaction Fees and Expenses (as hereinafter defined) immediately prior to the Closing. (ii) The "Pre-Closing Adjusted Purchase Price" shall be the amount determined pursuant to this subsection 1.5(a)(ii) by subtracting the sum of the Net Indebtedness, the Redemption Payments and the Transaction Fees and Expenses, as set forth on the Pre-Closing Statement, from the Unadjusted Purchase Price (as hereinafter defined). The calculation of the Pre-Closing Adjusted Purchase Price shall be set forth in reasonable detail on the Pre-Closing Statement. At Closing, the Pre-Closing Adjusted Purchase Price shall be used to determine the amounts to be paid to Sellers or for the benefit of Sellers as described in Section 1.4. (iii) As used herein, (A) "Net Indebtedness" shall mean (1) the sum of (x) the indebtedness of the Company and its Subsidiaries on a consolidated basis for borrowed money (including accrued interest thereon and all related charges, fees, expenses and penalties, including prepayment penalties which become due as a result of the transactions contemplated hereby), including amounts owed under the senior loan agreement and the credit agreement plus amounts reflected in capital leases to the extent such amounts would be required to be shown as indebtedness on a consolidated balance sheet of the Company and its Subsidiaries prepared in accordance with generally accepted accounting principles applied in a manner consistent with the Financial Statements (as hereinafter defined), and -3- (y) all amounts outstanding under the Conditional Promissory Note executed by Arcade, dated June 9, 1995 for the original principal amount of $1,750,000 minus (2) the amount of cash and cash equivalents of the Company and its Subsidiaries that would be shown on a consolidated balance sheet prepared in accordance with generally accepted accounting principles applied in a manner consistent with the Financial Statements, in each case as of the Closing Date. (B) "Transaction Fees and Expenses" shall mean the aggregate amount of the fees and expenses of the Company and its Subsidiaries or the Sellers (to the extent paid or payable by the Company on behalf of the Sellers) incurred at or prior to the Closing in connection with the negotiation and execution of this Agreement and the consummation of the transactions contemplated hereby, including any investment banking, brokers, finders and legal fees and including the fees of the Seller Representative (as hereinafter defined), or transfer taxes (including real property transfer taxes, change of control payments, conveyance and recording fees, documentary stamp taxes and all other similar charges); provided, however, that Transaction Fees and Expenses shall not include any expenses or fees incurred in connection with the capitalization of Purchaser and the financing (including broker and agent fees) to consummate the transactions contemplated hereby. (C) "Unadjusted Purchase Price" shall mean $195.0 million. (b) Post-Closing Statement. (i) As soon as practicable, but in no event more than 30 days after the Closing Date, Purchaser shall furnish the Seller Representative a statement (the "Post-Closing Statement") reflecting its determination of the Net Indebtedness, the Redemption Payments and the Transaction Fees and Expenses. (ii) The "Adjusted Purchase Price" shall be the amount determined pursuant to this subsection 1.5(b)(ii) by subtracting the sum of the Net Indebtedness, the Redemption Payments and the Transaction Fees and Expenses from the Unadjusted Purchase Price as calculated based on the Post-Closing Statement. The calculation of the Adjusted Purchase Price and the Proposed Closing Differential (as hereinafter defined) shall be set forth in reasonable detail on the post-closing statement. (iii) As used herein, -4- (A) "Closing Differential" shall mean the Proposed Closing Differential with such revisions, adjustments and changes thereto, if any, as shall be effected pursuant to Section 1.5(b)(iv). (B) "Proposed Closing Differential" shall mean the amount (whether a positive or negative number) equal to the difference between (1) the Adjusted Purchase Price determined based upon the Post-Closing Statement minus (2) the Pre-Closing Adjusted Purchase Price determined based upon the Pre-Closing Statement. (iv) Within 60 days after the delivery of the Post-Closing Statement to the Seller Representative, the Seller Representative shall (on behalf of the Sellers) either accept the amount of the Proposed Closing Differential as reflected on the Post-Closing Statement as correct or object to the Proposed Closing Differential, specifying in reasonable detail in writing the nature of its objection(s). In the event the Seller Representative does not object to the Proposed Closing Differential within said 60-day period, the Seller Representative shall be deemed to have accepted the Proposed Closing Differential as the Closing Differential. In the event the Seller Representative objects to the Proposed Closing Differential, then, during a 30-day period subsequent to the receipt by Purchaser of notice of the Seller Representative's objection(s), Purchaser and the Seller Representative shall attempt in good faith to resolve the differences respecting such Proposed Closing Differential. In the event Purchaser and the Seller Representative are unable to resolve their differences within said 30-day period, the parties agree that the matter shall be submitted to a mutually acceptable firm of certified public accountants, the costs and expenses of which firm shall be borne equally by the Purchaser and the Sellers. If Purchaser and the Seller Representative cannot mutually agree upon said firm of certified public accountants within fifteen days, the disputed Proposed Closing Differential shall be jointly determined by two firms of certified public accountants, one such firm being selected by each of Purchaser and the Seller Representative, with Purchaser, on the one hand, and Sellers, on the other hand, each paying the costs and expenses of the firm selected by it. In the event that the respective firms of certified public accountants of Purchaser and the Seller Representative are unable to so agree, such firms of certified public accountants shall select a third firm of certified public accountants (which shall be one of the five largest nationally-recognized public accounting firms in the United States) to determine the Closing Differential pursuant to this Section 1.5 and -5- whose determination shall be final and binding upon the parties. The costs and expenses of such third firm of certified public accountants shall be borne equally by Purchaser, on the one hand, and Sellers, on the other hand. During the period from the date of delivery of the Post-Closing Statement to the Seller Representative through the date of resolution of any dispute regarding the Proposed Closing Differential as contemplated by this Section 1.5(b)(iv), Purchaser shall cause the Company and each of its Subsidiaries to provide the Seller Representative and its agents and representatives (including accountants) reasonable access to the books, records (including those supplemental schedules prepared by Purchaser in connection with preparation of the Post-Closing Statement), facilities, employees and accountants of the Company and each of its Subsidiaries and to accountants' work papers for purposes relevant to the review of such Post-Closing Statement and the resolution of any related dispute. All determinations to be made hereunder shall be made in accordance with the terms of this Agreement consistently applied. (c) Within three days after the final determination of the Closing Differential, the Adjusted Purchase Price shall be determined as follows: If the amount of the Closing Differential is a positive amount, then the Adjusted Purchase Price shall be adjusted upward by an amount equal to the Closing Differential. In such case, Purchaser shall inform the Seller Representative and the Escrow Agent and fund the Escrow Account under the Escrow Agreement with the amount of such difference (for allocation among the Sellers in the manner contemplated by Section 1.4 upon expiration of the Escrow Agreement in accordance with its terms). Conversely, if the amount of the Closing Differential is a negative amount, then the Adjusted Purchase Price shall be adjusted downward by an amount equal to the Closing Differential (expressed as a positive amount), which amount shall be distributed to Purchaser in accordance with the terms of the Escrow Agreement. 1.6 Redemption of Preferred Stock. Simultaneously with the Closing, Purchaser shall pay or cause to be paid to SBA on behalf of the Company the "Liquidation Value" (as defined in the Company's Certificate of Incorporation (the "Certificate of Incorporation")) of the Preferred Stock and all accrued and unpaid dividends thereon to which SBA is entitled in accordance with the Certificate of Incorporation as a result of the optional redemption of the Preferred Stock by the Company. The Company shall take all action necessary prior to Closing to provide for the redemption of the Preferred Stock at the Closing, including delivering any notice of redemption required under the Certificate of Incorporation. The amount payable pursuant to this Section 1.6 is referred to herein as the "Redemption Payments". -6- 1.7 Payment of Debt. (a) SBA Payments. Simultaneously with the Closing, Purchaser shall pay or cause to be paid to SBA on behalf of the Company the unpaid principal balance (together with all interest accrued thereon and all other amounts due) under Arcade's line of credit and term loan with SBA pursuant to (i) the Senior Loan Agreement between SBA and Arcade dated November 4, 1993, as amended (the "Senior Loan Agreement"), and (ii) the Subordinated Loan Agreement between SBA and Arcade dated November 4, 1993, as amended (the "Subordinated Loan Agreement"). The aggregate amounts payable pursuant to this Section 1.7(a) are referred to herein as the "SBA Payments". (b) Heller Payments. Simultaneously with the Closing, Purchaser shall pay or cause to be paid on behalf of the Company to Heller Financial, Inc. ("Heller") the unpaid principal balance (together with all interest accrued thereon) of all Revolving Loans and Lender Guarantees (as such terms are defined in the Credit Agreement dated as of April 30, 1996 between Arcade and Heller (the "Credit Agreement")) and all other amounts due under the Credit Agreement. The aggregate amounts payable pursuant to this Section 1.7(b) are referred to herein as the "Heller Payments". 1.8 Closing. Subject to the satisfaction or waiver of the conditions set forth in Article 7, consummation of the transactions contemplated hereby (the "Closing") shall take place on December 15, 1997 or such other time as the parties agree (the "Closing Date") at the offices of Sonnenschein Nath & Rosenthal, 1221 Avenue of the Americas, 24th Floor, New York, New York 10020, or at such other place as the parties agree. Notwithstanding the foregoing, the parties agree that if any filing is required under the HSR Act (as hereinafter defined) and early termination of the waiting period thereunder is not received prior to December 15, 1997, then the Closing shall occur on the third business day following receipt of notice of early termination. At the Closing, Sellers shall deliver to Purchaser (i) stock certificates representing the Common Stock, duly endorsed in blank for transfer or accompanied by appropriate stock powers duly executed in blank, (ii) the Option Agreements representing the Options to be cancelled pursuant to Section 1.2, and (iii) the Warrant. Notwithstanding anything to the contrary set forth herein, Purchaser shall use its best efforts to satisfy the conditions set forth in Section 7.2 and, only with respect to its obligations hereunder, cause the Closing to occur on or before December 1, 1997. Notwithstanding anything to the contrary contained herein, in the event (i) the Closing has not occurred on or before December 8, 1997, and (ii) the conditions set forth in Section 7.1 have been satisfied as of that date, upon Closing Purchaser shall pay to Sellers, in addition to its payment obligations under Sections 1.4, 1.6 and 1.7, an amount that would equal the amount of interest on $56.0 million at an annual rate equal to the prime rate as published from time to time in the Wall Street Journal table of money rates from December 8, 1997 through the Closing Date. 1.9 Sellers' Closing Deliveries. Subject to the conditions set forth in this Agreement, at the Closing, simultaneous with Purchaser's deliveries hereunder, Sellers shall deliver or cause -7- to be delivered to Purchaser all of the documents and instruments set forth on Schedule 1.9, all in form and substance reasonably satisfactory to Purchaser and its counsel. 1.10 Purchaser's Closing Deliveries. Subject to the conditions set forth in this Agreement, at the Closing, simultaneous with Sellers' deliveries hereunder, Purchaser shall deliver or cause to be delivered to Sellers all of the payments, documents and instruments set forth on Schedule 1.10, all in form and substance reasonably satisfactory to Sellers and their counsel. 1.11 Withholding Taxes. All payments pursuant to this Agreement shall be subject to and shall be reduced by any and all required withholding Tax (as hereinafter defined) and other similar withholding requirements imposed by applicable law or regulations. 1.12 Appointment of Seller Representative. Each Seller hereby appoints and designates Victor J. Barnett and Michael J. Kluger, jointly (collectively, the "Seller Representative") as the true and lawful agent and attorney-in-fact of such Seller with full power of substitution. Any action or decision to be made by the Seller Representative shall require the approval of both Victor J. Barnett and Michael J. Kluger. The Seller Representative shall have the authority to take such actions and exercise such discretion as is required of the Seller Representative pursuant to the terms of this Agreement and the Escrow Agreement (and any such actions shall be binding on each Seller) including the following: (a) to receive, hold and deliver to Purchaser the certificates for the Common Stock and the Preferred Stock, the Option Agreements and the Warrant and any other documents relating thereto on behalf of Sellers; (b) to execute, acknowledge, deliver, record and file all ancillary agreements, certificates and documents that the Seller Representative deems necessary or appropriate in connection with the consummation of the transactions contemplated by the terms and provisions of this Agreement; (c) to receive any payments due under this Agreement and acknowledge receipt for such payments; (d) to waive any breach or default under this Agreement or to waive any condition precedent to the Closing; (e) to terminate this Agreement; (f) to receive service of process in connection with any claims under this Agreement; (g) to give and receive all notices permitted hereunder; and -8- (h) to perform the obligations and exercise the rights under this Agreement and the Escrow Agreement, including the settlement of any claims and disputes with Purchaser and Sellers arising hereunder and thereunder. The Sellers may, at any time, substitute or replace the Seller Representative named above, if such action is agreed to in writing by Sellers owning not less than a majority of the Common Stock on a fully-diluted basis and a copy of such writing is delivered to each party to this Agreement. ARTICLE 2. REPRESENTATIONS AND WARRANTIES BY EACH SELLER. Each Seller hereby, severally for itself only and not jointly with any other Seller, represents and warrants to Purchaser that the following statements are true with respect to such Seller: 2.1 Ownership of Stock. Such Seller is the sole record owner of the number of shares of Common Stock, Options and/or Warrant, as the case may be, set forth opposite such Seller's name on Schedule 2.1, which ownership is free and clear of all liens, security interests, mortgages, pledges, charges, claims, restrictions and other encumbrances of any nature whatsoever (collectively, "Liens") other than restrictions on transfer under federal and state securities laws and restrictions which will be terminated in connection with the consummation of the transactions contemplated hereby and as set forth on Schedule 2.1, such shares of Common Stock have been validly issued and are fully paid and are nonassessable and such shares of Common Stock represent all of the issued and outstanding shares of Common Stock owned by such Seller. Upon consummation of the transactions contemplated herein and delivery of and payment for the Shares as set forth herein and assuming Purchaser has no actual knowledge of any adverse claim to the Shares, Sellers shall convey to Purchaser marketable title thereto. No Seller holds any Common Stock as a nominee. 2.2 Restrictions on Stock, Options and Warrant. (a) Agreements Relating to Stock. Such Seller is not a party to any agreement which will not be terminated prior to or as of the Closing and which is not set forth on Schedule 2.2(a) creating rights with respect to such Seller's shares of Common Stock, Options or Warrant in any Person and such Seller has the full power and legal right to sell, assign, transfer and deliver such Seller's shares of Common Stock, Options and Warrant. (b) No Warrants, Options, Etc. Except for the Warrant, the Options and the Option Agreements, there are no existing warrants, options, stock purchase agreements, redemption agreements, restrictions of any nature, calls or rights to subscribe of any character relating to the shares of Common Stock owned by such Seller, which will not be terminated prior to or as of the Closing and which is not set forth on Schedule 2.2(b). -9- 2.3 Authority. (a) Corporate Action; Capacity. If such Seller is not a natural person, the execution and delivery to Purchaser of this Agreement and the performance of such Seller's obligations under this Agreement have been duly authorized by such Seller and its governing body, If such Seller is a natural person, such Seller has the capacity and authority to execute and deliver to Purchaser this Agreement and to perform such Seller's obligations under this Agreement. (b) Execution and Delivery. This Agreement has been duly and validly executed and delivered to Purchaser by each Seller who is a signatory hereto and constitutes a valid and binding obligation of such Seller, enforceable against such Seller in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights in general and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law. (c) No Violation. Except for violations which will be waived prior to the Closing, as set forth on Schedule 2.3(c), or Liens which will be released concurrent with the Closing, the execution, delivery and performance of this Agreement by such Seller do not: (i) constitute a breach, or a violation of, or a default under, any organizing or governing document, if any, of such Seller, or of any law, rule or regulation, agreement, indenture, deed of trust, mortgage, loan agreement or other agreement or instrument to which such Seller is a party or by which such Seller or any of such Seller's shares of Common Stock, Options or Warrant are bound; (ii) constitute a violation of any order, judgment or decree to which such Seller or any of such Seller's shares of Common Stock, Options or Warrant are bound; or (iii) result in the creation of any Lien upon any of the assets or properties of the Company, any Subsidiary or such Seller, including any of such Seller's shares of Common Stock, Options or Warrant. 2.4 Consents and Approvals No consent, approval, waiver or authorization from any governmental and regulatory authorities, domestic and foreign (collectively, "Consents") or notice or filing with any such authorities is required to be obtained or made by such Seller in connection with the execution or delivery of this Agreement or the consummation of the transactions contemplated hereby, except for Consents which have been obtained or will have been timely obtained prior to Closing, which Consents are set forth on Schedule 2.4. ARTICLE 3. Representations and warranties of the company. The Company hereby represents and warrants to Purchaser the following: 3.1 Corporate Organization; Authority; No Violation. Except as set forth on Schedule 3.1, the Company and each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and in each other jurisdiction (as set forth on Schedule 3. 1) where the failure to so qualify would have a material -10- adverse effect on the business, assets, properties, operations or financial condition of the Company and the Subsidiaries taken as a whole (a "Material Adverse Effect"). Each of the Company and the Subsidiaries has all requisite corporate power and authority to own, lease, operate or otherwise hold its properties and assets and to carry on the Business as now being conducted. The Company has the requisite corporate power to execute and to deliver this Agreement and to perform the transactions contemplated hereby to be performed by it. The execution and delivery by the Company of this Agreement and the performance by it of the transactions contemplated hereby to be performed by it have been duly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and delivered by duly authorized officers of the Company and, assuming the due execution and delivery of this Agreement by the other parties hereto, constitutes a valid and binding obligation of the Company enforceable against it in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights in general and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). The execution, delivery and performance by the Company of this Agreement (i) do not and will not conflict with or result in any violation of, or constitute a breach or default under, any term of the charter documents, by-laws or other organizational documents of the Company or the Subsidiaries, of any agreement, permit or other instrument to which the Company or any Subsidiary is subject (other than those violations, breaches or defaults for which the Company or such Subsidiary shall have obtained a waiver prior to the Closing, which are set forth on Schedule 3.1), or any domestic or foreign statute, ordinance, law, regulation, order, judgment or decree of any court or other governmental or regulatory authority to which any of the same are, subject, (ii) do not and will not give rise to a right of termination which is not waived prior to Closing, cancellation or acceleration of any obligation or to the loss of a benefit under, any contract, permit, order, judgment or decree to which the Company or any Subsidiary is a party or by which any of their respective properties are bound, and (iii) do not and will not result in the creation of any Lien upon any of the Common Stock, Options, Warrant, properties or assets of the Company or any Subsidiary. 3.2 Capitalization Subsidiaries. (a) The Company. The authorized capital stock of the Company consists solely of (i) 100,000 shares of Common Stock, $.01 par value, of which there are 48,000 shares issued and outstanding as of the date hereof, and (ii) 8,700 shares of preferred stock, $1.00 par value, of which there are 8,678.197 shares issued and outstanding as of the date hereof. All of such shares of Common Stock and Preferred Stock have been duly authorized and validly issued and are fully paid and non-assessable and were not issued in violation of any preemptive rights or federal or state securities laws. (b) Subsidiaries. the authorized capital stock of each Subsidiary and the number of issued and outstanding shares of such stock is set forth on schedule 3.2. All of the outstanding shares of capital stock of Arcade are owned beneficially and of record by the Company and all of the outstanding shares of capital stock of Scent Seal and Arcade Europe are -11- owned beneficially and of record by Arcade. All of the issued and outstanding shares of capital stock of Arcade and Scent Seal have been duly authorized and validly issued and are fully paid and non-assessable and were not issued in violation of any preemptive rights or federal or state securities laws. (c) Rights. Except as set forth on Schedule 3.2, (i) no other class of capital stock of the Company or any Subsidiary is authorized or outstanding and there are no securities convertible into or exchangeable for any shares of capital stock of the Company or any Subsidiary or containing any profit participation features, (ii) there are no existing warrants, options, agreements, calls, conversion rights, exchange rights, preemptive rights which will not be terminated prior to Closing or other rights to subscribe for, purchase or otherwise acquire any of the shares of capital stock of the Company or any of the Subsidiaries, (iii) none of the shares of capital stock of the Company or any of the Subsidiaries is subject to any voting trust, transfer restrictions or other similar arrangements which will not be terminated prior to Closing, and (iv) except for ownership of the Subsidiaries, neither the Company nor any Subsidiary has, directly or indirectly, any joint venture, partnership, license or similar relationship with, or any ownership interest in, any Person. All of the holders of Options are listed on Schedule 2.1 and are designated therein as an Option Holder, The cancellation of the Options pursuant to Section 1.2 hereof, is in compliance with the terms and conditions of and does not constitute a breach of, or a violation of, or a default under any applicable Option Agreement. 3.3 Financial Statements. The Company has previously delivered copies of the following consolidated financial statements to Purchaser (collectively, the "Financial Statements"): (a) audited balance sheets as of June 30, 1997, 1996 and 1995, and an unaudited internally-prepared balance sheet as of September 30, 1997 (the "Balance Sheet"), and (b) audited income statements and cash flow statements for the fiscal years ended June 30, 1997, 1996 and 1995 and unaudited internally-prepared income statements and cash flow statements for the three months ended September 30, 1997, accompanied by the opinions of Coopers & Lybrand on the audited Financial Statements. Except as set forth on Schedule 3.3, the Financial Statements: (i) were prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, and (ii) present fairly, in all material respects, the financial position, cash flows and results of operations of the Company and the Subsidiaries at the dates and for the periods indicated therein. 3.4 Employees. (a) Except as set forth on Schedule 3.4(a), neither the Company nor any Subsidiary is a party to a collective bargaining agreement or any other agreement with any labor organization applicable to its employees. No labor organization or group of employees of the Company or any of its Subsidiaries has made a pending demand for recognition or certification, and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or threatened in writing to be brought or filed with the National Labor Relations Board or any other labor relations tribunal or authority. No unfair labor practice complaints are pending or, to the Company's Knowledge (as defined in Section 8.12), -12- threatened against the Company or any of the Subsidiaries before the National Labor Relations Board, no similar claims are pending or, to the Company's Knowledge, threatened before any similar foreign agency. To the Company's Knowledge, no strike, slowdown, work stoppage, lockout or other collective labor action by or with respect to any employees of the Company or any of the Subsidiaries is in progress or has been threatened. The Company and its Subsidiaries are in material compliance with all material laws, regulations and orders relating to the employment of labor, including all such laws, regulations and orders relating to wages, hours, the Workers Adjustment and Retraining Notification Act and any similar state or local law ("WARN"), collective bargaining, discrimination, civil rights, safety and health, workers' compensation and the collection and payment of withholding and/or social security taxes and any similar tax. There has been no "mass layoff" or "plant closing" as defined by WARN with respect to the Company or any of its Subsidiaries within the six months prior to Closing. (b) Schedule 3.4(b) contains a complete and accurate list of each material pension, retirement, profit sharing, savings, stock option, restricted stock, severance, termination, bonus, fringe benefit, insurance, supplemental benefit, medical, education reimbursement or other employee benefit plan, including each "employee benefit plan" as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), sponsored, maintained or contributed to or required to be contributed to by the Company or any of the Subsidiaries for the benefit of current or former employees of the Company or any of the Subsidiaries within the three years prior to the Closing (each a "Plan"). Schedule 3.4(b) separately indicates each Plan which is a multiemployer plan, as defined in Section 3(37) of ERISA ("Multiemployer Plan"). There are no trades or businesses (whether or not incorporated) which are or have ever been under common control, or which are or have ever been treated as a single employer, with the Company under Section 414(b), (c), (m) or (o) of the Code, other than the Subsidiaries. During the past six years, neither the Company nor any of its Subsidiaries have contributed to an employee benefit plan subject to Title IV of ERISA, other than the Multiemployer Plan. (c) Complete and accurate copies of the following items relating to each Plan, where applicable, have been delivered to Purchaser or its representatives: (i) all material Plan documents and related trust agreements including amendments thereto; (ii) the most recent determination letter received from the Internal Revenue Service (the "IRS") with respect to each such Plan that is intended to be qualified under Section 401 of the Internal Revenue Code (the "Code"); (ii) the most recent summary plan description, summary of material modifications and all material communications to participants; and (iv) the most recent Annual Report (5500 Series) and accompanying schedules for each Plan as filed with the IRS. -13- (d) In connection with the operation and administration of the Plans, the Company and the Subsidiaries have complied in all material respects with, and are not in material violation of, the applicable provisions of ERISA and the Code and the terms of such Plans. (e) Each of the Plans that is intended to be "qualified" within the meaning of Section 401(a) of the Code is so qualified and the trusts maintained pursuant thereto are exempt from federal income taxation under Section 501 of the Code, and to the Company's Knowledge, nothing has occurred with respect to the operation of such Plans which is reasonably likely to cause the loss of such qualification or exemption or the imposition of any liability, penalty or tax under ERISA or the Code. (f) Neither the Company nor any Subsidiary has any current material liability with respect to a plan termination under Title IV of ERISA, a funding deficiency under Section 412 of the Code or Section 302 of ERISA or a withdrawal from a "multiemployer plan" as defined under Section 4063 of ERISA. (g) Neither the Company nor any of its Subsidiaries has withdrawn in a complete or partial withdrawal from any Multiemployer Plan within the three years prior to the Closing Date, nor has any of them incurred any liability due to the termination or reorganization of a Multiemployer Plan. (h) All contributions (including all employer contributions and employee salary reduction contributions) required to have been made under any of the Plans or by law (without regard to any waivers granted under Section 412 of the Code), to any funds or trusts established thereunder or in connection therewith have been made by the due date thereof (including any valid extension), and all contributions for any period ending on or before September 30, 1997 which are not yet due will have been paid or accrued on the Balance Sheet on or prior to the Closing Date. (i) None of the Plans provide for post-employment life or health insurance, benefits or coverage for any participant or any beneficiary of a participant, except as may be required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and at the expense of the participant or the participant's beneficiary. (j) There are no pending actions, claims or lawsuits which have been asserted or instituted against the Plans, the assets of any of the trusts under such Plans or the plan sponsor or the plan administrator, or against any fiduciary of the Plans with respect to the operation of such Plans (other than routine benefit claims), nor does the Company have Knowledge of any such threatened claim or lawsuit. 3.5 Intangible Property. Set forth in Schedule 3.5 is a complete and accurate list of all United States and foreign trademarks, service marks, trade names and patents owned by, or registered or applied for in the name of, or licensed to, the Company or any Subsidiary which -14- are utilized in the operation of the Business (collectively, the "Intangible Property"). Neither the Company nor any Subsidiary has any copyright registrations or applications. Except as set forth on Schedule 3.5, (a) to the Company's Knowledge, the Intangible Property does not infringe the rights of any third party or is being infringed by any third party, (b) to the Company's Knowledge, there is no material restriction or action threatened in writing affecting the use of any of the Intangible Property by the Company or any Subsidiary in the manner in which the Company or the Subsidiaries have been using it, and (c) no license has been granted by the Company or any Subsidiary to any third party with respect thereto. Except as set forth on Schedule 3.5, the Company or a Subsidiary owns the entire right, title and interest in and to the Intangible Property. Except as set forth on Schedule 3.5, there is, to the Knowledge of the Company, no reasonable basis upon which any claim may be asserted against the Company or a Subsidiary for infringement or misappropriation of any of the Intangible Property. All letters patent, registrations and certificates issued by any Governmental Authority relating to any of the Intangible Property and all licenses and other agreements pursuant to which the Company uses any of the Intangible Property, are, to the Company's Knowledge, valid and subsisting, and neither the Company, nor in the case of any such license or agreement to the Knowledge of the Company, any other person, is in default or violation thereunder. 3.6 Assets; Inventory. Except as set forth on Schedule 3.6, all of the material assets of the Company and the Subsidiaries are in good operating condition and repair, subject to normal wear and tear, are usable in the regular and ordinary course of business, and conform in all material respects to all material applicable Laws, licenses, authorizations and approvals issued to the Company by any Governmental Authority relating to their construction, use and operation. The Assets constitute all material assets and rights necessary to operate the Business as currently conducted and the Company or a Subsidiary has marketable title to all such assets, free and clear of all Liens other than Permitted Liens. The term "Permitted Liens" means (a) tax liens with respect to taxes not yet due and payable or which are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established in accordance with generally accepted accounting principles, consistently applied; (b) deposits or pledges made in connection with, or to secure payment of, utilities or similar services, workers' compensation, unemployment insurance, old age pensions or other social security obligations; (c) purchase money security interests in any property acquired by the Company or any Subsidiary; (d) interests or title of a lessor under any lease; (e) mechanics', materialmen's or contractors' liens or encumbrances or any similar lien or restriction for amounts not yet past due; (f) easements, rights-of-way, restrictions and other similar charges and encumbrances not interfering with the ordinary conduct of the business of the Company and its Subsidiaries or detracting from the value of the assets of the Company and its Subsidiaries; (g) liens outstanding on the date hereof which secure the indebtedness outstanding under the Senior Loan Agreement, the Subordinated Loan Agreement or the Credit Agreement. The inventory of the Subsidiaries consists only of items of quality and quantity commercially useable and saleable in the ordinary course of the Subsidiaries' manufacturing processes, and is fit for the purpose for which it was procured or manufactured, except for any items of obsolete material or material below standard quality, all of which have been written down to realizable market value, or for which adequate reserves have been provided on the Balance Sheet and except for immaterial amounts. All such -15- items of inventory are (and will be) carried at amounts which reflect valuations pursuant to the normal inventory valuation policy of the Company and the Subsidiaries of stating inventory at the lower of cost or market on a last-in, first-out basis. 3.7 Litigation. Except as set forth on Schedule 3.7, there is no action, suit, claim, judicial or administrative proceeding or arbitration which is pending nor, to the Company's Knowledge, is there any pending investigation nor to the Company's Knowledge is any of the foregoing overtly threatened, against the Company or any Subsidiary before any court, arbitrator or administrative or governmental body, nor is there any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or arbitrator outstanding against the Company or any Subsidiary. 3.8 Real Property. Title to the real property owned by the Company and described on Schedule 3.8 and all of the buildings, structures and other improvements located thereon (collectively, the "Owned Real Property"), are, and at Closing shall be, owned by the Company or a Subsidiary in fee simple absolute, free and clear of all material Liens affecting title to or possession of such Owned Real Property, including all material encroachments, boundary disputes, covenants, restrictions, easements, rights of way, mortgages, security interests, leases, encumbrances and title objections, excepting only the Permitted Liens and such easements, restrictions and covenants set forth on Schedule 3.8 (in a manner so that the Owned Real Property to which they relate is readily identifiable). The Owned Real Property set forth on Schedule 3.8 constitutes all of the real property owned by the Company and the Subsidiaries on the date hereof and as of the Closing Date. Schedule 3.8 contains a list of all real property leased by the Company or any Subsidiary (collectively, the "Leased Premises"). A complete and accurate copy of each lease, as amended to date (a "Lease") for each of the Leased Premises has been provided to Purchaser or its representatives. Except as set forth on Schedule 3.8, (i) each Lease is valid and binding upon the Subsidiary which is a party thereto and, to the Company's Knowledge, enforceable against the lessor in accordance with the terms thereof, and (ii) the Subsidiary which is a party thereto has performed all material obligations required to be performed by it under each Lease prior to the date hereof and possesses and quietly enjoys the Leased Premises. Except as set forth on Schedule 3.8, neither the Company nor, to the Company's Knowledge, the landlord or sublandlord under any Lease is in material default under any of the Real Property Leases, and no circumstances or state of facts presently exists which, with the giving of notice or passage of time, or both, would permit the landlord or sublandlord under any Lease to terminate such Lease. For purposes of the following representations, the Owned Real Property and the Leased Premises are collectively referred to as the "Real Property." Neither the Company nor Sellers have received any written notice from any Governmental Authority that the assessed value of the Real Property has been determined to be greater than that upon which county, township or school tax was paid for the 1996 tax year applicable to each such tax, or from any insurance carrier of the Company of fire hazards with respect to the Real Property. Neither the Company nor Sellers have received any written notice that any Governmental Authority having the power of eminent domain over the Real Property has commenced or intends to exercise the power of eminent domain or a similar power with respect to all or any part of the Real Property. No assessment for public improvements has been -16- made against the Real Property that remains unpaid. No written, uncured notice from any county, township or other Governmental Authority has been received by the Company or Sellers requiring any work, repair, construction, alteration or installation on or in connection with the Real Property that has not been complied with. The Real Property complies with all applicable zoning and other land use requirements. There are no restrictions on entrance to or exit from the Real Property to adjacent public streets and no conditions that will result in the termination of the present access from the Real Property to existing highways and roads. No part of the Real Property contains, is located within, or abuts any flood plain, navigable water, tideland, wetland, marshlands or any other area that is subject to special state, federal or municipal regulation, control or protection. 3.9 Consents and Approvals. Except for filings with the Federal Trade Commission and the Antitrust Division of the United States Department of Justice pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the Company has obtained (or will have obtained prior to the Closing) all consents, waivers, authorizations and approvals of, and made all required filings with, all governmental and regulatory authorities, domestic and foreign, and of all other Persons required or necessary in connection with the execution, delivery and performance by the Company of this Agreement. All material consents, waivers, authorizations, approvals and filings required to be made by the Company in connection with this Agreement are set forth on Schedule 3.9. 3.10 Contracts. Except for the contracts listed on Schedule 3.10 (the "Contracts"), and except for purchase orders in the ordinary course of business, neither the Company nor any Subsidiary is a party to or otherwise bound by any written or oral contract for the purchase of materials, supplies, goods, services, equipment or other assets providing for annual payments by the Company or any Subsidiary of $50,000 or more, (ii) any sales, distribution, agency, dealer, sales representative or other similar agreement providing for annual payments by the Company or any Subsidiary or materials, goods, supplies, services, equipment or other assets providing for annual payments to the Company or any Subsidiary of $100,000 or more, (iii) any partnership, joint venture or other similar contract, arrangement or agreement, (iv) any contract relating to indebtedness for borrowed money, (v) any material license agreement or franchise agreement granted to or held by the Company or any Subsidiary, (vi) any contract or other document that limits the freedom of the Company or any Subsidiary to compete in any line of business or with any Person or in any area or which would so limit the freedom of the Company or any Subsidiary after the Closing, (vii) any material contract or commitment not made in the ordinary course of business other than contracts to be terminated effective upon the Closing (none of which terminated contracts or commitments will result in any material liability or obligation on the part of the Company), or (viii) any collective bargaining agreement, or agreement providing for severance payments in the event of the sale or change in control of the Company or any Subsidiary. The Company has previously provided Purchaser or its representatives with complete and accurate copies of the Contracts. The Contracts are in full force and effect and are valid and binding upon the Company or the Subsidiary which is a party thereto and, to the Company's KNOWLEDGE, THE OTHER PARTIES THERETO. Neither the Company nor any Subsidiary is in material default under any Contract, nor to the Company's Knowledge, is -17- any other party thereto. The Company will have no liability or obligation under any of the agreements set forth on Schedule 2.2(a) or 2.2(b) upon termination of such agreements effective upon Closing. 3.11 Absence of Undisclosed Liabilities. As of the date of the Balance Sheet (the "Balance Sheet Date"), neither the Company nor any Subsidiary had any liability or obligation, either direct or indirect, matured or unmatured or absolute, contingent or otherwise that should be reflected in balance sheets prepared in accordance with generally accepted accounting principles (a "Balance Sheet Liability") which was not fully disclosed on, or reflected or reserved against in, the Balance Sheet; and except for liabilities which have been incurred since the Balance Sheet Date in the ordinary course of business, consistent with past business practice or liabilities, the incurrence of which is contemplated by this Agreement, since the Balance Sheet Date, neither the Company nor any Subsidiary has incurred any Balance Sheet Liability. 3.12 Licenses; Compliance with Laws. Since 1993, the Company or the Subsidiaries have held all material licenses, franchises, permits and authorizations ("Permits") necessary for the lawful conduct of the Business as conducted by the Company during such time period and neither the Company nor any Subsidiary is in material violation of any applicable material laws, statutes, regulations, rules, ordinances, decrees, orders and judgments (collectively, "Laws") of any governmental, regulatory or administrative body, agency or authority (a "Governmental Authority"). The Company is not in material default, nor has it received any written notice of any claim of default. All such Permits are renewable by their terms or in the ordinary course of business without the need to comply with any special qualification procedures or to pay any amounts other than routine filing fees or other immaterial amounts. None of such material Permits will be adversely affected by consummation of the transactions contemplated hereby. No shareholder, director, officer, employee or former employee of the Company or any Affiliates of the Company (other than its Subsidiaries), or any other Person owns or has any proprietary, financial or other interest (direct or indirect) in any Permits that the Company owns, possesses or uses in the operation of the Business as now conducted. 3.13 Environmental Matters. (a) Except as disclosed on Schedule 3.13, (i) the Company and the Subsidiaries are in material compliance with Environmental Laws; (ii) the Company and each Subsidiary has obtained and currently maintains all Permits required under or pursuant to Environmental Laws that are material to the conduct of the business or for the ownership or use of their property or assets; (iii) there is no civil, criminal or administrative order, action, suit, demand, claim, hearing, notice of violation, investigation, proceeding or demand letter pending or, to the Knowledge of the Company, threatened against the Company or any Subsidiary; (iv) neither the Company nor any Subsidiary is otherwise subject to any currently outstanding liabilities under Environmental Law, the effect of which would result in material liabilities, losses or expenses under Environmental Law; and (v) there is not now, nor, to the Knowledge of the Company, has there been in the past, on, in or under any real property owned, leased or operated by the Company or any Subsidiary (x) any underground storage tanks, above-ground storage tanks, dikes or impoundments containing Hazardous Materials, (Y) any asbestos-containing materials, or (Z) any polychlorinated biphenyls, the presence of -18- which could reasonably be expected to result in material liabilities, losses or expenses under Environmental Law. (b) Seller has provided Buyer with copies of all environmentally-related audits, assessments, studies, reports, analyses, and results of environmental investigations of any real property currently or formerly owned, operated or leased by the Company that are in the possession, custody or control of Sellers, the Company or any Subsidiary; and (c) For purposes of this Agreement, the following terms have the following definitions: (i) "Environmental Law" means any applicable federal, state, local, or foreign law, statute, code, ordinance, rule, regulation or other requirement relating to the environment, natural resources, or public or employee health and safety and includes the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. ss. 9601 et seq., the Hazardous Materials Transportation Act, 49 U.S.C. ss. 1801 et IM,, the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. ss. 6901 seq. seq., the Clean Water Act, 33 U.S.C. ss. 1251 et seq., the Clean Air Act, 33 U.S.C. ss. 2601 et seq., the Toxic Substances Control Act, 15 U.S.C. ss. 2601 et seq., the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. ss. 136 et seq., the Oil Pollution Act of 1990, 33 U.S.C. ss. 2701 et seq. and the Occupational Safety and Health Act, 29 U.S.C. ss. 651 et seq., as such laws have been amended or supplemented, and the regulations promulgated pursuant thereto, and all analogous state or local statutes; and (ii) "Hazardous Material" means any substance, material or waste which is regulated by or forms the liability under any Environmental Law, including petroleum, petroleum products, asbestos, urea formaldehyde and polychlorinated biphenyls. 3.14 Tax Matters. Except as set forth on Schedule 3.14: (i) All Tax Returns (as hereinafter defined) required to be filed by or with respect to the Company or any Subsidiary have been duly and timely filed and all such Tax Returns are complete. Each of the Company and its Subsidiaries has duly and timely paid all Taxes that are due. With respect to any period for which Taxes are not yet due from the Company or any Subsidiary up to September 30, 1997, the Company has made sufficient current accruals for such Taxes in the Financial Statements and the Balance Sheet. The Company and each Subsidiary has made all required estimated Tax payments sufficient to avoid any material underpayment penalties. The Company and each Subsidiary has withheld and paid all material Taxes required by all applicable Laws to be withheld or paid in connection with any amounts paid or owing to any employee, creditor, independent contractor, or other third person. (ii) There are no outstanding agreements, waivers, or arrangements extending the statutory period of limitation applicable to any claim for, or the period for the collection or assessment of, Taxes due from or with respect to the Company or any Subsidiary for any taxable period. No audit or other proceeding by any court, governmental or regulatory authority, or similar person is pending or, to the Knowledge of the Company, threatened in regard to any Taxes due from or with respect to the -19- Company or any Subsidiary or any Tax Return filed by or with respect to the Company or any Subsidiary. No assessment of Taxes is proposed in writing against the Company or any Subsidiary or any of their respective assets. (iii) Neither the Company nor any Subsidiary has agreed to make any adjustment pursuant to Section 481(a) of the Code (or any predecessor provision) by reason of any change in any accounting method, and there is no application pending with any taxing authority requesting permission for any changes in any accounting method of the Company or any Subsidiary. (iv) Neither the Company nor any Subsidiary is a party to, is bound by, or has any obligation under, any Tax sharing agreement, Tax allocation agreement, Tax indemnity agreement, or similar contract by which the Company or any Subsidiary has a current or potential obligation to indemnify another person with respect to Taxes. (v) There is no contract, option, agreement, plan, or arrangement covering any person that, individually or collectively, could give rise to the payment of any amount that would not be deductible by the Company or any Subsidiary by reason of Section 280G of the Code. (vi) None of the Sellers is a foreign person for purposes of Section 1445(b)(2) of the Code. (vii) The Company is not (and during the preceding five years has not been) a "U.S. real property holding corporation" as defined in Section 897(c)(2) of the Code. (viii) None of the outstanding indebtedness of the Company or any Subsidiary is "corporate acquisition indebtedness" for purposes of Section 279 of the Code, (ix) Since 1996, none of the Company or any Subsidiary has ever been a member of a consolidated, combined, or affiliated group other than any group of which the Company is the common parent. There are no deferred gains attributable to "intercompany transactions" for purposes of Treas. Reg. ss. 1.1502-13 with respect to the Company or any Subsidiary, and there are no "excess loss accounts" for purposes of Treas. Reg. ss. 1.1502-19 with respect to any Subsidiary. (x) "Taxes" shall mean all taxes, charges, fees, levies, or other similar assessments or liabilities, including (a) income, gross receipts, ad valorem, premium, excise, real property, personal property, sales, use, transfer, withholding, employment, payroll, and franchise taxes imposed by the United States of America, or by any state, local, or foreign government, or any subdivision, agency, or other similar person of the United States or any such government; and (b) any interest, fines, penalties, assessments, or additions to taxes resulting from, attributable to, or incurred in connection with any tax or any contest, dispute, or refund thereof. "Tax Returns" shall mean any report, -20- return, or statement required to be supplied to a taxing authority in connection with Taxes. 3.15 Accounts Receivable. Except as reserved against on the Balance Sheet or in the books and records of the Company and the Subsidiaries for receivables arising since the Balance Date, the accounts and notes receivable reflected on such Balance Sheet and all accounts or notes receivable arising since the Balance Sheet Date are valid and genuine and represent bona fide claims against debtors for sales, services performed or other charges arising on or before the date of recording thereof in the ordinary course of business consistent with past practice, and are not subject to valid defenses, set-offs or counterclaims, other than adjustments, which in the aggregate are not material, made in the ordinary course of business. 3.16 Conduct of Business Since Balance Sheet Date. Since the Balance Sheet Date, except as contemplated by this Agreement or as set forth on Schedule 3.16: (a) the Company and the Subsidiaries have conducted the Business only in the ordinary course of business consistent with past practice; (b) except for equipment, inventory and supplies purchased, sold or otherwise disposed of in the ordinary course of business consistent with past practice, the Company and the Subsidiaries have not purchased, sold, leased, mortgaged, pledged, assigned, transferred or otherwise acquired or disposed of any properties or assets; (c) neither the Company nor any Subsidiary has sustained or incurred any material loss or damage with respect to the Business (whether or not insured against) on account of fire, flood, accident or other calamity; (d) neither the Company nor any Subsidiary has increased the rate of compensation of any officer or other employee, or made any advance or loan to (except for advances for business expenses in the ordinary course of business), any officer or other employee, or made any increase in, or any addition to, other benefits to which any officer or other employee may be entitled, except in the ordinary course of business consistent with past practice; (e) neither the Company nor any Subsidiary has changed any accounting methods or practices; (f) neither the company nor any subsidiary has incurred any liabilities, other than liabilities incurred in the ordinary course of business consistent with past practice, or discharged or satisfied any Lien or paid, or failed to pay or discharge when due, any liabilities, other than in the ordinary course of business consistent with past practice; (g) neither the company nor any subsidiary has made or suffered any amendment or termination of any material agreement, contract, commitment, lease or plan to -21- which it is a party or by which it is bound, or cancelled, modified or waived any substantial debts or claims held by it or waived any rights of substantial value, other than modifications of customer orders in the ordinary course of business; (h) neither the Company nor any Subsidiary has declared, set aside or paid any dividend or made or agreed to make any other distribution or payment in respect to its capital shares or redeemed, purchased or otherwise acquired or agreed to redeem, purchase or acquire any of its capital shares; (i) the Company and the Subsidiaries have not entered into any material transaction other than in the ordinary course of business consistent with past practice; (j) the Company and the Subsidiaries have not suffered any Material Adverse Effect; and (k) neither the Company nor any Subsidiary has agreed to take any of the actions described in paragraphs (b), (d), (e), (f), (g), (h) or (i) above. 3.17 Affiliated Transactions. Except for compensation and benefits arrangements in the ordinary course of business and as disclosed on Schedule 3.17, no Seller, no member of any Seller's family nor any entity controlled by or under control of any Seller (i) has borrowed from or loaned money or other property to the Company or any Subsidiary which has not been repaid or returned; or (ii) has any direct or indirect interest in any Person which is a customer or supplier of the Company or the Subsidiaries. 3.18 Names. The Company has not conducted business under any names other than the names set forth on Schedule 3.18 during the past three years. 3.19 Brokers and Finders. Except for amounts which may become due from the Company to Bowles Hollowell Conner & Co. ("Bowles"), there are no outstanding broker, finder or investment banker fees or commissions owed or to be owed by the Company or the Subsidiaries in connection with the transactions contemplated by this Agreement. 3.20 Schedules. Notwithstanding any specific reference to the disclosure of any matter pursuant to any section of this Article 3 or to any Schedule, all disclosures made pursuant to any section hereunder or on the Schedules shall be deemed made for all other sections of the Schedules to which such disclosure is readily apparent on the face of the Schedules and any headings or captions on any section herein or therein are for convenience of reference only; provided, however, that no disclosure on the Schedules shall be deemed effective unless the reason such item is being disclosed on a particular schedule is adequately explained to be informative of the matter at issue with respect to the disclosure to be set forth on such schedule. Sellers shall be entitled to supplement or amend the Schedules delivered in connection herewith with respect to any matter occurring after the date hereof which, if existing or occurring at the date of this Agreement, would have been required to be set forth or described in any such -22- Schedule, and whether or not such matter is material. No supplement or amendment shall have any effect for the purpose of determining satisfaction of the conditions set forth in Section 7.1(a) hereof or the compliance by Sellers with the covenant set forth in Section 5.2 hereof; provided, however, that by consummating the transactions contemplated hereby, Purchaser waives any right or claim it may have or have had on account of or relating to such failure to satisfy such conditions or comply with such covenant or on account of or relating to any such breach of representation or warranty of Sellers. 3.21 DISCLAIMER OF WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE 3, NEITHER THE COMPANY NOR ANY SELLER MAKES ANY REPRESENTATION OR WARRANTY, WHATSOEVER, EXPRESS OR IMPLIED, RELATING TO THE COMPANY'S OR THE SUBSIDIARIES' BUSINESS OR ASSETS, INCLUDING ANY REPRESENTATION OR WARRANTY AS TO THE FUTURE SALES OR PROFITABILITY OF THE COMPANY'S OR THE SUBSIDIARIES' BUSINESS OR AS TO THE MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE, OF ANY OF THE COMPANY'S OR THE SUBSIDIARIES' ASSETS OR REPRESENTATIONS OR WARRANTIES ARISING BY STATUTE OR OTHERWISE IN LAW, FROM A COURSE OF DEALING OR USAGE OF TRADE. ALL SUCH OTHER REPRESENTATIONS AND WARRANTIES ARE HEREBY EXPRESSLY DISCLAIMED BY THE COMPANY AND SELLERS. ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser hereby represents and warrants to the Company and each Seller the following: 4.1 Organization; Authority; Capitalization. Purchaser is a corporation duly organized, existing and in good standing under the laws of the State of Delaware, Purchaser has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Purchaser, the performance by Purchaser of its obligations hereunder and the consummation by Purchaser of the transactions contemplated hereby have been duly authorized pursuant to and in accordance with the laws governing Purchaser and no other proceedings on the part of Purchaser are necessary to authorize such execution, delivery and performance. This Agreement has been duly and validly executed and delivered by Purchaser and constitutes a valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights in general and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.2 No Violation. The execution, delivery and performance by Purchaser of this Agreement and the transactions contemplated hereby do not and will not conflict with or result in any violation of, or constitute a breach or default under, any term of the charter documents, by-laws or other organizational documents of Purchaser, of any agreement, permit or other instrument to which Purchaser is a party or by which Purchaser is subject, or any law, -23- regulation, order, judgment or decree of any court or other governmental or regulatory authority to which Purchaser is subject. 4.3 Consents and Approvals. Except for filings pursuant to the HSR Act, Purchaser has obtained (or will obtain prior to Closing) all necessary consents, waivers, authorizations and approvals of all governmental and regulatory authorities, domestic and foreign, and of all other Persons required in connection with the execution, delivery and performance by Purchaser of this Agreement, all of which are set forth on Schedule 4.3. 4.4 Financing; Solvency. (a) Purchaser currently has or will have as of the Closing all funds necessary to consummate the transactions contemplated by this Agreement. Attached hereto as Exhibit C is a commitment letter with respect to the equity financing necessary to consummate the transactions contemplated by this Agreement. No transfer of property is being made and no obligation is being incurred in connection with the transactions contemplated by this Agreement or with the financing to be obtained by or on behalf of the Purchaser in connection with consummating the transaction contemplated by this Agreement with the intent to hinder, delay or defraud either present or future creditors of the Company or any of its Subsidiaries. (b) Neither the Company nor any subsidiary shall become insolvent as a result of the consummation of the transactions contemplated by this Agreement or the financing to be obtained by or on behalf of Purchaser in connection with consummating the transactions contemplated by this Agreement. The Company and each of its subsidiaries, after giving effect to the transactions contemplated by this Agreement and the financing to be obtained by or on behalf of Purchaser in connection with consummating the transactions contemplated by this Agreement, shall be able to pay their debts as they become due, and the Company's and each Subsidiary's property, after giving effect to the transactions contemplated hereby, shall have a fair salable value greater than the amounts required to pay its debts (including a reasonable estimate of the amount of all contingent liabilities). The Company and each subsidiary, after giving effect to the transactions contemplated by this Agreement, shall have adequate capital to carry on its business. 4.5 Litigation. Purchaser has not received any notice of any action, suit, inquiry, judicial or administrative proceeding, arbitration or investigation which is pending and, to the knowledge of Purchaser, none of the foregoing is threatened, against or involving Purchaser before any Governmental Authority, nor is there any judgment, decree, injunction, rule or order of any Governmental Authority outstanding against Purchaser which, individually or in the aggregate, could impair the ability of Purchaser to consummate the transactions contemplated by this Agreement. 4.6 Brokers and Finders. There are no outstanding broker, finder or investment banker fees or commissions owed or to be owed by Purchaser in connection with the transactions contemplated by this Agreement other than amounts that will be fully satisfied by Purchaser. -24- 4.7 Investment Intent; Sophistication. Purchaser is acquiring the Common Stock hereunder solely for its own account and not for any other Person and for investment purposes only and without any intent to distribute, resell or otherwise transfer any of such Common Stock. Purchaser represents, warrants and acknowledges that it is an "accredited investor" as defined in Rule 501(a) under the Securities Act of 1933, as amended (the "Securities Act"), that it has such knowledge and experience in business and financial matters as to be capable of evaluating the merits and risks of the investment contemplated to be made hereunder, that it has sufficient financial strength to hold the same as an investment and to bear the economic risks of such investment (including possible loss of such investment) for an indefinite period of time. Purchaser acknowledges that it is fully informed that the shares of Common Stock being sold hereunder are being sold pursuant to a private offering exemption of the Securities Act and are not being registered under the Securities Act or under the securities or blue sky laws of any state or foreign jurisdiction; and that such securities must be held indefinitely unless they are subsequently registered under the Securities Act and any applicable state securities or blue sky laws, or unless an exemption from registration is available thereunder. Purchaser acknowledges that it has such knowledge and experience in financial and business matters so as to be capable of evaluating the risks and merits of this investment, that all documents and records pertaining to the investment in the Company requested by Purchaser have been made available or delivered to it; and that it has had an opportunity to ask questions of and receive answers from Sellers concerning the terms and conditions of this Agreement and to obtain additional information. ARTICLE 5. COVENANTS. 5.1 Indemnification of Directors and Officers. Notwithstanding any provision to the contrary in Section 8.13 hereof, Purchaser acknowledges that each Person who served prior to the Closing as a director or officer of the Company or any of the Subsidiaries shall be entitled to all rights to indemnification existing in favor of the directors and officers of the Company or such Subsidiaries, as applicable, as provided in their respective articles of incorporation and bylaws during the time any such Person served as an officer or director. 5.2 Satisfaction of Conditions. Purchaser shall use all reasonable efforts to cooperate with Sellers to satisfy the conditions set forth in Section 7.2 and Sellers shall use all reasonable efforts to cooperate with Purchaser to satisfy the conditions set forth in Section 7. 1. 5.3 Conduct of Business. Except as disclosed on Schedule 5.3 or as reasonably contemplated as a result and in anticipation of the transactions contemplated hereby, from the date hereof through the Closing Date, the Company shall use reasonable efforts to continue to conduct the business in the ordinary course consistent with past practice and to preserve the Company's present business operations, and to keep available the services of their key employees and to preserve their relationship with their customers and suppliers, licensors and others having a business relationship with the Company and the Subsidiaries. Without limiting the generality of the foregoing, the Company and the Subsidiaries shall not, without the written consent of Purchaser which consent shall not be unreasonably withheld or delayed, (a) declare or pay any dividend with respect to its capital stock (except for dividends payable with respect -25- to the Preferred Stock), (b) redeem or repurchase any of its capital stock or otherwise make or commit to make any distribution to its stockholders, (c) fail to maintain their cash management practices and all related policies, practices and procedures with respect to collection of trade accounts receivable, accrual of accounts receivable, inventory control, prepayment of expenses, payment of trade accounts payable, accrual of other expenses, deferral of revenue, and acceptance of customer deposits in the ordinary course of business, (d) fail to pay or discharge when due any material liabilities, (e) make or suffer any amendment or termination of any Contract or Permit, or cancel, modify or waive any substantial debts or claims held by it or waive any rights of substantial value, other than modifications of customer orders in the ordinary course of business, (f) make commitments or agreements for capital expenditures or capital additions or betterments in excess of $250,000 except as set forth in Schedule 5.3, (g) change any of the accounting principles followed by it or the methods of applying such principles, (h) amend its certificate of incorporation or bylaws nor take any action with respect to any such amendment, (i) authorize or issue any shares of the Company's capital stock or other equity securities nor grant any option, warrant, or right calling for the authorization or issuance of any such shares, j) enter into any contract or other transaction with any Seller or any affiliate of the Company or any Seller, and (k) agree, in writing or otherwise, to do any of the foregoing. 5.4 Taxes. Sellers agree to pay all sales and other taxes (except income taxes), if any, arising from the sale of the Shares, Options and Warrants to Purchaser pursuant to this Agreement. 5.5 Further Assurances. Upon the reasonable request of any party after the Closing, the other parties shall promptly execute and deliver such documents and instruments as necessary to further effectuate the transactions contemplated herein. 5.6 Books and Records: Personnel. Purchaser hereby covenants and agrees with Sellers as follows: (a) Retention of Records; Purchaser shall not, for a period of five years after the Closing Date, dispose of or destroy any of the business records and files of the Company or the Subsidiaries relating to the period prior to the Closing Date without first offering to turn over possession thereof to Sellers by written notice to Sellers at least 30 days prior to the proposed date of such disposition or destruction. (b) Access to Records. Purchaser shall, for a period of five years after the Closing date, allow Sellers access to all business records and files of the Company and the Subsidiaries relating to the period prior to the Closing Date, upon prior written request of Sellers and during normal working hours at the principal places of business of the Company and the Subsidiaries or at any location where such records are stored, and sellers Shall have the right, at their own expense, to make copies of any such records and files; provided, however, that any such access or copying shall be had or done in such a manner so as not to interfere unreasonably with the normal conduct of the business of the Company and the Subsidiaries. -26- (c) Assistance with Records. Purchaser, shall make available to Sellers, consistent with the business requirements of the Company, (i) the Company's personnel to assist Seller in locating and obtaining records and files maintained by the Company, and (ii) any of the Company's personnel whose assistance or participation is reasonably required by Sellers in anticipation of, or preparation for, any existing or future litigation, tax or other matters in which Sellers or any of their past, present or future affiliates are involved and which related to the business of the Company. 5.7 Hart-Scott-Rodino. As promptly as practicable, and in any event within seven business days following the execution and delivery of this Agreement by the parties, Purchaser and the Company shall each prepare and file any required notification and report form under the HSR Act, in connection with the transactions contemplated hereby or mutually agree no filing is necessary. Purchaser and the Company shall request early termination of the waiting period thereunder. Purchaser and the Company shall respond with reasonable diligence to, and reasonably cooperate with each other with respect to, any request for additional information made in response to such filings and shall promptly notify the other party of any such request. Purchaser and the Company shall each pay one-half of any filing fee associated with the notification and report forms required under the HSR Act. 5.8 Resignation of Directors. Sellers shall cause such members of the board of directors of the Company and such officers of the Company as are designated by Purchaser to tender, effective at the Closing, their resignations from such positions with the Company. 5.9 Confidentiality. Purchaser and each Seller shall keep confidential all information obtained by it with respect to the other pursuant to this Agreement and the negotiations preceding this Agreement, and will use such information solely in connection with the transactions contemplated by this Agreement, and if the transactions contemplated hereby are not consummated, each shall return to the other, without retaining a copy thereof, any schedules, documents or other written information obtained from the other in connection with this Agreement and the transactions contemplated hereby. Notwithstanding the foregoing, neither party shall be required to keep confidential or return any information which (a) is known or available through other lawful sources, (b) is or becomes publicly known through no fault of the receiving party or its agents, (c) is required to be disclosed pursuant to an order or request of a judicial authority or Governmental Authority (provided the disclosing party is given reasonable prior notice), or (d) is developed by the receiving party independently of the disclosure by the disclosing party. 5.10 Acquisition Proposals. From and after the date of this Agreement unless this agreement is terminated pursuant to the terms hereof, Sellers shall not, nor shall they authorize or permit any officer, director or employee of, or any investment banker, attorney, accountant or other representative retained by, any seller, the company or any Subsidiary to, directly or indirectly, solicit, initiate or encourage submission of any proposal or offer (including by way of furnishing information) from any person which constitutes, or may reasonably be expected to lead to, any proposal for a merger or other business combination involving the Company or -27- any Subsidiary or any proposal or offer to acquire any of the capital stock or any of the assets of the Company or any Subsidiary. 5.11 Access. Prior to the Closing, the Company shall make reasonably available to Purchaser, at locations other than the facilities of the Company or any Subsidiary, the business records of the Company and access to Victor Barnett, Roger Barnett and Gordon Jones and the Company's independent accountants upon Purchaser's prior written request and subject to reasonable time, place and manner restrictions imposed by the Company. 5.12 Noncompetition. Effective upon Closing, Victor Barnett agrees to be bound by the noncompete terms set forth on Exhibit H. 5.13 Minority Investors' Agreements. Concurrent with the Closing, Purchaser shall execute and deliver to Liberty Holdings and Roger Barnett the Common Stock Purchase Agreement and the Minority Investors' Stockholders' Agreement, as set forth on Schedule 1.10, and Liberty Holdings and Roger Barnett shall execute and deliver to Purchaser the Common Stock Purchase Agreement and the Minority Investors' Stockholders' Agreement as set forth on Schedule 1.9. ARTICLE 6. INDEMNIFICATION. 6.1 Sellers' Indemnification. Subject to the provisions of this Article 6 (including Sections 6.5 and 6.8), Sellers shall indemnify and hold harmless Purchaser and its successors and permitted assigns and their affiliates and their respective directors, officers, partners, employees, agents and each person who controls Purchaser (collectively, "Purchaser Indemnified Parties") from and against and in respect of any and all losses, costs, fines, liabilities, claims, penalties, damages and expenses (including reasonable legal fees and expenses incurred in the investigation and defense of claims and actions) (collectively "Losses") resulting from, in connection with or arising out of: (a) any breach of any representation or warranty made by Sellers in Article 2 of this Agreement or by the Company in Article 3 of this Agreement or in any closing certificate executed and delivered by Sellers or the Company in connection with this Agreement; (b) any breach or non-fulfillment of any covenant made by Sellers or the Company under the terms of this Agreement; or (c) any action, suit or proceeding relating to any of the foregoing. 6.2 Purchaser's Indemnification. Subject to the provisions of this Article 6 (including Sections 6.5 and 6.8), Purchaser shall indemnify and hold harmless Sellers and their respective successors, permitted assigns, personal representatives and heirs and their affiliates and their respective directors, officers, partners, employees, agents and each person who controls any -28- Seller (collectively, "Seller Indemnified Parties") from and against and in respect of any and all Losses resulting from, in connection with or arising out of: (a) any breach of any representation or warranty made by Purchaser in Article 4 of this Agreement or in any closing certificate executed and delivered by Purchaser in connection with this Agreement; (b) any breach or non-fulfillment of any covenant made by Purchaser under the terms of this Agreement; or (e) any action, suit or proceeding relating to any of the foregoing. 6.3 Indemnification Procedures. (a) Procedures Relating to Indemnification . In the event that a third party files a lawsuit, enforcement action or other proceeding against a party entitled to indemnification under this Article 6 (an "Indemnified Party") or the Indemnified Party receives notice of assertion, or knowledge, of a claim by a third party (a "Third Party Claim"), the Indemnified Party shall give written notice thereof (the "Claim Notice") promptly, but in any event not later than 30 days after receipt of notice of such Third Party Claim, to Purchaser, with respect to a claim for indemnification made pursuant to Section 6.2, or to Seller Representative, with respect to a claim for indemnification made pursuant to Section 6.1, other than with respect to any breach of a representation or warranty made by Sellers in Article 2 of this Agreement, in which case to any such Seller breaching such representation or warranty. The Claim Notice shall describe in reasonable detail the nature of the claim, including an estimate, if practicable, of the amount of Losses that have been or may be suffered or incurred by the Indemnified Party attributable to such claim and the basis of the Indemnified Party's request for indemnification under this Agreement (the "Claim Detail"). Notwithstanding the foregoing, failure by an Indemnified Party to provide notice on a timely basis of a Third Party Claim or include any information required to be included in such notice shall not relieve the party obligated to provide indemnification pursuant to this Article 6 (an "Indemnifying Party") of its obligations hereunder, except to the extent that the Indemnifying Party is actually damaged thereby (including by incurring additional fees or expenses in defending such claim, having to pay greater damages or being precluded from asserting certain claims or defenses). (b) Conduct of Defense. The Indemnifying Party shall have the right, upon written notice to the Indemnified Party (the "Defense Notice") within fifteen days of its receipt from the Indemnified Party of the Claim Notice, to conduct and control the defense against such Third Party Claim in its own name, or, if necessary, in the name of the Indemnified Party and the Indemnifying Party shall have the right subject to the terms of the Escrow Agreement, TO withdraw funds from the Escrow to pay for the conduct of Such Defense, and shall not be liable for any legal expenses incurred in connection with such Third Party Claim by the Indemnitee subsequent to the receipt of such Defense Notice, except as otherwise provided herein. When the Indemnifying Party conducts and controls the defense, the Indemnified Party shall have the -29- right to approve the defense counsel representing the Indemnifying Party in such defense, which approval shall not be unreasonably withheld or delayed, and in the event the Indemnifying Party and the Indemnified Party cannot agree upon such counsel within ten days after the Defense Notice is provided, then the Indemnifying Party shall propose an alternate defense counsel, which shall be subject again to the Indemnified Party's approval, which approval shall not be unreasonably withheld or delayed. The Indemnifying Party shall have the right to withdraw from the defense of any Third Party Claim with respect to which the Indemnifying Party had previously delivered a Defense Notice at any time upon reasonable notice to the Indemnified Party. (c) Conduct by Indemnified Party. In the event that the Indemnifying Party shall fail to give the Defense Notice within the time prescribed by Section 6.3(b) or the Indemnifying Party withdraws from the defense of a Third Party Claim as contemplated by Section 6.3(b), the Indemnified Party shall have the right to conduct and control such defense in good faith with counsel reasonably acceptable to the Indemnifying Party, but the Indemnified Party shall be prohibited from compromising or settling the claim without the prior written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. Failure at any time of the Indemnifying Party to diligently defend a Third Party Claim as required herein or failure of the Indemnifying Party to undertake to fully indemnify the Indemnified Party with respect to Losses relating to the Third Party Claim shall entitle the Indemnified Party to assume the defense and settlement of such Third Party Claim as if the Indemnifying Party had never elected to do so as provided in this Section. (d) Cooperation. In the event that the Indemnifying Party does deliver a Defense Notice and thereby elects to conduct the defense of such Third Party Claim in accordance with Section 6.3(b), the Indemnified Party will cooperate with and make available to the Indemnifying Party such assistance, personnel, witnesses and materials as the Indemnifying Party may reasonably request. Regardless of which party defends such Third Party Claim, the other party shall have the right at its expense to participate in the defense assisted by counsel of its own choosing. (e) Settlements. Without the prior written consent of the Indemnified Party (which shall not be unreasonably withheld or delayed), the Indemnifying Party shall not enter into any settlement of any Third Party Claim if pursuant to or as a result of such settlement, such settlement would result in any liability, obligation or material hardship on the part of the Indemnified Party for which the Indemnified Party is not entitled to indemnification hereunder. If a firm offer is made to settle a Third Party Claim, without leading to liability or creation of a financial or other obligation on the part of the Indemnified Party for which the Indemnified Party would not be entitled to indemnification hereunder or any other Material Adverse Effect on the Company and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party shall give written notice to the Indemnified Party to that effect. If the Indemnified Party fails to consent to such firm offer within ten days after its receipt of such notice, the Indemnified Party may continue to contest or defend such Third Party Claim and, in such event, the maximum liability of the Indemnifying Party as to such Third Party Claim -30- shall not exceed the amount of such settlement offer, plus other Losses paid or incurred by the Indemnified Party up to the expiration of such ten-day period. (f) Binding Obligations. Any judgment entered or settlement agreed upon in the manner provided herein shall be binding upon the Indemnifying Party and shall be conclusively deemed to be an obligation with respect to which the Indemnified Party is entitled to prompt indemnification hereunder, subject to the Indemnifying Party's right to appeal an appealable judgment or order. (g) Mitigation. Each Indemnified Party shall reasonably consult and cooperate with each Indemnifying Party with a view towards mitigating Losses, in connection with claims for which a party seeks indemnification under this Section 6.3. (h) Seller Representative. If a Purchaser Indemnified Party seeks indemnification hereunder from the Sellers collectively, the Seller Representative shall be deemed to be the Indemnifying Party for purposes of giving and receiving notices and consents hereunder, 6.4 Nature of Other Liabilities. In the event any Indemnified Party should have a claim against any Indemnifying Party hereunder which does not involve a Third Party Claim, the Indemnified Party shall promptly transmit to the Indemnifying Party a written notice (the "Indemnity Notice") setting forth applicable Claim Detail. Notwithstanding the foregoing, failure by an Indemnified Party to provide notice on a timely basis of such a claim or include any information required to be included in such notice shall not relieve the Indemnifying Party of its obligations hereunder, except to the extent that the Indemnifying Party is actually damaged thereby (including by incurring additional fees or expenses in defending such claim, or having to pay greater damages or being precluded from asserting certain claims or defenses). 6.5 Certain Limitations on Remedies. No Seller shall be obligated to indemnify or hold harmless any Person entitled to indemnification under Section 6.1(a) or (c) (with respect to any action, suit or proceeding relating to Section 6.1(a)) (collectively, the "Purchaser Indemnified Parties") unless claims for indemnification on account of. any breaches of representations or warranties exceed in the aggregate $500,000 (the "Basket") after which point any such Person entitled to indemnification shall be entitled to indemnification only for Losses in excess of the Basket; provided, however, that under no circumstance shall any Seller be obligated to pay Losses for indemnity claims made pursuant to Section 6.1(a) with respect to the breach by any other Seller of any representations and warranties set forth in Article 2; provided, further that nothing shall prohibit Purchaser Indemnified Parties from making a claim under the Escrow Agreement in respect of such claims. Notwithstanding anything to the contrary in this Agreement, Purchaser acknowledges that the sole and exclusive recourse and remedy of the Purchaser Indemnified Parties with respect to the breach of any representation or warranty or pre-Closing covenant of the Company contained in this Agreement or in any closing certificate executed and delivered by Sellers or the Company in connection herewith shall be indemnification in accordance with the provisions of this Article 6 and limited to the amounts -31- of the Escrow then on deposit with the Escrow Agent subject to the terms and conditions of the Escrow Agreement. 6.6 Amount of Losses. The amount of any Loss payable hereunder shall be reduced by any insurance proceeds which the Indemnified Party may receive with respect to the event or occurrence giving rise to such Losses and shall be reduced by any amounts which Purchaser may receive from third parties in connection with Losses for which indemnification is sought under this Article 6 and shall be reduced by any net reduction in Taxes actually realized by the Indemnified Party in connection with such Losses; provided, however, that the Indemnifying Party shall repay to the Indemnified Party the amount of such net actual reduction in Taxes which is subsequently disallowed pursuant to a determination of a taxing authority. Purchaser shall use commercially reasonable efforts to pursue insurance claims or third party claims that may reduce or eliminate Losses. If the Indemnified Party both collects proceeds from any insurance company or third party and receives a payment from the Indemnifying Party hereunder, and the sum of such proceeds and payment is in excess of the amount payable with respect to the matter that is the subject of the indemnity, then the Indemnified Party shall promptly refund to the Indemnifying Party (or to the Escrow) the amount of such excess to the extent of such Indemnifying Party's indemnification Payments. 6.7 Subrogation. After any indemnification payment is made to any Purchaser Indemnified Party pursuant to this Article 6, Sellers shall, to the extent of such payment, be subrogated to all rights (if any) of the Purchaser Indemnified Party against any third party in connection with the Losses to which such payment relates. Without limiting the generality of the preceding sentence, any Purchaser Indemnified Party receiving an indemnification payment pursuant to the preceding sentence shall execute, upon the written request of the Indemnifying Party, any instrument reasonably necessary to evidence such subrogation rights. 6.8 Survival of Representations, Warranties and Pre-Closing Covenants. The respective representations and warranties of each of the parties to this Agreement shall survive the Closing and the consummation of the transactions contemplated hereby until December 31, 1998 (the "Expiration Date"), and any claim for indemnification which is not asserted by notice as herein provided within such period of survival may not be pursued and is hereby irrevocably waived after such time. Any claim for indemnification asserted within such period of survival as herein provided will be timely made for purposes hereof and may be pursued after the expiration of such period of survival. 6.9 Purchase Price Adjustment. Any indemnification payment pursuant to this Article 6 shall be treated by sellers and Purchaser as an adjustment to the purchase price hereunder for the Shares, Options or Warrants, as the case may be. -32- ARTICLE 7. CONDITIONS TO CLOSING. 7.1 Conditions to Obligations of Purchaser. All obligations of Purchaser to close the transactions contemplated by this Agreement are subject to the fulfillment, at or prior to the Closing, of the following conditions: (a) Representations and Warranties of Sellers and the Company. All representations and warranties made by Sellers and the Company in this Agreement or any other certificate delivered in connection herewith shall be true and correct in all material respects on and as of the Closing Date, as if again made by Sellers and the Company on and as of such date, (b) Performance of Obligations. The Company and the Sellers shall have delivered all documents and agreements described in Section 1.8 and shall have otherwise performed in all material respects all obligations required under this Agreement to be performed by them on or prior to the Closing Date. (c) Pending Proceedings; Legal Restraints. No injunction, restraining order or other ruling or order issued by any court of competent jurisdiction or governmental authority or other legal restraint or prohibition preventing the consummation of the transactions contemplated by this Agreement shall be in effect. No action or proceeding shall be pending by or before any court or other governmental authority seeking to restrain, prohibit or invalidate the transactions contemplated by this Agreement which is reasonably expected to restrain, prohibit or invalidate such transactions. (d) HSR Waiting Period. Any waiting period applicable to the consummation of the transactions contemplated by this Agreement under the HSR Act shall have expired or been terminated. (e) FIRPTA Certificate. Each of the Sellers shall have provided a nonforeign affidavit pursuant to Section 1445(b)(2) of the Code and the Treasury Regulations thereunder. (f) Consents and Approvals. Sellers and the Company shall have obtained all material consents, waivers, authorizations and approvals of any Person required in connection with their execution, delivery and performance of this Agreement. 7.2 Conditions to Obligations of Sellers. All obligations of Sellers to close the transactions contemplated by this Agreement are subject to the fulfillment, at or prior to the Closing, of the following conditions: (a) Representations and Warranties of Purchaser. All representations and warranties made by Purchaser in this agreement or any other certificate delivered in connection herewith shall be true and correct in all material respects on and as of the Closing Date, as if again made by Purchaser on and as of such date. -33- (b) Performance of Purchaser's Obligations. Purchaser shall have delivered all documents and agreements described in Section 1.9 and shall have otherwise performed in all material respects all obligations required under this Agreement to be performed by Purchaser on or prior to the Closing Date. (c) Pending Proceedings; Legal Restraints. No injunction, restraining order or other ruling or order issued by any court of competent jurisdiction or governmental authority or other legal restraint or prohibition preventing the consummation of the transactions contemplated by this Agreement shall be in effect. No action or proceeding shall be pending by or before any court or other governmental authority seeking to restrain, prohibit or invalidate the transactions contemplated by this Agreement which is reasonably expected to restrain, prohibit or invalidate such transactions. (d) HSR Waiting Period. Any waiting period applicable to the consummation of the transactions contemplated by this Agreement under the HSR Act shall have expired or been terminated. 7.3 Termination. (a) Methods of Termination. This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing: (i) by mutual consent of the Seller Representative and Purchaser; (ii) by either Purchaser or the Seller Representative if there shall have been entered a final, nonappealable order or injunction of any governmental authority restraining or prohibiting the consummation of the transactions contemplated hereby or any material part thereof; (iii) by the Purchaser if the Sellers or the Company is in material breach of any material representation, warranty, covenant or agreement herein contained and such breach shall not be cured within fifteen days of the date of notice of default served by the Purchaser; provided, that Purchaser shall not have the right to terminate pursuant to this provision if Purchaser is in material breach of any representation, warranty, covenant or agreement herein contained at the time such notice of default is served; (iv) by the Seller Representative if the Purchaser is in material breach of any representation, warranty, covenant or agreement herein contained and such breach shall not be cured within fifteen days of the date of notice of default served by the Seller Representative; provided, that the Seller Representative shall not have the right to terminate pursuant to this provision if the Sellers or the Company is in material breach of any representation, warranty, covenant or agreement herein contained at the time such notice of default is served. -34- (v) by either Purchaser or the Seller Representative if the Closing has not occurred on or before December 31, 1997; provided, however, that if the Closing has not occurred by such date solely because applicable waiting periods (and any extensions thereof) under the HSR Act shall not have expired or otherwise been terminated, no party shall be entitled to terminate this Agreement pursuant to this Section 7.3(a)(v) until January 31, 1998; provided, further, that the right to terminate this Agreement shall not be available to any party whose breach of this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date. (b) Procedure and Effect of Termination. In the event of written notice of termination of this Agreement by the Sellers or Purchaser, this Agreement shall immediately become void and there shall be no liability hereunder on the part of any party except as follows; (i) the Confidentiality Agreement shall remain in full force and effect; and (ii) nothing contained in this Section shall relieve any party hereto from any liability for any material breach of a representation or warranty contained in this Agreement or the material breach of any covenant contained herein prior to the date of termination. ARTICLE 8. MISCELLANEOUS PROVISIONS. 8.1 Successors and Assigns. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective successors and assigns; provided, however, that no party shall assign or delegate this Agreement or any of its rights or obligations created hereunder without the prior consent of the other parties, which consent shall not be unreasonably withheld or delayed. 8.2 Remedies. In the absence of fraud, no party shall be liable or responsible in any manner whatsoever to any other party, whether for indemnification or otherwise, with respect to any matter arising out of the representations, warranties or covenants of this Agreement or any Schedule hereto or any opinion or certificate delivered in connection herewith, except for (i) equitable relief as described below, (ii) indemnity as provided in Article 6, or (iii) pursuant to other remedies expressly provided for in this Agreement all of which provide the exclusive remedies of the parties. Each of the parties acknowledges and agrees that each other party would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the parties agrees that each other party shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in addition to any other remedy to which it may be entitled at law or in equity. -35- 8.3 Publicity. No party shall issue or cause the publication of any press release or other announcement with respect to this Agreement or the transactions contemplated hereby or disclose the identity of any party hereto or its principals without the prior written consent of the other parties, except where such release or announcement is required by applicable law, provided that the other parties are notified in writing as to the content of such release or announcement prior to the publication thereof. 8.4 Notices. All notices, requests, consents, instructions and other communications required or permitted to be given hereunder shall be in writing and hand delivered, sent by nationally-recognized, next-day delivery service or mailed by certified or registered mail, return receipt requested, postage prepaid, 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 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 Purchaser, as follows: DLJ Merchant Banking II, Inc. 277 Park Avenue, 19th Floor New York, New York 10172 Attention: Tom Dean with a copy to counsel for Purchaser: Weil, Gotshal & Manges LLP 100 Crescent Court, Suite 1300 Dallas, Texas 75201 Attention: R. Scott Cohen (b) if to any Seller, to each of the following: Vilarc Capital 895 Park Avenue New York, NY 10021 Attention: Victor J. Barnett Liberty Partners 1177 Avenue of the Americas New York, New York 10036 Attention: Michael J. Kluger -36- with a copy to counsel for Sellers: Sonnenschein Nath & Rosenthal 8000 Sears Tower Chicago, IL 60606 Attention: Donald G. Lubin Michael M. Froy Kirkland & Ellis 200 East Randolph Drive Chicago, Illinois 60601 Attention: Edward T. Swan Mark B. Tresnowski or such other address or persons as the parties may from time to time designate in writing in the manner provided in this Section. 8.5 Entire Agreement. This Agreement, together with the Schedules and Exhibits attached hereto, represent the entire agreement and understanding of the parties hereto with respect to the transactions contemplated herein and therein, and no representations, warranties or covenants have been made in connection with this Agreement, other than those expressly set forth herein and therein, or in the certificates delivered in accordance herewith or therewith. Except for the Confidentiality Agreement, which shall remain in effect unless and until consummation of the Closing, this Agreement supersedes all prior negotiations, discussions, correspondence, communications, understandings and agreements among the parties relating to the subject matter of this Agreement and such other agreements and all prior drafts of this Agreement and such other agreements are merged into this Agreement. No Seller shall have any liability for statements, claims, forecasts, projections or other information, financial or otherwise, provided by or on behalf of any Seller, the Company or any Subsidiary or in connection with the Business prior to the Closing (including information contained in the September 1997 Arcade, Inc. Confidential Information Memorandum prepared by Bowles). Purchaser agrees that it is not relying on any financial data, statements, claims, projections, forecasts or other information other than as expressly set forth in Article 3 in entering into this Agreement or consummating the transactions contemplated hereby. 8.6 Amendments and Waivers. This Agreement may be amended, superseded, cancelled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by the purchaser, the Company, and the Sellers set forth on schedule 8.6 or, in the case of a waiver, by the party waiving compliance (or by the Sellers set forth on Schedule 8.6 on behalf of all of the Sellers). No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any waiver on the part of any party of any such right, power or privilege, nor any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or the exercise of any other such right, power or privilege. -37- 8.7 Severabilily. This Agreement shall be deemed severable and the invalidity or unenforceability of any term or provision hereof shall not affect the validity or enforceability of this Agreement or of any other term or provision hereof. 8.8 Headings. The article and section headings contained in this Agreement are solely for convenience of reference and shall not affect the meaning or interpretation of this Agreement or of any term or provision hereof. 8.9 Terms. All references herein to Articles, Sections, Schedules and Exhibits shall be deemed references to such parts of this Agreement, unless the context shall otherwise require. All references to singular or plural shall include the other as the context may require. 8.10 Governing Law; Jurisdiction; Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to choice of law principles. The parties agree that (a) the United States District Court for the State of New York (or, in the absence of diversity jurisdiction, the courts of the State of New York) shall have exclusive jurisdiction of any action or proceeding relating to, or arising under or in connection with this Agreement and each party consents to personal jurisdiction of such courts and waives any objection to such courts' jurisdiction, and (b) service of any summons and complaint or other process in any such action or proceeding may be made by registered or certified mail directed to each party at the address set forth in Section 8.4, and service so made shall be deemed to be completed upon the earlier of actual receipt or five days after posting, each party hereby waiving personal service thereof. 8.11 Schedules and Exhibits. The Schedules and Exhibits attached hereto are a part of this Agreement as if fully set forth herein. 8.12 Definitions. (a) "Person". The term "Person" as used in this Agreement shall mean any individual, partnership, corporation, company, limited liability company, trust or other entity. (b) "Knowledge". The term "Knowledge" (or any form of such term, such as "Knows", "Known", etc.) as used in this Agreement with respect to the Company's awarness of the presence or absence of a fact, event or condition shall mean actual, not implied or imputed, then present knowledge of the following individuals, after due inquiry: Victor Barnett, Roger Barnett and Gordon Jones. Purchaser acknowledges that none of Victor Barnett, Roger Barnett or Gordon Jones have advised other officers or employees of the Company or its Subsidiaries (other than Hubert Brown) of this Agreement or the transactions contemplated hereby, nor have they discussed or reviewed with any such officers or employees the representations and warranties of the Company set forth herein. -38- (c) "Including". The term "including" as used in this Agreement shall mean including, without limitation, and shall not be deemed to indicate an exhaustive enumeration of the items at issue. 8.13 No Third Party Beneficiaries. Except as expressly contemplated in this Agreement (including pursuant to Sections 1.2 and 5.1), this Agreement shall be binding upon and inure solely to the benefit of each party hereto and nothing in this Agreement is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement. 8.14 Expenses. All transaction fees and expenses (including fees and expenses of legal counsel, accountants, investment bankers, brokers, finders or other representatives and consultants) incurred in connection with the preparation, negotiation, execution and performance of this Agreement and the transactions contemplated hereby are referred to herein as the "Deal Expenses." Except as expressly provided otherwise in this Agreement, Purchaser shall bear its own Deal Expenses and the Company shall bear the Deal Expenses of itself and the Sellers; provided, that any filing fee paid under the HSR Act shall be borne between the parties as set forth in Section 5.7. 8.15 Construction. The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent and no rule of strict construction shall be applied against any party. Without limiting the generality of the foregoing, the parties acknowledge that they have jointly participated in the negotiation and drafting of this Agreement and that in the event of an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumptions or burdens of proof shall arise favoring any party by virtue of the authorship of any of the provisions of this Agreement. -39- This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. PURCHASER: By: /s/ Tompson Dean _________________________________ Name: _______________________________ Title: ______________________________ ARCADE HOLDING CORPORATION By: /s/ Victor Barnett _________________________________ Name: _______________________________ Title: ______________________________ SELLERS: VILARC CAPITAL By: /s/ Michael Kluger _________________________________ Name: _______________________________ Title: ______________________________ LIBERTY PARTNERS HOLDINGS 4, L,L.C. By: /s/ Michael Kluger _________________________________ Name: _______________________________ Title: ______________________________ STATE BOARD OF ADMINISTRATION OF FLORIDA By: LIBERTY PARTNERS, L.P., ITS ATTORNEY-IN-FACT By: LIBERTY CAPITAL PARTNERS, INC., ITS GENERAL PARTNER By: /s/ Michael Kluger _________________________________ Name: _______________________________ Title: ______________________________ -40- /s/ Roger L. Barnett ------------------------------- Roger L. Barnett /s/ Victor J. Barnett ------------------------------- Victor J. Barnett -41- FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT This First Amendment to Stock Purchase Agreement (this "Amendment"), dated December 2, 1997, by and among AHC I Acquisition Corp., a Delaware corporation ("Purchaser"), Arcade Holding Corporation, a Delaware corporation (the "Company"), and Victor J. Barnett and Michael J. Kluger (collectively, the "Seller Representative"). RECITALS WHEREAS, Purchaser will acquire all of the issued and outstanding capital stock of the Company pursuant to that certain Stock Purchase Agreement, dated November 14, 1997, by and among Purchaser, the Company and certain other parties identified on the signature pages thereto (the "Stock Purchase Agreement"); and WHEREAS, Purchaser, the Company and the Seller Representative desire to amend certain provisions of the Stock Purchase Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I AMENDMENT OF AGREEMENT Section 1.1 Amendment to Section 1.7(b). Section 1.7(b) of the Stock Purchase Agreement is hereby amended to add thereto the following at the end of such Section 1.7(b): Notwithstanding the foregoing, Purchaser may, at its sole option, elect not to pay or cause to be paid the Heller Payments. If Purchaser so elects, Sellers shall not be obligated to deliver to Purchaser any pay-off letter or termination statements with respect thereto as provided in Schedule 1.9. Section 1.2 Amendment to Article 1. Article 1 of the Stock Purchase Agreement is hereby amended to add the following section as follows: 1.13 Purchase and Sale Obligations. Notwithstanding any other provision herein, with respect to Sellers' obligation to sell, assign, transfer, convey and deliver the Shares, Options or Warrants, as applicable, to Purchaser and Purchaser's obligation to purchase the Shares, Options or Warrants, as applicable, from Sellers, Purchaser shall have the right to either (i) effect such transactions directly or (ii) designate and cause a wholly-owned subsidiary of Purchaser to effect such transactions and, in such case, Sellers shall sell, assign, transfer, convey and deliver the Shares, Options or Warrants, as applicable, to such wholly-owned subsidiary. ARTICLE II MISCELLANEOUS Section 2.1 Defined Terms. All capitalized terms used and not defined herein shall have the meanings ascribed to such terms in the Stock Purchase Agreement as hereby amended. Section 2.2 Effect of Amendment. Except as specifically provided herein, the Stock Purchase Agreement is in all respects ratified and confirmed. All of the terms, conditions and provisions of the Stock Purchase Agreement as hereby amended shall be and remain in full force and effect. Section 2.3 Entire Agreement. This Amendment and the unaltered portions of the Stock Purchase Agreement, together with the Schedules and Exhibits attached to the Stock Purchase Agreement, represent the entire agreement and understanding of the parties to the Stock Purchase Agreement with respect to the transactions contemplated herein and therein, and no representations, warranties or covenants have been made in connection with this Amendment or the Stock Purchase Agreement, other than those expressly set forth herein and therein, or in certificates delivered in accordance herewith or therewith. Except for the Confidentiality Agreement, which shall remain in effect unless and until consummation of the Closing, this Amendment and the unaltered portions of the Stock Purchase Agreement supersedes all prior negotiations, discussions, correspondence, communications, understandings and agreements among the parties relating to the subject matter of this Amendment and the Stock Purchase Agreement and such agreements and all prior drafts of this Amendment and the Stock Purchase Agreement and such other agreements are merged into this Amendment and the unaltered portions of the Stock Purchase Agreement. Section 2.4 Amendments and Waivers. This Amendment and the Stock Purchase Agreement as hereby amended may be amended, superseded, cancelled, 2 renewed or extended, and the terms hereof may be waived, only by a written instrument signed by the Purchaser, the Company, and the Sellers set forth on Schedule 8.6 to the Stock Purchase Agreement or, in the case of a waiver, by the party waiving compliance (or by Sellers set forth on Schedule 8.6 to the Stock Purchase Agreement on behalf of all Sellers). Section 2.5 Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to choice of laws principles. Section 2.6 Seller Representative. Victor J. Barnett and Michael J. Kluger have all requisite power and authority to execute and deliver this Amendment on behalf of all of the Sellers pursuant to Section 8.6 of the Stock Purchase Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 3 This Amendment may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. AHC I ACQUISITION CORP. By: /s/ David Wittels ----------------------- David Wittels, Vice President ARCADE HOLDING CORPORATION By: /s/ Victor J. Barnett ----------------------- Victor J. Barnett, Chairman SELLER REPRESENTATIVE By: /s/ Victor J. Barnett ----------------------- Victor J. Barnett By: /s/ Michael J. Kluger ----------------------- Michael J. Kluger 4 EXECUTION COPY SECOND AMENDMENT TO STOCK PURCHASE AGREEMENT This Second Amendment to Stock Purchase Agreement (this "Amendment"), dated December 12, 1997, by and among AHC I Acquisition Corp., a Delaware corporation ("Purchaser"), Arcade Holding Corporation, a Delaware corporation (the "Company"), and Victor J. Barnett and Michael J. Kluger (collectively, the "Seller Representative"). RECITALS WHEREAS, Purchaser will acquire all of the issued and outstanding capital stock of the Company pursuant to that certain Stock Purchase Agreement, dated November 14, 1997, by and among Purchaser, the Company and certain other parties identified on the signature pages thereto, as amended by that certain First Amendment to Stock Purchase Agreement dated December 2, 1997 (as amended, the "Stock Purchase Agreement"); and WHEREAS, Purchaser, the Company and the Seller Representative desire to amend certain provisions of the Stock Purchase Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I AMENDMENT OF AGREEMENT Section 1.1 Amendment to Section 1.2. Section 1.2 of the Stock Purchase Agreement is hereby amended to add thereto the following at the end thereof: Notwithstanding the foregoing, Roger Barnett's Options to purchase 1,368.55 Shares (the "Exchanged Shares") shall be surrendered and exchanged for options to receive 100,000 shares of preferred stock, $0.01 par value, of Purchaser, in accordance with the Option Substitution Agreement dated as of December 15, 1997, among the Company, Purchaser and Roger Barnett. Section 1.2 Amendment to Section 1.5. Section 1.5(a)(iii)(C) is hereby amended by replacing "$195.0 million" with "$192,636,855." Section 1.3 Amendment to Section 1.5(c)Section 1.5(c) of the Stock Purchase Agreement is hereby amended to read in its entirety as follows: (c) Within three days after the final determination of the Closing Differential, the Adjusted Purchase Price shall be determined as follows: If the amount of the Closing Differential is a positive amount, then the Adjusted Purchase Price shall be adjusted upward by an amount equal to the Closing Differential. In such case, Purchaser shall inform the Seller Representative and pay the amount of such difference to the Seller Representative, which shall allocate the amount among the Sellers in accordance with Exhibit A attached to the original Stock Purchase Agreement. Conversely, if the amount of the Closing Differential is a negative amount, then the Adjusted Purchase Price shall be adjusted downward by an amount equal to the Closing Differential (expressed as a positive amount), which amount shall be distributed to Purchaser in accordance with the terms of the Escrow Agreement. For purposes of calculating Net Indebtedness, (i) no indebtedness incurred in connection with the financing of the transactions contemplated by this Agreement shall be taken into consideration; provided that no credit shall be given for indebtedness paid in connection with the transactions contemplated by this Agreement, and (ii) the amount of cash and cash equivalents under Section 1.5(a)(iii)(A) shall be determined as of the close of business on the Closing Date. ARTICLE II MISCELLANEOUS Section 2.1 Defined Terms. All capitalized terms used and not defined herein shall have the meanings ascribed to such terms in the Stock Purchase Agreement as hereby amended. Section 2.2 Effect of Amendment. Except as specifically provided herein, the Stock Purchase Agreement is in all respects ratified and confirmed. All of the terms, conditions and provisions of the Stock Purchase Agreement as hereby amended shall be and remain in full force and effect. 2 Section 2.3 Entire Agreement. This Amendment and the unaltered portions of the Stock Purchase Agreement, together with the Schedules and Exhibits attached to the Stock Purchase Agreement, represent the entire agreement and understanding of the parties to the Stock Purchase Agreement with respect to the transactions contemplated herein and therein, and no representations, warranties or covenants have been made in connection with this Amendment or the Stock Purchase Agreement, other than those expressly set forth herein and therein, or in certificates delivered in accordance herewith or therewith. Except for the Confidentiality Agreement, which shall remain in effect unless and until consummation of the Closing, this Amendment and the unaltered portions of the Stock Purchase Agreement supersedes all prior negotiations, discussions, correspondence, communications, understandings and agreements among the parties relating to the subject matter of this Amendment and the Stock Purchase Agreement and such agreements and all prior drafts of this Amendment and the Stock Purchase Agreement and such other agreements are merged into this Amendment and the unaltered portions of the Stock Purchase Agreement. Section 2.4 Amendments and Waivers. This Amendment and the Stock Purchase Agreement as hereby amended may be amended, superseded, cancelled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by the Purchaser, the Company, and the Sellers set forth on Schedule 8.6 to the Stock Purchase Agreement or, in the case of a waiver, by the party waiving compliance (or by Sellers set forth on Schedule 8.6 to the Stock Purchase Agreement on behalf of all Sellers). Section 2.5 Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to choice of laws principles. Section 2.6 Seller Representative. Victor J. Barnett and Michael J. Kluger have all requisite power and authority to execute and deliver this Amendment on behalf of all of the Sellers pursuant to Section 8.6 of the Stock Purchase Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 3 This Amendment may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. AHC I ACQUISITION CORP. By: /s/ David Wittels, ----------------------- David Wittels, Vice President ARCADE HOLDING CORPORATION By: Victor J. Barnett ----------------------- Victor J. Barnett, Chairman SELLER REPRESENTATIVE By: /s/ VIctor J. Barnett ----------------------- Victor J. Barnett By: /s/ Michael J. Kluger ----------------------- Michael J. Kluger 4 EX-10.11 8 FINANCIAL ADVISORY AGREEMENT Exhibit 10.11 December 12, 1997 PRIVATE AND CONFIDENTIAL AHC I Acquisition Corp. c/o DLJ Merchant Banking II, Inc. 277 Park Avenue New York, NY 10172 Attention: David Wittels Gentlemen: This letter agreement (the "Agreement") confirms our understanding that AHC I Acquisition Corp. (which together with its subsidiaries is hereinafter referred to as the "Company") has engaged Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") to act as its (i) exclusive financial advisor commencing with the acceptance of this Agreement with respect to the acquisition of Arcade Holding Corporation (the "Acquisition"), and (ii) following the closing of the Acquisition and continuing for a period through December 31, 2002 (the "Engagement Period") with respect to the review and analysis of financial and structural alternatives available to the Company with a view to meeting its long term strategic objectives. As discussed, we propose to undertake certain services on your behalf, to the extent requested by you, which shall consist of the following: (i) advising you with regard to the Acquisition, (ii) assisting you in analyzing the Company's operations and its historical performance; and (iii) assisting you in analyzing the Company's future prospects. As compensation for the services to be provided by DLJ hereunder, the Company agrees to pay DLJ (i) a financial advisory fee of $2,000,000 for services related to the Acquisition, payable upon consummation of the Acquisition and (ii) an annual advisory fee of $250,000, payable quarterly in equal installments of $62,500, payable March 31, June 30, September 30 and December 31 of each year. As further compensation, the Company agrees that in the event the Company determines to pursue any Transaction (as hereinafter defined) during the period of our engagement, DLJ shall have the right to act as the Company's exclusive financial advisor, sole placement agent, sole initial purchaser or sole managing underwriter or sole dealer-manager, as the case may be, with respect to each such Transaction. For purposes of this letter, the term "Transaction" shall include each of the following: (i) the sale, merger, consolidation or any other business combination, in one or a series of transactions, involving any portion of the business, securities or assets of the Company; (ii) the acquisition (and any related matters such as financings, divestitures, etc.), in one or a series of transactions, of all or a portion of the business, securities or assets of another entity or person; (iii) any recapitalization, refinancing, repurchase or restructuring of the Company's equity or debt securities or indebtedness or any amendments or modifications to the Company's debt securities or indentures whether or not in connection therewith, involving, by or on behalf of the Company, an offer to purchase or AHC I Acquisition Corp. Page 2 December 12, 1997 exchange for cash, property, securities, indebtedness or other consideration, or a solicitation of consents, waivers of authorizations with respect thereto; (iv) any spin-off, split-off or other extraordinary dividend of cash, securities or other assets to stockholders of the Company; or (v) any sale of securities of the Company effected pursuant to a private sale or an underwritten public offering. If the Company determines to pursue any such Transaction, DLJ and the Company will enter into an agreement appropriate to the circumstances, containing provisions for, among other things, compensation, indemnification, contribution, and representations and warranties, which are usual and customary for similar agreements entered into by DLJ or other investment bankers of international standing acting in similar transactions. DLJ shall have no obligation to act as placement agent, initial purchaser, underwriter, or dealer manager to the Company or to place or purchase any securities of the Company, except to the extent that such obligations arise out of a placement agent agreement, purchase agreement, underwriting agreement or dealer-manager agreement, as the case may be, with respect to a particular Transaction executed and delivered by both DLJ and the Company. As further consideration for its services hereunder, the Company shall, upon request by DLJ from time to time, reimburse DLJ promptly for all out-of-pocket expenses (including the reasonable fees and expenses of counsel) incurred by DLJ in connection with its engagement hereunder, regardless of whether a Transaction is consummated. As DLJ will be acting on your behalf, it is our practice to receive indemnification and the Company agrees to the indemnification and other obligations set forth in Schedule I attached hereto, which Schedule is an integral part hereof. The Company acknowledges and agrees that DLJ has been retained solely to provide the advice or services set forth in this Agreement. In such capacity, DLJ shall act as an independent contractor, and any duties of DLJ arising out of its engagement hereunder shall be owed solely to the Company. The Company shall make available to DLJ all available financial and other information concerning its business and operations which DLJ reasonably requests and will provide DLJ with access to the Company's officers, directors, employees, independent accountants and legal counsel. In performing its services hereunder, DLJ shall be entitled to rely without investigation upon all information that is available from public sources as well as all other information supplied to it by or on behalf of the Company or its advisors and, except as otherwise specifically agreed to in a writing signed by both parties, shall not in any respect be responsible for the accuracy or completeness of, or have any obligation to verify, the same or to conduct any appraisal of assets. To the extent consistent with legal requirements, all information given to DLJ by the Company, unless publicly available or otherwise available to DLJ without restriction or breach of any confidentiality agreement, will be held by DLJ in confidence and will not be disclosed to anyone other than DLJ's agents and advisors without the Company's prior approval or used for any purpose other than those referred to in this Agreement. Any advice, written or oral, provided by DLJ pursuant to this Agreement will be treated by the Company as confidential, will be solely for the information and assistance of the Company in connection with the advisory services performed by DLJ hereunder and will not be reproduced, summarized, described or referred to, or furnished to any other party or used for any other purpose, except in each case with our prior written consent. AHC I Acquisition Corp. Page 3 December 12, 1997 This Agreement may be terminated by DLJ at any time or by the Company upon expiration of the Engagement Period upon receipt of written notice to that effect by the other party. Upon any termination or expiration of this Agreement, DLJ will be entitled to prompt payment of all fees accrued prior to such termination or expiration and reimbursement of all out-of-pocket expenses as described above. The indemnity and other provisions contained in Schedule I will also remain operative and in full force and effect regardless of any termination or expiration of this Agreement. This Agreement shall be extended automatically and without further action by the parties for an additional term of one (1) year, unless otherwise terminated by either party in writing within 60 days prior to the expiration of the initial term or the applicable renewal term. The Company further agrees that it will not enter into a Transaction referred to in the preceding paragraph unless, prior to or simultaneously with consummation of such Transaction, adequate provision is made with respect to the payment of compensation to DLJ as contemplated by such paragraph. This Agreement including Schedule I hereto, incorporates the entire understanding of the parties and supersedes all previous agreements with respect to the subject matter hereof and shall be governed by, and construed and enforced in accordance with, the laws of the State of New York. This Agreement shall be binding upon and inure to the benefit of the Company, DLJ, each Indemnified Person (as defined in Schedule I hereto) and their respective successors and assigns. The Company irrevocably and unconditionally submits to the exclusive jurisdiction of any State or Federal court sitting in New York City over any suit, action or proceeding arising out of or relating to this Agreement (including Schedule I). The Company hereby agrees that service of any process, summons, notice or document by U.S. registered mail addressed to the Company shall be effective service of process for any action, suit or proceeding brought in any such court. The Company irrevocably and unconditionally waives any objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in such a court has been brought in an inconvenient forum. The Company agrees that a final judgment in any such suit, action or proceeding brought in any such court shall be conclusive and binding upon the Company and may be enforced in any other courts to whose jurisdiction the Company is or may be subject, by suit upon such judgment. The Company irrevocably and unconditionally submits to the exclusive jurisdiction of any State or Federal court sitting in New York City over any suit, action or proceeding arising out of or relating to this Agreement (including Schedule I). The Company hereby agrees that service of any process, summons, notice or document by U.S. registered mail addressed to the Company shall be effective service of process for any action, suit or proceeding brought in any such court. The Company irrevocably and unconditionally waives any objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in such a court has been brought in an inconvenient forum. The Company agrees that a final judgment in any such suit, action or proceeding brought in any such court shall be conclusive and binding upon the Company and may be enforced in any other courts to whose jurisdiction the Company is or may be subject, by suit upon such judgment. The prevailing party in any suit, action or proceeding arising out of or relating to this Agreement shall be entitled to recover from the non-prevailing party all of the attorney fees and AHC I Acquisition Corp. Page 4 December 12, 1997 other expenses the prevailing party may incur in such suit, action or proceeding and in any subsequent suit to enforce a judgment. This letter agreement shall be binding upon and inure to the benefit of the Company, DLJ, each Indemnified Person (as defined in Schedule I hereto) and their respective successors and assigns. If any term, provision, covenant or restriction contained in this Agreement, including Schedule I, is held by a court of competent jurisdiction or other authority to be invalid, void, unenforceable or against its regulatory policy, the remainder of the terms, provisions, covenants and restrictions contained in this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. After reviewing this letter, please confirm that the foregoing is in accordance with your understanding by signing and returning to me the duplicate of this Agreement attached hereto, whereupon it shall be our binding Agreement. Very truly yours, DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: /s/ Colin Knudsen ----------------------------- Colin Knudsen Managing Director Accepted and agreed to this 12th day of December, 1997 AHC I ACQUISITION CORP. By: /s/ David Wittels --------------------------- David Wittels SCHEDULE I This Schedule I is a part of and is incorporated into that certain letter agreement (together, the "Agreement") dated December 12, 1997 by and between AHC I Acquisition Corp. (the "Company") and Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). The Company will indemnify and hold harmless DLJ and its affiliates, and the respective directors, officers, agents and employees of DLJ and its affiliates (other than the Company) (DLJ and each such entity or person, an "Indemnified Person"), from and against any losses, claims, damages, judgments, assessments, costs and other liabilities (collectively "Liabilities"), and will reimburse each Indemnified Person for all fees and expenses (including the reasonable fees and expenses of counsel) (collectively, "Expenses") as they are incurred in investigating, preparing, pursuing or defending any claim, action, proceeding or investigation, whether or not in connection with pending or threatened litigation and whether or not any Indemnified Person is a party (collectively, "Actions"), arising out of or in connection with advice or services rendered or to be rendered by any Indemnified Person pursuant to this Agreement, the transactions contemplated hereby or any Indemnified Person's actions or inactions in connection with any such advice, services or transactions; provided that the Company will not be responsible for any Liabilities or Expenses of any Indemnified Person that are determined by a judgment of a court of competent jurisdiction which is no longer subject to appeal or further review to have resulted solely from such Indemnified Person's gross negligence or willful misconduct in connection with any of the advice, actions, inactions or services referred to above. The Company also agrees to reimburse each Indemnified Person for all Expenses as they are incurred in connection with enforcing such Indemnified Person's rights under this Agreement (including, without limitation, its rights under this Schedule I). Upon receipt by an Indemnified Person of actual notice of an Action against such Indemnified Person with respect to which indemnity may be sought under this Agreement, such Indemnified Person shall promptly notify the Company in writing; provided that failure so to notify the Company shall not relieve the Company from any liability which the Company may have on account of this indemnity or otherwise, except to the extent the Company shall have been materially prejudiced by such failure. The Company shall, if requested by DLJ, assume the defense of any such Action including the employment of counsel reasonably satisfactory to DLJ. Any Indemnified Person 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 such Indemnified Person, unless: (i) the Company has failed promptly to assume the defense and employ counsel or (ii) the named parties to any such Action (including any impleaded parties) include such Indemnified Person and the Company, and such Indemnified Person shall have been advised by counsel that there may be one or more legal defenses available to it which are different from or in addition to those available to the Company; provided that the Company shall not in such event be responsible hereunder for the fees and expenses of more than one firm of separate counsel in connection with any Action in the same jurisdiction, in addition to any local counsel. The Company shall not be liable for any settlement of any Action effected without its written consent. In addition, the Company will not, without prior written consent of DLJ, settle, compromise or consent to the entry of any judgment in or otherwise seek to terminate any pending or threatened Action in respect of which indemnification or contribution may be sought hereunder (whether or not any Indemnified Person is a party thereto) unless such settlement, compromise, consent or termination includes an unconditional release of each Indemnified Person from all Liabilities arising out of such Action. In the event the foregoing indemnity is unavailable to an Indemnified Person other than in accordance with this Agreement, the Company shall contribute to the Liabilities and Expenses paid or payable by such Indemnified Person in such proportion as is appropriate to reflect (i) the relative benefits to the Company and its shareholders, on the one hand, and to DLJ, on the other hand, of the matters contemplated by this Agreement or (ii) if the allocation provided by the immediately preceding clause is not permitted by the applicable law, not only such relative benefits but also the relative fault of the Company, on the one hand, and DLJ, on the other hand, in connection with the matters as to which such Liabilities or Expenses relate, as well as any other relevant equitable considerations; provided that in no event shall the Company contribute less than the amount necessary to ensure that all Indemnified Persons, in the aggregate, are not liable for any Liabilities and Expenses in excess of the amount of fees actually received by DLJ pursuant to the Agreement. For purposes of this paragraph, the relative benefits to the Company and its shareholders, on the one hand, and to DLJ, on the other hand, of the matters contemplated by the Agreement shall be deemed to be in the same proportion as (a) the total value paid or contemplated to be paid or received or contemplated to be received by the Company or the Company's shareholders, as the case may be, in the transaction or transactions that are within the scope of the Agreement, whether or not any such transaction is consummated, bears to (b) the fees paid or to be paid to DLJ under the Agreement. The Company also agrees that no Indemnified Person shall have any liability (whether direct or indirect, in contract or tort or otherwise) to the Company for or in connection with advice or services rendered or to be rendered by any Indemnified Person pursuant to this Agreement, the transactions contemplated hereby or any Indemnified Person's actions or inactions in connection with any such advice, services or transactions except for Liabilities (and related Expenses) of the Company that are determined by a judgment of a court of competent jurisdiction which is no longer subject to appeal or further review to have resulted solely from such Indemnified Person's gross negligence or willful misconduct in connection with any such advice, actions, inactions or services. The reimbursement, indemnity and contribution obligations of the Company set forth herein shall apply to any modification of this Agreement and shall remain in full force and effect regardless of any termination of, or the completion of any Indemnified Person's services under or in connection with, this Agreement. EX-10.13 9 REPLACEMENT STOCK OPTION AGREEMENT REPLACEMENT STOCK OPTION AGREEMENT This Replacement Stock Option Agreement is made as of December 15, 1997 between AHC I Acquisition Corp., a Delaware corporation (the "Company"), and Roger L. Barnett (the "Barnett"), 1. BACKGROUND. As of August 4, 1994, Barnett was granted a stock option ("Arcade Option") under the 1993 Stock Option Plan of Arcade Holding Corporation, a Delaware Corporation ("Arcade"). In connection with the acquisition of all the shares of common stock of Arcade by the Company (the "Transaction") and pursuant to the terms of an Option Substitution Agreement dated as of December 15, 1997 ("Option Substitution Agreement") among the Company, Barnett and Arcade, a portion of the Arcade Option ("Surrendered Arcade Option") was surrendered, terminated and cancelled. This option is granted in replacement of the Surrendered Arcade Option to preserve those opportunities and benefits under the Arcade Option which were terminated and cancelled in connection with the Transaction, 2. GRANT OF OPTION. The Company hereby irrevocably grants to Barnett a stock option (the "Option") to purchase all or any part of an aggregate of 100,000 shares of 15% Senior Preferred Stock Due 2012, per value $.01 per share of the Company (the "Preferred Stock") (such number being subject to adjustment as provided in Section 8) on the terms and conditions hereinafter set forth. The number of shares of Preferred Stock subject to the Option has been determined in accordance with the Option Substitution Agreement. 3. PURCHASE PRICE. The per share purchase price of the shares of Preferred Stock deliverable upon exercise of the Option shall be $1.37. The per share purchase price has been determined in accordance with the Option Substitution Agreement. 4. VESTING AND TERM. The Option shall be fully vested and may be exercised, in part or in full, at any time and from time to time prior to the expiration or termination thereof. The term of the Option shall expire, if not sooner terminated as provided herein, on August 4, 2004, (which is the 10th anniversary of the date of grant of the Arcade Option), and the Option is not exercisable as to any shares on or after such date. 5. PUT AND CALL AGREEMENT. Barnett and the Company agree that this Option and any Preferred Shares acquired pursuant to the Option shall be subject to the terms and conditions of that certain Put and Call Agreement dated as of December 15, 1997, a copy of which is attached hereto. 6. NONTRANSFERABILITY. The Option shall not be transferable (other than pursuant to the Put and Call Agreement dated the date hereof among the parties hereto and certain shareholders of the Company) otherwise than by will or the laws of descent and distribution and the Option may be exercised, during the lifetime of Barnett, only by him (or in the event of Executive's death, his estate), 7. CHARACTERIZATION. The Option granted hereunder is intended to be a nonqualified stock option and not an incentive stock option. 8. RECAPITALIZATION AND OTHER ADJUSTMENTS. The number of shares subject to the Option (and the purchase price of such shares) will be equitably adjusted for any reorganization, recapitalization, reclassification, stock split, stock dividend or similar change in the Preferred Stock which occurs subsequent to the date of this agreement, it being understood that no adjustment shall be made to the shares subject to the Option in respect of the accretion to liquidation value or payment of dividends on such shares In accordance with the terms of the Preferred Stock. 9. SALE OR REORGANIZATION. In case the Company is merged or consolidated with another corporation and the Company is not the surviving company, or in case all or substantially all the assets of the Company is acquired by another corporation, or in case of a reorganization or liquidation of the Company, the Board of Directors of the Company or the board of directors of any corporation assuming the obligations of the Company hereunder, shall either (i) make appropriate provisions for the protection of the value of any outstanding portion of the Option by the substitution on an equitable basis of appropriate stock of the Company, or an appropriate stock of the merged, consolidated, or otherwise reorganized corporation following written notice to the holder of the Option, or (ii) give written notice to the holder of the Option of the contemplated transaction in order to permit the holder of the Option to elect to exercise prior to the effectiveness of such transaction. 10. METHOD OF EXERCISING OPTION. At any time and from time to time prior to the termination or cancellation of the Option, Barnett may exercise all or a portion of the Option by delivering written notice of exercise to the Company, together with (i) a written acknowledgment, reasonably satisfactory to the Company, that Barnett has read and has been afforded an opportunity to ask questions of management of the Company regarding all financial and other information provided to Barnett regarding the Company and (ii) payment in full of the amount of the purchase price with respect to the number of shares with respect to which the Option is being exercised ("Exercise Price") by delivery to the Company of a cashier's or certified check or by wire transfer in immediately available funds in the amount of the Exercise Price. Barnett shall be liable for and shall remit to the Company all federal, state, local and foreign withholding taxes for which the Company may be liable with respect to the Option. As a condition to any exercise of the Option, Barnett will permit the Company to deliver to him all financial and other information regarding the Company and its affiliates which the Company believes necessary to enable Barnett to make an informed investment decision. In the event the Option shall be exercised by any person or persons other than Barnett, such notice of exercise shall be accompanied by appropriate proof of the right of such person or persons to exercise the Option. 11. SECURITIES LAWS RESTRICTIONS. Barnett represents that when Barnett exercises the Option, Barnett will be purchasing Preferred Shares for Barnett's own account and not on behalf of any other person. Barnett understands and acknowledges that federal and state -2- securities laws govern and restrict Barnett's right to offer, sell, pledge or otherwise dispose of any Preferred Stock acquired on exercise of the Option unless Barnett's offer, sale or other disposition thereof is registered under the Securities Act of 1933, as amended (the "1933 Act"), and applicable state securities laws or such offer, sale or other disposition is exempt from registration thereunder. Barnett agrees that Barnett will not offer, sell or otherwise dispose of any shares of Preferred Stock acquired on exercise of the Option in any manner which would (i) require the Company to file any registration statement (or similar filing under state law) with the Securities and Exchange Commission (or with any state securities commission or agency) or to amend or supplement any such filing or (ii) violate or cause the Company to violate the 1933 Act, the rules and regulations promulgated thereunder or any other state or federal law. Barnett further understands that the certificates for any Preferred Stock Barnett purchases will bear the legend set forth below or such other legend as the Company deems necessary or desirable to assure compliance with the 1933 Act and other applicable laws, rules and regulations. The certificates representing Preferred Stock acquired on exercise of the Option will bear the following legend: "THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, TRANSFERRED, OR OTHERWISE DISPOSED OF (OTHER THAN PURSUANT TO THE PUT AND CALL AGREEMENT DESCRIBED BELOW) UNTIL HOLDER HEREOF PROVIDES EVIDENCE SATISFACTORY TO THE ISSUER (WHICH, IN THE DISCRETION OF THE ISSUER, MAY INCLUDE AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER) THAT SUCH OFFER, SALE, PLEDGE, TRANSFER, OR OTHER DISPOSITION WILL NOT VIOLATE APPLICABLE FEDERAL OR STATE SECURITIES LAWS. THE ISSUER IS AUTHORIZED TO ISSUE SHARES OF MORE THAN ONE CLASS AND TO ISSUE SHARES IN MORE THAN ONE SERIES OF AT LEAST ONE CLASS. THE ISSUER WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS A STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. 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 -3- TIME, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER AT ITS PRINCIPAL EXECUTIVE OFFICES. THIS SECURITY IS SUBJECT TO CERTAIN REPURCHASE RIGHTS UPON THE TERMS AND SUBJECT TO THE CONDITIONS SET FORTH IN THAT CERTAIN PUT AND CALL 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 ISSUER AT ITS PRINCIPAL EXECUTIVE OFFICES, AND THIS SECURITY MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, TRANSFERRED, OR OTHERWISE DISPOSED OF ON OR PRIOR TO THE LAST DAY SUCH REPURCHASE RIGHTS MAY BE EXERCISED BY THE COMPANY. 12. NO RIGHTS OF OWNERSHIP. Barnett shall have no rights of a stockholder with respect to shares of Preferred Stock to be acquired by the exercise of the Option until the date of issuance of a certificate or certificates representing such shares. Except as otherwise expressly provided herein, no adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. All shares of Preferred Stock purchased upon the exercise of the Option as provided herein shall be fully paid and non-assessable. The Company shall give Barnett advance notice prior to declaring any cash dividend on the Preferred Stock to allow Barnett time to exercise the Option prior to the record date of any such dividend. 13. OBLIGATION OF THE COMPANY. The Company shall at all times during the term of the Option reserve and keep available such number of shares of Preferred Stock (which may be newly issued or treasury shares) as will be sufficient to satisfy the requirements of this agreement, shall pay all original issue taxes, if any, with respect to the issuance of shares of Preferred Stock pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith, and shall, from time to time, use its best efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto. 14. MISCELLANEOUS. a. Notices. All notices, requests, consents, instructions and other communications required or permitted to be given hereunder shall be in writing and hand delivered, sent by nationally-recognized, next-day delivery service or mailed by certified or registered mail, return receipt requested, postage prepaid, 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 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. -4- (i) if to the Company as follows: DLJ Merchant Banking II, Inc. 277 Park Avenue, 19th Floor New York, New York 10172 Attention: Thompson Dean with a copy to: Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Attention: Ivy Dodes with a copy to: Weil, Gotshal & Manges LLP 100 Crescent Court, Suite 1300 Dallas, Texas 75201 Attention: R. Scott Cohen (ii) if to RLB, as follows: Roger L. Barnett 903 Park Avenue New York, NY 10021 with a copy to counsel for RLB; Sonnenschein Nath & Rosenthal 8000 Sears Tower Chicago, IL 60606 Attention: Donald G. Lubin Michael M. Froy or such other address or persons as the parties may from time to time designate in writing in the manner provided in this Section. b. Binding Effect. This agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, spouses, heirs and personal and legal representatives. -5- C. Headings. The headings contained in this agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this agreement. d. Amendments/Waivers. No supplement, modification or amendment of this agreement shall be binding unless executed in writing by each of the parties hereto, No waiver of any of the provisions of this agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. e. Invalid Provisions. If any provision of this agreement is held to be invalid or unenforceable, such provision shall be automatically severed from this agreement and there shall be added to this agreement a provision as similar as possible to such severed provision as may be valid and enforceable, and the validity and enforceability of the other provisions of this agreement shall not be affected thereby. f. Survival. The representations, warranties and covenants hereunder shall survive any exercise of the Option. g. Governing Law. This agreement shall be governed and construed in accordance with the laws of the State of New York, other than its laws respecting choice of laws, h. Counterpart. This agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. i. Entire Agreement. This agreement evidences the entire understanding and agreement of the parties relative to the matters discussed herein. This agreement supersedes any and all other agreements and understandings, whether written or oral, relative to the matters discussed herein. -6- IN WITNESS WHEREOF, the Company has caused this agreement to be duly executed by its officer thereunto duly authorized, and Barnett has hereunto set his hand, all as of the day and year first above written. AHC I Acquisition Corp. By /s/ David Wittels -------------------------- Its Vice President Roger L. Barnett /s/ ROGER L. BARNETT ----------------------------- EX-10.14 10 OPTION SUBSTITUTION AGREEMENT OPTION SUBSTITUTION AGREEMENT OPTION SUBSTITUTION AGREEMENT (the "Agreement"), made and entered into as of the 15th day of December, 1997, by and among Arcade Holding Corporation, a Delaware corporation ("Arcade"), Roger L. Barnett ("Barnett"), and AHC I Acquisition Corp., a Delaware corporation ("Acquiror"). Recitals WHEREAS, pursuant to a Stock Option Agreement dated as of August 4, 1994 ("Option Agreement"), Arcade granted to Barnett an option (the "Option") to purchase 2,096 shares of the common stock of Arcade ("Common Stock"), WHEREAS, Arcade, its shareholders, and Acquiror have entered into a Stock Purchase Agreement dated as of November 14, 1997, as amended by that certain First Amendment to Stock Purchase Agreement dated as of December 2, 1997 and that certain Second Amendment to Stock Purchase Agreement dated as of December 12, 1997 (as amended, the "Stock Purchase Agreement"), pursuant to which Acquiror will acquire all the Common Stock (the "Transaction"); WHEREAS, in connection with the Transaction, a portion of the Option will be acquired pursuant to the terms of the Stock Purchase Agreement, and a portion of the Option (the "Surrendered Option") will be surrendered for cancellation and in lieu thereof, Acquiror will grant Barnett a substitute option ("Replacement Option") to purchase 15% Senior Preferred Stock due 2012, par value $.01 per share, of Acquiror ("Acquiror Stock"). Agreement NOW, THEREFORE, the parties agree as follows: 1. Surrender and Cancellation of Surrendered Option. The Surrendered Option is for 1,368. 55 shares of Common Stock. Barnett agrees that, on the date (the "Effective Date") of the closing of the Transaction (the "Closing"), and concurrently therewith, Barnett shall, and hereby does, surrender to Arcade the Surrendered Option for cancellation, and hereby relinquishes all right, title and interest in and to the Surrendered Option and any Common Stock that would be issuable upon exercise of such Surrendered Option. Upon such surrender, which shall take place concurrently with the consummation of the Closing, the Surrendered Option shall be, and hereby is cancelled and terminated. 2. Issuance of Acquiror Option. a. On the Effective Date, and concurrently with the consummation of the Closing, Acquiror shall grant to Barnett a Replacement Option to purchase 100,000 shares of Acquiror Stock ("Replacement Share Number") and at an exercise price ("Replacement Exercise Price") equal to $1.37 per share. b. The Replacement Option shall be subject to terms and conditions substantially as set forth in the form of replacement option agreement ("Replacement Option. Agreement") attached hereto and hereby made a part hereof. 3. Certain Warranties and Understandings of Barnett. Barnett represents and warrants to Arcade and Acquiror that (a) he is the owner, of record and beneficially, of the Option, free and clear of any liens, claims, encumbrances, restrictions on transfer (except for those existing under applicable securities laws) and any other rights of others, (b) he has all power and authority necessary to enter into and perform his obligations under this agreement, (c) the execution and delivery of this Agreement shall constitute his valid and binding obligation, enforceable against him in accordance with its terms, and (d) the execution, delivery and performance of this Agreement by him will not breach or violate any contract or agreement to which he is a party or by which he is bound or any law, court order, rule or regulation applicable to him, 4. Certain Warranties of Arcade and Acquiror. Each of Arcade and Acquiror represent and warrant to Barnett that (a) It has all corporate power and authority to enter into and perform its obligations under this Agreement, (b) the execution, delivery and performance of this Agreement by it will not breach or violate its corporate charter or by laws or any contract or agreement to which it is a party or by which it is bound or any law, court order, rule or regulation applicable to it, (c) the execution and delivery of this Agreement shall constitute a valid and binding obligation, enforceable against it in accordance with its terms, and (d) the purchase price per share being paid to Acquiror for Acquiror Stock on the date hereof in connection with the consummation of the Transaction is $25.00, except with respect to Acquiror Stock issued as a unit with notes and common stock of Acquiror. 5. Miscellaneous. a. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, spouses, heirs and personal and legal representatives. None of the parties may assign its rights or delegate its obligations under this Agreement without the prior written consent of the other parties hereto, b. Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. c. Amendments/Waivers. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by each of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a -2- waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver, d. Invalid Provisions. If any provision of this Agreement is held to be invalid or unenforceable, such provision shall be automatically severed from this Agreement and there shall be added to this Agreement a provision as similar as possible to such severed provision as may be valid and enforceable, and the validity and enforceability of the other provisions of this Agreement shall not be affected thereby. e. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York, other than its laws respecting choice of laws. f. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. -3- g. Entire Agreement. This Agreement evidences the entire understanding and agreement of the parties relative to the matters discussed herein. This Agreement supersedes any and all other agreements and understandings, whether written or oral, relative to the matters discussed herein, IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above, ARCADE HOLDING CORPORATION By /s/ David Wittels ----------------------------------- Name: Title: AHC I ACQUISITION CORP. By /s/ David Wittels ----------------------------------- Name: Title: /s/ Roger Barnett ------------------------------------- Roger L. Barnett -4- EX-10.15 11 PUT AND CALL AGREEMENT Exhibit 10.15 PUT AND CALL AGREEMENT This Agreement is made as of December 15, 1997 between DLJMB Funding II, Inc., DLJ Merchant Banking Partners II, L,P., DLJ Merchant Banking Partners II-A, L.P., 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 (collectively the "DLJMB Parties"), Roger L. Barnett ("RLB") and AHC I Acquisition Corp., a Delaware corporation (the "Company"). RECITALS A. RLB is a party to a Management Securities Purchase Agreement with the Company dated as of the date hereof (The "Purchase Agreement") pursuant to which RLB shall purchase 90,000 shares (the "Covered RLB Shares") of common stock, par value $.01 per share (the "Common"). B. The Company has granted to RLB an option (the "RLB Preferred Option") to purchase shares of its 15% Senior Preferred Stock due 2012, par value $.01 per share (the "Preferred") pursuant to that certain Replacement Stock Option between the Company and RLB dated the date hereof. The RLB Preferred Option and other shares of Preferred Acquired pursuant thereto together with the Covered RLB Shares are collectively referred to herein as the "RLB Equity Interests". The term RLB Equity Interests shall not include the remaining 44,325 shares of Common acquired by RLB on the date hereof. C. The DLJMB Parties own a majority of the outstanding Common and outstanding Preferred. The parties hereto desire to enter into this Agreement to provide for certain repurchase rights and to provide certain other rights and obligations in respect thereto as hereinafter provided. NOW, THEREFORE, the parties hereby agree as follows: 1. Put Option The DLJMB Parties hereby severally (in accordance with the allocation among the DLJMB Parties set forth on Exhibit A) grant to RLB an irrevocable option (the "Put Option") to require the DLJMB Parties to purchase all of the RLB Equity Interests upon the terms and subject to the conditions set forth below in the event that RLB ceases to be employed by the Company or any of its subsidiaries by resignation (which may be effective immediately) or otherwise for any reason on or prior to February 2, 1998. The Put Option may be exercised by written notice ("Put Option Notice") delivered by RLB to the DLJMB -1- Parties on or prior to February 2, 1998. The purchase price to be paid for the RLB Equity Interests pursuant to the exercise of the Put Option shall be $2,590,000 in cash. 2. Call-Option RLB hereby grants to the DLJMB Parties an irrevocable option (the "Call Option") to purchase from RLB all of the RLB Equity Interests (in accordance with the allocation among the DLJMB Parties set forth on Exhibit A) upon the terms and subject to the conditions set forth below in the event that RLB ceases to be employed by the Company or any of its subsidiaries by resignation (which may be effective immediately) or otherwise for any reason on or prior to February 2, 1998. The Call Option may be exercised by written notice (the "Call Option Notice") delivered by the DLJMB Parties to RLB on or prior to February 2, 1998. The purchase price to be paid for the RLB Equity Interests pursuant to exercise of the Call Option shall be $2,590,000 in cash. 3. Closing The closing for any sale of the RLB Equity Interests pursuant to an exercise of the Put Option or Call Option shall take place at the offices of Sonnenschein Nath & Rosenthal, 1221 Avenue of the Americas, New York, New York at 10:00 a.m. on the fifth business day after the date on which either the Put Option Notice or Call Option Notice, as the case may be, is delivered or at such other time and place as shall be agreed upon by the parties. The DLJMB Parties' obligation to purchase the RLB Equity Interests shall be subject solely to the conditions that the Put Option or Call Option as the case may be has been validly exercised and that the RLB Equity Interests are free and clear of all liens, claims, pledges and encumbrances ("Liens") other than restrictions on transfer under federal and state securities laws. At the time of the closing of the sale of the RLB Equity Interests pursuant to any exercise of the Put Option or Call Option, RLB, the DLJMB Parties and the Company shall execute and deliver to each other such documents as either reasonably requests to carry out the provisions of this Agreement. Prior to closing, RLB shall have exercised the RLB Preferred Option in order to deliver to the DLJMB Parties the shares of Preferred issuable upon exercise of the RLB Preferred Option unless otherwise specified in writing by the DLJMB Parties. At the closing, RLB shall deliver to the DLJMB Parties a certificate for the Covered RLB Shares and the Preferred issued upon exercise of the RLB Preferred Option (or the Preferred Option, as the case may be), duly endorsed in blank or with stock powers attached duly executed in blank and in proper form for transfer. The DLJMB Parties shall pay the purchase price for the RLB Equity Interests to RLB by wire transfer of immediately available funds to an account designated by RLB in writing as provided by RLB no less than two business days prior to closing. To the extent the DLJMB Parties shall not have paid the purchase price at closing, without limiting RLB's rights at law or in equity, the DLJMB Parties shall pay to RLB, in addition to the purchase price, interest on the purchase price at an annual rate of 18% until such time as the DLJMB Parties shall have paid the purchase price, together with any costs or expenses incurred by RLB in connection with such failure to pay hereunder including all reasonable legal fees and -2- expenses. To the extent RLB shall not have delivered at closing certificates for the Covered RLB Shares and the Preferred (or such other reasonably acceptable documentation in the event such certificates are lost or destroyed) in the aforesaid manner, without limiting the DLJMB Parties' rights at law or in equity, the purchase price payable to RLB shall be reduced at an annual rate of 18% until such time as RLB shall have delivered such certificates or such other reasonably acceptable documentation and RLB shall pay to the DLJMB Parties any costs or expenses incurred by the DLJMB Parties in connection with such failure of delivery hereunder including all reasonable legal fees and expenses. 4. RLB Representations and Warranties. RLB represents and warrants to the DLJMB Parties and Company as follows: 4.1. RLB owns the RLB Equity Interests free and clear of all Liens other than restrictions on transfer under federal and state securities laws. 4.2. This Agreement has been duly and validly executed and delivered by RLB and constitutes a valid and binding obligation of RLB, enforceable against RLB in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights in general and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.3. The execution, delivery and performance of this Agreement by RLB do not: (i) constitute a breach, or a violation of, or a default under, any law, rule or regulation, agreement, indenture, deed of trust, mortgage, loan agreement or other agreement or instrument to which RLB is a party or by which RLB is bound; (ii) constitute a violation of any order, judgment or decree to which RLB is bound; or (iii) result in the creation of any Lien upon any of the assets or properties of RLB, including any of the RLB Equity Interests. 4.4. No consent, approval, waiver or authorization from any individual, partnership, corporation, company, limited liability company, trust or other entity (each a "Person") and all governmental and regulatory authorities, domestic and foreign (collectively, "Consents") or notice or filing with any such authorities is required to be obtained or made by RLB in connection with the execution or delivery of this Agreement or the consummation of the transactions contemplated hereby. 5. Representations and Warranties of DLJMB Parties AND THE Company. Each of the DLJMB Parties and the Company hereby represents and warrants to RLB as follows: 5.1. Such party is an entity duly organized, existing and in good standing under the laws of its respective jurisdiction of organization. Such party has the requisite power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by such party and the performance by such party of its obligations hereunder and the consummation -3- by such party of the transactions contemplated hereby have been duly authorized pursuant to and in accordance with the laws governing such party and no other proceedings on the part of such party are necessary to authorize such execution, delivery and performance, This Agreement has been duly and validly executed and delivered by such party and constitutes a valid and binding obligation of such party, enforceable against such party in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights in general and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law), 5.2. The execution, delivery and performance by such parry of this Agreement and the transactions contemplated hereby do not and will not conflict with or result in any violation of, or constitute a breach or default under, any term of the charter documents, by-laws or other organizational documents of such party, of any agreement, permit or other instrument to which such party is a party or by which such party is subject, or any law, regulation, order, judgment or decree of any court or other governmental or regulatory authority to which such party is subject, 5.3. Such party has obtained all necessary Consents of and made or provided all necessary notices or filings to all governmental and regulatory authorities, domestic and foreign, and of all other Persons required in connection with the execution, delivery and performance by such party of this Agreement and the consummation of the transactions contemplated hereby, including under such party's financing documents, 5.4. Each such party has and will have as of the closing for any sale of the RLB Equity Interests pursuant to an exercise of the Put Option or Call Option all funds necessary to consummate the transactions contemplated by this Agreement. 6. Successors and Assigns. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective successors and assigns including ANY heirs or representatives; provided, however, that no party shall assign or delegate this Agreement or any of its rights or obligations created hereunder without the prior consent of the other parties, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, the DLJMB Parties may assign their rights and obligations hereunder to AHC I Acquisition Corp. or one of its subsidiaries, but such assignment shall not relieve or affect in any way the DLJMB Parties of their obligations hereunder, including RLB's ability to seek recourse against the DLJMB Parties in the event of a failure to perform hereunder by any such assignee. RLB agrees that he shall not sell, assign or otherwise transfer the Covered RLB Shares prior to termination of the time period during which the Put Option or the Call Option may be exercised or, if exercised, at any time other than pursuant to the terms hereof to the DLJMB Parties or their designees. 7. Notices. All notices, requests, consents, instructions and other communications required or permitted to be given hereunder shall be in writing and hand -4- delivered, sent by nationally-recognized, next-day delivery service or mailed by certified or registered mail, return receipt requested, postage prepaid, 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 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 or any of the DLJMB Parties as follows: DLJ Merchant Banking II, Inc. 277 Park Avenue, 19th Floor New York, New York 10172 Attention: Thompson Dean with a copy to counsel for the DLJMB Parties: Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Attention: Ivy Dodes with a copy to counsel for the Company: Weil, Gotshal & Manges LLP 100 Crescent Court, Suite 1300 Dallas, Texas 75201 Attention: R. Scott Cohen b. if to RLB, as follows: Roger L. Barnett 903 Park Avenue New York, NY 10021 with a copy to counsel for RLB: Sonnenschein Nath & Rosenthal 8000 Sears Tower Chicago, IL 60606 Attention: Donald G. Lubin Michael M. Froy or such other address or persons as the parties may from time to time designate in writing in the manner provided in this Section. -5- 8. Entire Agreement. This Agreement represents the entire agreement and understanding, of the parties hereto with respect to the transactions contemplated herein and no representations, warranties or covenants have been made in connection with this Agreement, other than those expressly set forth herein and therein. This Agreement supersedes all prior negotiations, discussions, correspondence, communications, understandings and agreements among the parties relating to the subject matter of this Agreement and such other agreements and all prior drafts of this Agreement and such other agreements are merged into this Agreement. 9. Amendments and Waivers. This Agreement may be amended. superseded, cancelled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by the DLJMB Parties, RLB and the Company or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any waiver on the part of any party of any such right, power or privilege, nor any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or the exercise of any other such right, power or privilege. 10. Severability. This Agreement shall be deemed severable and the invalidity or unenforceability of any term or provision hereof shall not affect the validity or enforceability of this Agreement or of any other term or provision hereof, 11. Headings. The article and section headings contained in this Agreement are solely for convenience of reference and shall not affect the meaning or interpretation of this Agreement or of any term or provision hereof. 12. Governing Law; Jurisdiction; Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. without giving effect to choice of law principles. The parties agree that (a) the United States District Court for the State of New York (or, in the absence of diversity jurisdiction, the courts of the State of New York) shall have exclusive jurisdiction of any action or proceeding relating to, or arising under or in connection with this Agreement and each party consents to personal jurisdiction of such courts and waives any objection to such courts' jurisdiction, and (b) service of any summons and complaint or other process in any such action or proceeding may be made by registered or certified mail directed to each party at the address set forth in Section 7, and service so made shall be deemed to be completed upon the earlier of actual receipt or five days after posting, each party hereby waiving personal service thereof. 13. No Third Party Beneficiaries. Except as expressly contemplated in this Agreement, this Agreement shall be binding upon and inure solely to the benefit of each party hereto and nothing in this Agreement is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement. -6- 14. Construction. The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent and no rule of strict construction shall be applied against any party. Without limiting the generality of the foregoing, the parties acknowledge that they have jointly participated in the negotiation and drafting of this Agreement and that in the event of an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumptions or burdens of proof shall arise favoring any party by virtue of the authorship of any of the provisions of this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. DLJMB FUNDING II, INC. By: /s/ David Wittels ---------------------------------- David Wittels, Attorney-in-Fact DLJ MERCHANT BANKING PARTNERS II, L.P. By: DLJ MERCHANT BANKING II, INC., Managing General Partner By: /s/ David Wittels ------------------------------- David Wittels, Attorney-in-Fact DLJ MERCHANT BANKING PARTNERS II-A L.P. By: DLJ MERCHANT BANKING II, INC., Managing General Partner By: /s/ David Wittels ------------------------------- David Wittels, Attorney-in-Fact DLJ DIVERSIFIED PARTNERS, L.P. By: DLJ DIVERSIFIED PARTNERS, INC. By: /s/ David Wittels ------------------------------- David Wittels, Attorney-in-Fact -7- DLJ DIVERSIFIED PARTNERS-A, L.P. By: DLJ DIVERSIFIED PARTNERS, INC. By: /s/ David Wittels ------------------------------- David Wittels, Attorney-in-Fact DLJ MILLENNIUM PARTNERS, L.P. By: DLJ MERCHANT BANKING II, INC. By: /s/ David Wittels ------------------------------- David Wittels, Attorney-in-Fact DLJ MILLENNIUM PARTNERS-A, L.P. By: DLJ MERCHANT BANKING II, INC. By: /s/ David Wittels ------------------------------- David Wittels, Attorney-in-Fact DLJ FIRST ESC L.P. By: DLJ LBO PLANS MANAGEMENT CORPORATION General Part By: /s/ David Wittels ------------------------------- David Wittels, Attorney-in-Fact DLJ OFFSHORE PARTNERS II, C.V. By: DLJ MERCHANT BANKING II, INC. Managing General Partner By: /s/ David Wittels ------------------------------- David Wittels, Attorney-in-Fact -8- DLJ EAB PARTNERS, L.P. By: DLJ LBO PLANS MANAGEMENT CORPORATION By: /s/ David Wittels ------------------------------- David Wittels, Attorney-in-Fact UK INVESTMENT PLAN 1997 PARTNERS By: DONALDSON LUFKIN & JENRETTE, INC. By: /s/ David Wittels ------------------------------- David Wittels, Attorney-in-Fact /s/ Roger L. Barnett --------------------------------------- Roger L. Barnett AHC I ACQUISITION CORP. By: ----------------------------------- Name: Title: -9- FIRST AMENDMENT TO PUT AND CALL AGREEMENT This First Amendment to Put and Call Agreement (this "Amendment"), dated February 2, 1998, by and among DLJMB Funding II, Inc., DLJ Merchant Banking Partners II, L.P., DLJ Merchant Banking Partners II-A, L.P., 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 (collectively, the "DLJMB Parties"), Roger L. Barnett ("RLB") and AHC I Acquisition Corp., a Delaware corporation (the "Company"). RECITALS WHEREAS, the DLJMB Parties, RLB and the Company entered into that certain Put and Call Agreement, dated as of December 15, 1997 (the "Agreement"); and WHEREAS, the DLJMB Parties, RLB and the Company desire to amend certain provisions of the Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE 1. AMENDMENT OF AGREEMENT Section 1.1. Amendment to Section 1. Section 1 (Put Option) of the Agreement is amended by deleting "February 2, 1998" and inserting "April 1, 1998" in lieu thereof in each place where "February 2, 1998" appears in such Section 1. Section 1.2. Amendment to Section 2. Section 2 (Call Option) of the Agreement is amended by deleting "February 2, 1998" and inserting "April 1, 1998" in lieu thereof in each place where "February 2, 1998" appears in such Section 2. 1 ARTICLE 2. MISCELLANEOUS Section 2.1. Defined Terms. All capitalized terms used and not defined herein shall have the meanings ascribed to such terms in the Agreement as hereby amended. Section 2.2. Effect of Amendment. Except as specifically provided herein, the Agreement is in all respects ratified and confirmed. All of the terms, conditions and provisions of the Agreement as hereby amended shall be and remain in full force and effect. Section 2.3. Entire Agreement. This Amendment and the unaltered portions of the Agreement represent the entire agreement and understanding of the parties to the Agreement with respect to the transactions contemplated herein and therein, and no representations, warranties or covenants have been made in connection with this Amendment or the Agreement, other than those expressly set forth herein and therein. This Amendment and the unaltered portions of the Agreement supersedes all prior negotiations, discussions, correspondence, communications, understandings and agreements among the parties relating to the subject matter of this Amendment and the Agreement and such agreements and all prior drafts of this Amendment and the Agreement and such other agreements are merged into this Amendment and the unaltered portions of the Agreement. Section 2.4. Amendments and Waivers. This Amendment and the Agreement as hereby amended may be amended, superseded, cancelled, renewed or extended, and the terms hereof and thereof may be waived, only by a written instrument signed by the DLJMB Parties, RLB and the Company or, in the case of a waiver, by the party waiving compliance. Section 2.5. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to choice of laws principles. 2 This Amendment may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. AHC I ACQUISITION CORP. By: /s/ David Wittels --------------------------------------------- David Wittels Vice President /s/ Roger L. Barnett -------------------------------------------------- Roger L. Barnett DLJMB FUNDING II, INC. By: /s/ David Wittels --------------------------------------------- David Wittels Attorney-in-Fact DLJ MERCHANT BANKING PARTNERS II, L.P. By: DLJ MERCHANT BANKING II, INC. Managing General Partner By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact 3 DLJ MERCHANT BANKING PARTNERS II-A, L.P. By: DLJ MERCHANT BANKING II, INC. Managing General Partner By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact DLJ DIVERSIFIED PARTNERS, L.P. By: DLJ DIVERSIFIED PARTNERS, INC. By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact DLJ DIVERSIFIED PARTNERS-A, L.P. By: DLJ DIVERSIFIED PARTNERS, INC. By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact DLJ MILLENNIUM PARTNERS, L.P. By: DLJ MERCHANT BANKING II, INC. By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact 4 DLJ MILLENNIUM PARTNERS-A, L.P. By: DLJ MERCHANT BANKING II, INC. By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact DLJ FIRST ESC L.P. By: DLJ LBO PLANS MANAGEMENT CORPORATION General Partner By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact DLJ OFFSHORE PARTNERS II, C.V. By: DLJ MERCHANT BANKING II, INC. Managing General Partner By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact DLJ EAB PARTNERS, L.P. By: DLJ LBO PLANS MANAGEMENT CORPORATION By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact 5 UK INVESTMENT PLAN 1997 PARTNERS By: DONALDSON LUFKIN & JENRETTE, INC. By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact 6 SECOND AMENDMENT TO PUT AND CALL AGREEMENT This Second Amendment to Put and Call Agreement (this "Amendment"), dated April 1, 1998, by and among DLJMB Funding II, Inc., DLJ Merchant Banking Partners II, L.P., DLJ Merchant Banking Partners II-A, L.P., 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 (collectively, the "DLJMB Parties"), Roger L. Barnett ("RLB") and AHC I Acquisition Corp., a Delaware corporation (the "Company"). RECITALS WHEREAS, the DLJMB Parties, RLB and the Company entered into that certain Put and Call Agreement, dated as of December 15, 1997, and that certain First Amendment to Put and Call Agreement, dated as of February 2, 1998 (as amended, the "Agreement"); and WHEREAS, the DLJMB Parties, RLB and the Company desire to amend certain provisions of the Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE 1. AMENDMENT OF AGREEMENT Section 1.1. Amendment to Section 1. Section 1 (Put Option) of the Agreement is amended by deleting "April 1, 1998" and inserting "April 15, 1998" in lieu thereof in each place where "April 1, 1998" appears in such Section 1. Section 1.2. Amendment to Section 2. Section 2 (Call Option) of the Agreement is amended by deleting "April 1, 1998" and inserting "April 15, 1998" in lieu thereof in each place where "April 1, 1998" appears in such Section 2. 1 ARTICLE 2. MISCELLANEOUS Section 2.1. Defined Terms. All capitalized terms used and not defined herein shall have the meanings ascribed to such terms in the Agreement as hereby amended. Section 2.2. Effect of Amendment. Except as specifically provided herein, the Agreement is in all respects ratified and confirmed. All of the terms, conditions and provisions of the Agreement as hereby amended shall be and remain in full force and effect. Section 2.3. Entire Agreement. This Amendment and the unaltered portions of the Agreement represent the entire agreement and understanding of the parties to the Agreement with respect to the transactions contemplated herein and therein, and no representations, warranties or covenants have been made in connection with this Amendment or the Agreement, other than those expressly set forth herein and therein. This Amendment and the unaltered portions of the Agreement supersedes all prior negotiations, discussions, correspondence, communications, understandings and agreements among the parties relating to the subject matter of this Amendment and the Agreement and such agreements and all prior drafts of this Amendment and the Agreement and such other agreements are merged into this Amendment and the unaltered portions of the Agreement. Section 2.4. Amendments and Waivers. This Amendment and the Agreement as hereby amended may be amended, superseded, cancelled, renewed or extended, and the terms hereof and thereof may be waived, only by a written instrument signed by the DLJMB Parties, RLB and the Company or, in the case of a waiver, by the party waiving compliance. Section 2.5. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to choice of laws principles. 2 This Amendment may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. AHC I ACQUISITION CORP. By: /s/ David Wittels -------------------------------------------- David Wittels Vice President /s/ Roger L. Barnett ------------------------------------------------- Roger L. Barnett DLJMB FUNDING II, INC. By: /s/ David Wittels -------------------------------------------- David Wittels Attorney-in-Fact DLJ MERCHANT BANKING PARTNERS II, L.P. By: DLJ MERCHANT BANKING II, INC. Managing General Partner By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact 3 DLJ MERCHANT BANKING PARTNERS II-A, L.P. By: DLJ MERCHANT BANKING II, INC. Managing General Partner By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact DLJ DIVERSIFIED PARTNERS, L.P. By: DLJ DIVERSIFIED PARTNERS, INC. By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact DLJ DIVERSIFIED PARTNERS-A, L.P. By: DLJ DIVERSIFIED PARTNERS, INC. By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact DLJ MILLENNIUM PARTNERS, L.P. By: DLJ MERCHANT BANKING II, INC. By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact 4 DLJ MILLENNIUM PARTNERS-A, L.P. By: DLJ MERCHANT BANKING II, INC. By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact DLJ FIRST ESC L.P. By: DLJ LBO PLANS MANAGEMENT CORPORATION General Partner By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact DLJ OFFSHORE PARTNERS II, C.V. By: DLJ MERCHANT BANKING II, INC. Managing General Partner By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact DLJ EAB PARTNERS, L.P. By: DLJ LBO PLANS MANAGEMENT CORPORATION By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact 5 UK INVESTMENT PLAN 1997 PARTNERS By: DONALDSON LUFKIN & JENRETTE, INC. By: /s/ David Wittels ------------------------------------ David Wittels Attorney-in-Fact 6 EX-10.16 12 TERMINATION OF PUT AND CALL AGREEMENT EXECUTION COPY TERMINATION OF PUT AND CALL AGREEMENT This Termination of Put and Call Agreement (this "Termination"), dated June 17, 1998, by and among DLJMB Funding II, Inc., DLJ Merchant Banking Partners II, L.P., DLJ Merchant Banking Partners II-A, L.P., 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 (collectively, the "DLJMB Parties"), Roger L. Barnett ("RLB") and AHC I Acquisition Corp., a Delaware corporation (the "Company"). RECITALS WHEREAS, the DLJMB Parties, RLB and the Company entered into that certain Put and Call Agreement, dated as of December 15, 1997, that certain First Amendment to Put and Call Agreement, dated as of February 2, 1998, and that certain Second Amendment to Put and Call Agreement, dated as of April 1, 1998, and that certain Third Amendment to Put and Call Agreement, dated as of April ___, 1998 (as amended, the "Agreement"); and WHEREAS, the DLJMB Parties, RLB and the Company desire to terminate the provisions of the Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE 1. TERMINATION OF AGREEMENT For good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, and subject to, and conditioned upon, the execution of the Put Option Agreement, dated as of the date hereof, by and among the DLJMB Parties, RLB and the Company, the DLJMB Parties, RLB and the Company agree that the Agreement is hereby terminated and of no further force and effect and that, by its execution and delivery of this Termination, each of the DLJMB Parties, RLB and the Company shall be deemed to have released its or his right and interests in, to and under the Agreement. ARTICLE 2. MISCELLANEOUS Section 2.1. Defined Terms. All capitalized terms used and not defined herein shall have the meanings ascribed to such terms in the Agreement. Section 2.2. Entire Agreement. This Termination represents the final agreement and understanding of the parties to the Agreement with respect to the transactions contemplated therein, and no representations, warranties or covenants have been made in connection with this Termination or the Agreement, other than those expressly set forth herein and therein. This Termination supersedes all prior negotiations, discussions, correspondence, communications, understandings and agreements among the parties relating to the subject matter of this Termination and the Agreement and such agreements and all prior drafts of this Termination and the Agreement and such other agreements are merged into this Termination. Section 2.3. Amendments and Waivers. This Termination may be amended, superseded, cancelled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by the DLJMB Parties, RLB and the Company or, in the case of a waiver, by the party waiving compliance. Section 2.4. Governing Law. This Termination shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to choice of laws principles. 2 This Termination may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. AHC I ACQUISITION CORP. By: /s/ David M. Wittels -------------------------------- David M. Wittels Vice President /s/ Roger L. Barnett -------------------------------- Roger L. Barnett DLJMB FUNDING II, INC. By: /s/ David M. Wittels -------------------------------- David M. Wittels Attorney-in-Fact DLJ MERCHANT BANKING PARTNERS II, L.P. By: DLJ MERCHANT BANKING II, INC. Managing General Partner By: /s/ David M. Wittels -------------------------------- David M. Wittels Attorney-in-Fact DLJ MERCHANT BANKING PARTNERS II-A, L.P. By: DLJ MERCHANT BANKING II, INC. Managing General Partner By: /s/ David M. Wittels -------------------------------- David M. Wittels Attorney-in-Fact DLJ DIVERSIFIED PARTNERS, L.P. By: DLJ DIVERSIFIED PARTNERS, INC. By: /s/ David M. Wittels -------------------------------- David M. Wittels Attorney-in-Fact DLJ DIVERSIFIED PARTNERS-A, L.P. By: DLJ DIVERSIFIED PARTNERS, INC. By: /s/ David M. Wittels -------------------------------- David M. Wittels Attorney-in-Fact DLJ MILLENNIUM PARTNERS, L.P. By: DLJ MERCHANT BANKING II, INC. By: /s/ David M. Wittels ------------------------------------ David M. Wittels Attorney-in-Fact DLJ MILLENNIUM PARTNERS-A, L.P. By: DLJ MERCHANT BANKING II, INC. By: /s/ David M. Wittels ------------------------------------ David M. Wittels Attorney-in-Fact DLJ FIRST ESC L.P. By: DLJ LBO PLANS MANAGEMENT CORPORATION General Partner By: /s/ David M. Wittels ------------------------------------ David M. Wittels Attorney-in-Fact DLJ OFFSHORE PARTNERS II, C.V. By: DLJ MERCHANT BANKING II, INC. Managing General Partner By: /s/ David M. Wittels ------------------------------------ David M. Wittels Attorney-in-Fact DLJ EAB PARTNERS, L.P. By: DLJ LBO PLANS MANAGEMENT CORPORATION By: /s/ David M. Wittels ------------------------------------ David M. Wittels Attorney-in-Fact UK INVESTMENT PLAN 1997 PARTNERS By: DONALDSON LUFKIN & JENRETTE, INC. By: /s/ David M. Wittels ------------------------------------ David M. Wittels Attorney-in-Fact EX-12.1 13 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 ---------------------------------------------------------------------- PRO FORMA --------------- FISCAL YEAR ENDED JUNE THREE MONTHS THREE MONTHS JULY 1, 30, ENDED ENDED 1997 THROUGH ----------------------- SEPTEMBER 30, SEPTEMBER 30, DECEMBER 15, 1996 1997 1997 1998 1997 ----------- ----------- --------------- --------------- -------------- Income (loss) before income taxes .......................... $ 4,279 $ 7,117 $ 3,083 $ 867 $ 3,234 Add: Interest on all indebtedness which includes amortization of deferred financing costs ....... 6,762 6,203 1,451 3,249 2,646 -------- -------- ------- -------- ------- Earnings available for fixed charges ........................ 11,041 13,320 4,534 4,116 5,880 Fixed charges ................... 6,762 6,203 1,451 3,249 2,646 -------- -------- ------- -------- ------- Ratio of earnings to fixed charges ....................... 1.6x 2.1x 3.1x 1.3x 2.2x THE COMPANY ------------------------------------------- PRO FORMA ------------- DECEMBER 16, FISCAL YEAR THREE MONTHS 1997 THROUGH ENDED ENDED JUNE 30, JUNE 30, SEPTEMBER 30, 1998 1998 1998 -------------- ------------- -------------- Income (loss) before income taxes .......................... $ (7,487) $ (4,094) $ 1,201 Add: Interest on all indebtedness which includes amortization of deferred financing costs ....... 11,269 13,049 3,210 -------- -------- ------- Earnings available for fixed charges ........................ 3,782 8,955 4,411 Fixed charges ................... 11,269 13,049 3,210 -------- -------- ------- Ratio of earnings to fixed charges ....................... -- -- 1.4x
In accordance with Regulation S-K, the calculation of the ratio of earnings to fixed charges for the pro forma three months ended September 30, 1997 and the pro forma fiscal year ended June 30, 1998 includes the effects of the Acquisition and the Refinancing, but does not include the effects of the 3M Acquisition. Earnings were not sufficient to cover fixed charges by $7,487 and $4,094 for the period from December 16, 1997 through June 30, 1998 and the pro forma fiscal year ended June 30, 1998, respectively. EX-16.1 14 LETTER FROM PRICEWATERHOUSECOOPERS LLP [Letterhead of PricewaterhouseCoopers LLP] November 13, 1998 Securities and Exchange Commission 450 5th Street, N.W. Washington, DC 20549 Commissioners: We have read the statements made by AKI, Inc. appearing in its registration statement on Form S-4 dated November 13, 1998. We agree with the statements concerning Coopers & Lybrand L.L.P. in such registration statement. Very truly yours, /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP EX-23.1 15 CONSENT 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 reports dated July 31, 1998 relating to the consolidated financial statements of AKI, Inc. and Subsidiaries and Arcade Holding Corporation and Subsidiaries (the "Predecessor") which appear in such Prospectus. We also consent to the application of such reports to the Financial Statement Schedule for the three years ended June 30, 1998 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 reports. The audits referred to in such reports also included this schedule. We also consent to the reference to us under the headings "Experts" in such Prospectus. /s/ PricewaterhouseCoopers LLP Nashville, Tennessee November 13, 1998 EX-25.1 16 FORM T-1 FROM IBJ SCHRODER BANK Exhibit 25.1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(B)(2) IBJ SCHRODER BANK & TRUST COMPANY (Exact name of trustee as specified in its charter) New York 13-5375195 (Jurisdiction of incorporation (I.R.S. employer or organization if not a U.S. national bank) identification No.) One State Street, New York, New York 10004 (Address of principal executive offices) (Zip code) IBJ SCHRODER BANK & TRUST COMPANY One State Street New York, New York 10004 (212) 858-2000 (Name, address and telephone number of agent for service) AKI, INC. (Exact names of obligors as specified in its charter) Delaware 13-3785856 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) 1815 East Main Street Chattanooga, TN 37404 (Address of principal executive offices) (Zip code) 10 1/2% Senior Notes Due 2008 (Title of indenture securities) Item 1. General information Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. New York State Banking Department, Two Rector Street, New York, New York Federal Deposit Insurance Corporation, Washington, D.C. Federal Reserve Bank of New York Second District, 33 Liberty Street, New York, New York (b) Whether it is authorized to exercise corporate trust powers. Yes Item 2. Affiliations with the Obligors. If the obligors are an affiliate of the trustee, describe each such affiliation. The obligors are not an affiliate of the trustee. Item 13. Defaults by the Obligors. (a) State whether there is or has been a default with respect to the securities under this indenture. Explain the nature of any such default. None (b) If the trustee is a trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the obligors are outstanding, or is trustee for more than one outstanding series of securities under the indenture, state whether there has been a default under any such indenture or series, identify the indenture or series affected, and explain the nature of any such default. None List of exhibits. List below all exhibits filed as part of this statement of eligibility. *1. A copy of the Charter of IBJ Schroder Bank & Trust Company as amended to date. (See Exhibit 1A to Form T-1, Securities and Exchange Commission File No. 22-18460). *2. A copy of the Certificate of Authority of the trustee to Commence Business (Included in Exhibit 1 above). *3. A copy of the Authorization of the trustee to exercise corporate trust powers, as amended to date (See Exhibit 4 to Form T-1, Securities and Exchange Commission File No. 22-19146). *4. A copy of the existing By-Laws of the trustee, as amended to date (See Exhibit 4 to Form T-1, Securities and Exchange Commission File No. 22-19146). 5. Not Applicable 6. The consent of United States institutional trustee required by Section 321(b) of the Act. 7. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority. * The Exhibits thus designated are incorporated herein by reference as exhibits hereto. Following the description of such Exhibits is a reference to the copy of the Exhibit heretofore filed with the Securities and Exchange Commission, to which there have been no amendments or changes. NOTE In answering any item in this Statement of Eligibility which relates to matters peculiarly within the knowledge of the obligors and its directors or officers, the trustee has relied upon information furnished to it by the obligors. Inasmuch as this Form T-1 is filed prior to the ascertainment by the trustee of all facts on which to base responsive answers to Item 2, the answer to said Item is based on incomplete information. Item 2, may, however, be considered as correct unless amended by an amendment to this Form T-1. Pursuant to General Instruction B, the trustee has responded to Items 1, 2 and 16 of this form since to the best knowledge of the trustee as indicated in Item 13, the obligors are not in default under any indenture under which the applicant is trustee. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, IBJ Schroder Bank & Trust Company, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility & qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York, and State of New York, on the 28th day of July, 1998. IBJ SCHRODER BANK & TRUST COMPANY By: /s/Stephen J. Giurlando ---------------------------- Stephen J. Giurlando Assistant Vice President EXHIBIT 6 CONSENT OF TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended, in connection with the issue by AKI, Inc., of its 10 1/2% Senior Notes due 2008, we hereby consent that reports of examinations by Federal, State, Territorial, or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. IBJ SCHRODER BANK & TRUST COMPANY By: /s/Stephen J. Giurlando --------------------------------- Stephen J. Giurlando Assistant Vice President Dated: July 28, 1998 EXHIBIT 7 CONSOLIDATED REPORT OF CONDITION OF IBJ SCHRODER BANK & TRUST COMPANY OF NEW YORK, NEW YORK AND FOREIGN AND DOMESTIC SUBSIDIARIES REPORT AS OF MARCH 31, 1998 DOLLAR AMOUNTS IN THOUSANDS ASSETS 1. Cash and balance due from depository institutions: a. Non-interest-bearing balances and currency and coin ......$ 29,353 b. Interest-bearing balances...................................$ 15,329 2. Securities: a. Held-to-maturity securities.................................$ 186,942 b. Available-for-sale securities...............................$ 102,403 3. Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and of its Edge and Agreement subsidiaries and in IBFs: Federal Funds sold and Securities purchased under agreements to resell........................................................$ 176,231 4. Loans and lease financing receivables: a. Loans and leases, net of unearned income....................$1,673,749 b. LESS: Allowance for loan and lease losses...................$ 63,611 c. LESS: Allocated transfer risk reserve.......................$ -0- d. Loans and leases, net of unearned income, allowance, and reserve.....................................................$1,610,138 5. Trading assets held in trading accounts.........................$ 584 6. Premises and fixed assets (including capitalized leases)........$ 2,575 7. Other real estate owned.........................................$ 819 8. Investments in unconsolidated subsidiaries and associated companies....................................................$ -0- 9. Customers' liability to this bank on acceptances outstanding....$ 503 10. Intangible assets...........................................$ -0- 11. Other assets................................................$ 61,923 12. TOTAL ASSETS................................................$2,186,800 LIABILITIES 13. Deposits: a. In domestic offices.........................................$ 659,051 (1) Noninterest-bearing ...................................$ 288,134 (2) Interest-bearing . . . . . . . . . . . . . . . . . . . $ 370,917 b. In foreign offices, Edge and Agreement subsidiaries, and IBFs........................................................$1,141,113 (1) Noninterest-bearing . . . . . . . . . . . . . . . . . . . . $ 19,428 (2) Interest-bearing . . . . . . . . . . . . . . . . . . . . . $1,121,685 14. Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs: Federal Funds purchased and Securities sold under agreements to repurchase...............................................$ -0- 15. a. Demand notes issued to the U.S. Treasury.................$ 5,000 b. Trading Liabilities......................................$ 344 16. Other borrowed money: a. With a remaining maturity of one year or less...............$ 61,953 b. With a remaining maturity of more than one year.............$ 1,763 c. With a remaining maturity of more than three years..........$ 2,242 17. Not applicable. 18. Bank's liability on acceptances executed and outstanding....$ 503 19. Subordinated notes and debentures...........................$ -0- 20. Other liabilities...........................................$ 70,344 21. TOTAL LIABILITIES...........................................$1,942,313 22. Limited-life preferred stock and related surplus............$ N/A EQUITY CAPITAL 23. Perpetual preferred stock and related surplus...............$ -0- 24. Common stock................................................$ 29,649 25. Surplus (exclude all surplus related to preferred stock)....$ 217,008 26. a. Undivided profits and capital reserves...................$ (2,291) b. Net unrealized gains (losses) on available-for-sale securities...........................................$ 121 27. Cumulative foreign currency translation adjustments.........$ -0- 28. TOTAL EQUITY CAPITAL........................................$ 244,487 29. TOTAL LIABILITIES AND EQUITY CAPITAL........................$2,186,800 EX-27.1 17 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF AKI, INC. (OR ITS PREDECESSOR) FOR THE YEAR ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JUN-30-1996 JUL-1-1995 JUN-30-1996 626 0 12,707 467 2,236 16,392 26,671 7,046 82,395 21,077 41,387 0 8,678 1 7,931 82,395 73,486 73,486 49,862 49,862 0 337 6,762 4,279 2,101 2,178 0 0 0 2,178 0 0
EX-27.2 18 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF AKI, INC. (OR ITS PREDECESSOR) FOR THE YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JUN-30-1997 JUL-1-1996 JUN-30-1997 303 0 10,362 319 2,786 13,934 29,017 10,861 77,142 50,871 3,399 0 8,678 1 11,224 77,142 77,723 77,723 49,467 49,467 0 120 6,203 7,117 3,135 3,982 0 0 0 3,982 0 0
EX-27.3 19 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF AKI, INC. (OR ITS PREDECESSOR) FOR THE YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JUN-30-1998 JUL-1-1997 JUN-30-1998 1,641 0 13,782 277 2,078 23,656 20,789 1,853 211,064 10,811 116,489 0 0 0 79,621 211,064 71,252 71,252 47,327 47,327 0 0 13,915 (4,253) (592) (3,661) 0 0 0 (3,661) 0 0
EX-27.4 20 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMAITON EXTRACTED FROM THE FINANCIAL STATEMENTS OF AKI, INC. (OR ITS PREDECESSOR) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUN-30-1998 JUL-1-1997 SEP-30-1997 1,514 0 15,886 349 3,428 21,317 29,465 11,952 83,518 57,170 1,951 0 8,678 1 12,859 83,518 21,928 21,928 13,622 13,622 0 30 1,451 3,083 1,287 1,796 0 0 0 1,796 0 0
EX-27.5 21 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF AKI, INC. FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUN-30-1999 JUL-1-1998 SEP-30-1998 1,341 0 21,639 278 3,984 28,059 21,473 2,894 213,725 13,615 116,328 0 0 0 80,090 213,725 24,024 24,024 15,421 15,421 0 0 3,121 1,201 844 357 0 0 0 357 0 0
EX-99.1 22 FORM OF LETTER OF TRANSMITTAL LETTER OF TRANSMITTAL OFFER TO EXCHANGE NEW 10 1/2% SENIOR NOTES DUE 2008 FOR AN EQUAL PRINCIPAL AMOUNT AT MATURITY OF 10 1/2% SENIOR NOTES DUE 2008 - ------------------------------------------------------------------------------- THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON NOVEMBER 1998, (AS SUCH DATE AND TIME MAY BE EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION (THE "EXPIRATION DATE")). TENDERS MAY BE WITHDRAWN PRIOR TO THE EXPIRATION DATE. - ------------------------------------------------------------------------------- The Exchange Agent for the Exchange Offer is: IBJ SCHRODER BANK & TRUST COMPANY
By Registered or Certified Mail: Facsimile Transmissions: By Hand or Overnight Delivery: (Eligible Institutions Only) IBJ Schroder Bank & Trust Company (212) 858-2611 IBJ Schroder Bank & Trust Company P.O. Box 84 One State Street Bowling Green Station New York, New York 10004 New York, New York 10274-0084 Attn.: Securities Processing Window, Subcellar One (SC-1) For Information Call: (212) 858-2103
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. The undersigned hereby acknowledges receipt of the Prospectus dated October ___ , 1998 ( the "Prospectus") of AKI, Inc., a Delaware corporation (the "Company"), and this Letter of Transmittal (the "Letter of Transmittal"), that together constitute the Company's offer (the "Exchange Offer") to exchange $1,000 in principal amount at maturity of its newly issued 10 1/2% Senior Notes due 2008, which have been registered under the Securities Act of 1933, as amended (the "Securities Act") (the "New Notes"), for each $1,000 in principal amount at maturity of its outstanding 10 1/2% Senior Notes due 2008 (the "Old Notes"). The New Notes and the Old Notes are collectively referred to as the "Notes." Capitalized terms used and not defined herein have the meanings ascribed to them in the Prospectus. 1 This Letter of Transmittal is to be completed by holders of Old Notes either if Old Notes are to be forwarded herewith or if tenders of Old Notes are to be made by book-entry transfer to an account maintained by IBJ Schroder Bank & Trust Company (the "Exchange Agent") at The Depository Trust Company (the "Book-Entry Transfer Facility" or "DTC") pursuant to the procedures set forth in "The Exchange Offer--Procedure for Tendering" in the Prospectus. Holders of Old Notes who wish to tender their Old Notes and whose Old Notes are not immediately available or who cannot deliver their Old Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent 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." PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING THE BOXES The undersigned has completed the appropriate boxes below and signed this Letter of Transmittal to indicate the action the undersigned desires to take with respect to the Exchange Offer.
- -------------------------------------------------------------------------------------------------------------------------------- BOX 1 - -------------------------------------------------------------------------------------------------------------------------------- DESCRIPTION OF OLD NOTES TENDERED 1 2 3 - -------------------------------------------------------------------------------------------------------------------------------- Name(s) and Address(es) of Registered Holder(s), exactly Certificate Aggregate Principal Principal Amount of as name(s) appear(s) on Old Notes Certificate(s): Number(s)* Amount of Old Notes Old Notes Tendered** (Please fill in, if blank) - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- Total - -------------------------------------------------------------------------------------------------------------------------------- * Need not be completed if Old Notes are being tendered by book-entry holders. ** Unless otherwise indicated in the column, a holder will be deemed to have tendered all Old Notes represented by the aggregate principal amount of Old Notes indicated in Column 2. See Instruction 4. - --------------------------------------------------------------------------------------------------------------------------------
2
- ------------------------------------------------------------------------------------------------------------------- BOX 2 - ------------------------------------------------------------------------------------------------------------------- BENEFICIAL OWNER(S) - ------------------------------------------------------------------------------------------------------------------- State of Principal Residence of Each Beneficial Owner Aggregate Principal Amount of Tendered Notes Tendered of Tendered Notes Held For Account of Beneficial Owner - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
3 - ------------------------------------------------------------------------------- (BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY) [ ] CHECK HERE IF OLD NOTES TENDERED ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING: Name of Tendering Institution -------------------------------------------------- Account Number ----------------------------------------------------------------- Transaction Code Number -------------------------------------------------------- [ ] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF OLD NOTES TENDERED ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name of Registered Holder(s) --------------------------------------------------- Window Ticket Number (if any) ----------------------------------------- Date of Execution of Notice of Guaranteed Delivery -------------------- Name of Institution which Guaranteed Delivery ---------------------------------- If Guaranteed Delivery is to be made By Book-Entry Transfer: Name of Tendering Institution -------------------------------------------------- Account Number ----------------------------------------------------------------- Transaction Code Number -------------------------------------------------------- [ ] CHECK HERE IF OLD NOTES TENDERED BY BOOK-ENTRY TRANSFER AND NOT ACCEPTED FOR EXCHANGE OR OTHERWISE NOT EXCHANGED ARE TO BE RETURNED BY CREDITING THE BOOK-ENTRY TRANSFER FACILITY ACCOUNT NUMBER SET FORTH ABOVE. [ ] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE OLD NOTES FOR ITS OWN ACCOUNT AS A RESULT OF MARKET MAKING OR OTHER TRADING ACTIVITIES (A "PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: -------------------------------------------------------------------------- Address: ----------------------------------------------------------------------- - ------------------------------------------------------------------------------- 4 Ladies and Gentlemen: The undersigned hereby tenders the principal amount of Old Notes described in the Box 1 above (the "Tendered Notes") pursuant to the terms and conditions described in the Prospectus and this Letter of Transmittal. The undersigned is the registered owner of all the Tendered Notes and the undersigned represents that it has received from each beneficial owner of the Tendered Notes ("Beneficial Owners") a duly completed and executed form of "Instruction to Registered Holder and/or book entry transfer participant from Beneficial Owner" accompanying this Letter of Transmittal, instructing the undersigned to take the action described in the Letter of Transmittal. Subject to, and effective upon, the acceptance for exchange of all or any portion of the Tendered Notes, the undersigned hereby exchanges, assigns and transfers to, or upon the order of, the Company, all right, title and interest in, to and under the Tendered Notes. Unless otherwise indicated herein in the box entitled "Special Issuance Instructions" below, the undersigned hereby directs that the New Notes be issued in the name(s) of the undersigned or, in the case of a book-entry transfer of Tendered Notes, that such New Notes be credited to the account indicated above maintained at DTC. If applicable, substitute Certificates representing Old Notes not exchanged or not accepted for exchange will be issued to the undersigned or, in the case of a book-entry transfer of Tendered Notes, will be credited to the account indicated above maintained at DTC. Similarly, unless otherwise indicated under "Special Delivery Instructions, " please deliver New Notes to the undersigned at the address shown below the undersigned's signature. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent as its agent and attorney-in-fact (with full knowledge that the Exchange Agent also acts as the agent of the Company in connection with the Exchange Offer and as Trustee under the Indenture for the Notes) with respect to the Tendered Notes, with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), subject only to the right of withdrawal described in the Prospectus, to (i) deliver Tendered Notes to the Company together with all accompanying evidences of transfer and authenticity to, or upon the order of, the Company, upon receipt by the Exchange Agent, as the undersigned's agent, of the New Notes to be issued in exchange for Tendered Notes, (ii) present such Tendered Notes for transfer, and to transfer the Tendered Notes on the books of the Company, and (iii) receive for the account of the Company all benefits and otherwise exercise all rights of beneficial ownership of such Tendered Notes, all in accordance with the terms and conditions of the Exchange Offer. The undersigned understands that tenders of Old Notes pursuant to any one of the procedures described in "The Exchange Offer--Procedure for Tendering" in the Prospectus and in the instructions attached hereto will, upon the Company's acceptance for exchange of such Old Notes tendered, constitute a binding agreement between the undersigned and the Company upon the terms and subject to the conditions of the Exchange Offer. The undersigned recognizes that, under certain circumstances set forth in the Prospectus, the Company may not be required to accept for exchange any of the Old Notes tendered hereby. All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned and any Beneficial Owner(s), and every obligation of the undersigned or any Beneficial Owners 5 hereunder shall be binding upon their heirs, representatives, successors, and assigns of the undersigned and such Beneficial Owner(s). The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, exchange, assign and transfer the Tendered Notes and that, when the same are accepted for exchange, the company will acquire good, marketable and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances, and that the old notes tendered hereby are not subject to any adverse claims or proxies. The undersigned will, upon request, execute and deliver any additional documents deemed by the company or the exchange agent to be necessary or desirable to complete the exchange, assignment and transfer of the Tendered Notes, and the undersigned will comply with its obligations under the registration rights agreement. The undersigned has read and agrees to all of the terms of the Exchange Offer. If any Old Notes tendered are not exchanged pursuant to the Exchange Offer for any reason, or if the certificate or certificates (the "Certificates") for such Old Notes are submitted in a principal amount not tendered or accepted for exchange, Certificates for such nonexchanged or nontendered Old Notes will be returned (or, in the case of Old Notes tendered by book-entry transfer, such Old Notes will be credited to an account maintained at DTC), without expense to the tendering holder, promptly following the expiration or termination of the Exchange Offer. The undersigned hereby represents and warrants that the information set forth in Box 2 is true and correct. By tendering Old Notes and executing this Letter of Transmittal, the undersigned, and each Beneficial Owner hereby represents and warrants that (i) the New Notes acquired pursuant to the Exchange Offer are being acquired in the ordinary course of business of the undersigned, (ii) neither the undersigned nor any such other person has an arrangement or understanding with any person to participate in the distribution within the meaning of the Securities Act of such New Notes, (iii) if the undersigned is not a broker-dealer, or is a broker-dealer but will not receive New Notes for its own account in exchange for Old Notes, neither the undersigned nor any such other person is engaged in or intends to participate in the distribution of such New Notes and (iv) neither the undersigned nor any such other person is an "affiliate" of the Company within the meaning of Rule 144 under the Securities Act or, if the undersigned is an "affiliate," that the undersigned will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. The undersigned and each Beneficial Owner acknowledge and agree that any person participating in the Exchange Offer for the purpose of distributing the New Notes must comply with the registration and prospectus delivery requirements of the Securities Act, in connection with a secondary resale transaction of the New Notes acquired by such person and cannot rely on the position of the Staff of the Securities and Exchange Commission (the Commission) set forth in the no-action letters that are discussed in the section of the Prospectus entitled "The Exchange Offer--Purpose and Effects of the Exchange Offer." The undersigned and each Beneficial Owner understands that any such secondary resale transaction should be covered by an effective registration statement containing the selling security holder information required by Item 507 of Regulation S-K of the Commission. 6 If the undersigned is a broker-dealer that will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of market-making or other trading activities, it acknowledges that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes; however, by so acknowledging and delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The New Notes bear interest from June 25, 1997. 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. 7 - ------------------------------------------------------------------------------- HOLDER(S) SIGN HERE (SEE INSTRUCTIONS 2, 5 AND 6) (PLEASE COMPLETE SUBSTITUTE FORM W-9 ON PAGE 19) (NOTE: SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2) Must be signed by registered holder(s) exactly as name(s) appear(s) on the face of the Certificate(s) for the Old Notes hereby tendered or in whose name Old Notes are registered on the books of the Company, or by any person(s) authorized to become the registered holder(s) by endorsements and documents transmitted herewith (including such opinions of counsel, certifications and other information as may be required by the Company for the Old Notes to comply with the restrictions on transfer applicable to the Old Notes). If signature is by an attorney-in-fact, executor, administrator, trustee, guardian, officer of a corporation or another acting in a fiduciary capacity or representative capacity, please set forth the signer's full title. See Instruction 5. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (SIGNATURE(S) OF HOLDER(S) Date: , 199 --------------- Name(s) --------------------------------------------------------------------- --------------------------------------------------------------------- (PLEASE PRINT) Capacity (full title) ---------------------------------------------------------- Address ---------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- (INCLUDE ZIP CODE) Area Code and Telephone Number ------------------------------------------------- - ------------------------------------------------------------------------------- (TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER(S)) - ------------------------------------------------------------------------------- 8 - ------------------------------------------------------------------------------- GUARANTEE OF SIGNATURE(S) (SEE INSTRUCTIONS 2 AND 5) - ------------------------------------------------------------------------------- AUTHORIZED SIGNATURE Date: , 199 -------------- Name of Firm ------------------------------------------------------------------- Capacity (full title) ---------------------------------------------------------- (PLEASE PRINT) Address ---------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- (INCLUDE ZIP CODE) Area Code and Telephone Number ------------------------------------------------- - ------------------------------------------------------------------------------- 9 - ------------------------------------------------------------------------------- SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 1, 5 AND 6) To be completed ONLY if the New Notes or Old Notes not tendered are to be issued in the name of someone other than the registered holder of the Old Notes whose name(s) appear(s) above. Issue [ ] Old Notes not tendered to: [ ] New Notes to: Name(s) ------------------------------------------------------------------------ Address ------------------------------------------------------------------------ ------------------------------------------------------------------------ (INCLUDE ZIP CODE) Area Code and Telephone Number --------------------------------------------------------------- - ------------------------------------------------------------------------------- (TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER(S)) - ------------------------------------------------------------------------------- 10 - ------------------------------------------------------------------------------- SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 5 AND 6) To be completed ONLY if New Notes or Old Notes not tendered are to be sent to someone other than the registered holder of the Old Notes whose name(s) appear(s) above, or such registered holder(s) at an address other than that shown above. Mail [ ] Old Notes not tendered to: [ ] New Notes to: Name(s) ------------------------------------------------------------------------ Address ------------------------------------------------------------------------ ------------------------------------------------------------------------ (INCLUDE ZIP CODE) Area Code and Telephone Number --------------------------------------------------------------- - ------------------------------------------------------------------------------- (TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER(S)) - ------------------------------------------------------------------------------- 11 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY PROCEDURES. This Letter of Transmittal is to be completed either if (a) Certificates are to be forwarded herewith or (b) tenders are to be made pursuant to the procedures for tender by book-entry transfer set forth in "The Exchange Offer-- Procedure for Tendering" in the Prospectus. Certificates, or timely confirmation of a book-entry transfer of such Old Notes into the Exchange Agent's account at DTC, as well as this Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees, and any other documents required by this Letter of Transmittal, must be received by the Exchange Agent at its address set forth herein on or prior to the Expiration Date. Old Notes may be tendered in whole or in part. Holders of Old Notes who wish to tender their Old Notes and whose Old Notes are not immediately available or who cannot deliver their Old Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent 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." Pursuant to such procedures: (i) such tender must be made by or through an Eligible Institution (as defined below); (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form made available by the Company, must be received by the Exchange Agent prior to the Expiration Date; and (iii) the Certificates (or a book-entry confirmation (as defined in the Prospectus)) representing all tendered Old Notes, in proper form for transfer, together with a Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees and any other documents required by this Letter of Transmittal, must be received by the Exchange Agent within three business days after the date of execution of such Notice of Guaranteed Delivery, all as provided in "The Exchange Offer--Guaranteed Delivery Procedures" in the Prospectus. The Notice of Guaranteed Delivery may be delivered by hand or overnight courier or transmitted by telegram, telex, facsimile or mail to the Exchange Agent, and must include a guarantee by an Eligible Institution in the form set forth in such Notice. For Old Notes to be properly tendered pursuant to the guaranteed delivery procedure, the Exchange Agent must receive a Notice of Guaranteed Delivery on or prior to the Expiration Date. As used herein and in the Prospectus, "Eligible Institution" means a firm or other entity identified in Rule 17Ad-15 under the Exchange Act as an "eligible guarantor institution," including (as such terms are defined therein) (i) a bank; (ii) a broker, dealer, municipal securities broker or dealer or government securities broker or dealer; (iii) a credit union; (iv) a national securities exchange, registered securities association or clearing agency; or (v) a savings association that is a participant in a Securities Transfer Association. THE METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, OR OVERNIGHT DELIVERY SERVICE IS 12 RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. The Company will not accept any alternative, conditional or contingent tenders. Each tendering holder, by execution of a Letter of Transmittal (or facsimile thereof), waives any right to receive any notice of the acceptance of such tender. 2. GUARANTEE OF SIGNATURES. No signature guarantee on this Letter of Transmittal is required if: (i) this Letter of Transmittal is signed by the registered holder (which term, for purposes of this document, shall include any participant in DTC whose name is registered on the books of the Company as the owner of the Old Notes) of Old Notes tendered herewith, unless such holder(s) has completed either the box entitled "Special Issuance Instructions" or the box entitled "Special Delivery Instructions" above, or (ii) such Old Notes are tendered for the account of a firm that is an Eligible Institution. In all other cases, an Eligible Institution must guarantee the signature(s) on this Letter of Transmittal. See Instruction 5. 3. INADEQUATE SPACE. If the space provided in the box captioned "Description of Old Notes" is inadequate, the Certificate number(s) and/or the aggregate principal amount of Old Notes and any other required information should be listed on a separate signed schedule which is attached to this Letter of Transmittal. 4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. If less than all the Old Notes evidenced by any Certificate submitted are to be tendered, fill in the principal amount of Old Notes which are to be tendered in the box entitled "Principal Amount of Old Notes Tendered." In such case, new Certificate(s) for the remainder of the Old Notes that were evidenced by your old Certificate(s) will only be sent to the holder of the Old Notes, promptly after the Expiration Date. All Old Notes represented by Certificates delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. 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 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 13 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 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 promptly as practicable after withdrawal, rejection of ender or termination of the Exchange Offer. Properly withdrawn Old Notes may be retendered by following one of the procedures described in "The Exchange Offer--Procedure for Tendering" in the Prospectus at any time prior to the Expiration Date. 5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS. If this Letter of Transmittal is signed by the registered holder(s) of the Old Notes tendered hereby, the signature(s) must correspond exactly with the name(s) as written on the face of the Certificate(s) without alteration, enlargement or any change whatsoever. If any of the Old Notes tendered hereby are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If any tendered Old Notes are registered in different name(s) on several Certificates, it will be necessary to complete, sign and submit as many separate Letters of Transmittal (or facsimiles thereof) as there are different registrations of Certificates. If this Letter of Transmittal or any Certificates or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing and must submit proper evidence satisfactory to the Company, in their sole discretion, of each such person's authority so to act. When this Letter of Transmittal is signed by the registered owner(s) of the Old Notes listed and transmitted hereby, no endorsement(s) of Certificate(s) or separate bond power(s) are required unless New Notes are to be issued in the name of a person other than the registered holder(s). Signature(s) on such Certificate(s) or bond power(s) must be guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered owner(s) of the Old Notes listed, the Certificates must be endorsed or accompanied by appropriate bond powers, signed exactly as the name or names of the registered owner(s) appear(s) on the face of the Certificates, and also must be accompanied by such opinions of counsel, certifications and other information as the Company may require in accordance with the restrictions on transfer applicable to the Old Notes. Signatures on such Certificates or bond powers must be guaranteed by an Eligible Institution. 6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If New Notes are to be issued in the name of a person other than the signer of this Letter of Transmittal, or if New Notes are to be sent to 14 someone other than the signer of this Letter of Transmittal or to an address other than that shown above, the appropriate boxes on this Letter of Transmittal should be completed. Certificates for Old Notes not exchanged will be returned by mail or, if tendered by book-entry transfer, by crediting the account indicated above maintained at DTC. See Instruction 4. 7. IRREGULARITIES. The Company will determine, in its sole discretion, all questions as to the form of documents, validity, eligibility (including time of receipt) and acceptance for exchange of any tender of Old Notes, which determination shall be final and binding on all parties. The Company reserves the absolute right to reject any and all tenders determined by either of them not to be in proper form or the acceptance of which, or exchange for which, may, in the view of counsel to the Company, be unlawful. The Company also reserves the absolute right, subject to applicable law, to waive any of the conditions of the Exchange Offer set forth in the Prospectus under "The Exchange Offer--Conditions" or any conditions or irregularity in any tender of Old Notes of any particular holder whether or not similar conditions or irregularities are waived in the case of other holders. The Company's interpretation of the terms and conditions of the Exchange Offer (including this Letter of Transmittal and the instructions hereto) will be final and binding. No tender of Old Notes will be deemed to have been validly made until all irregularities with respect to such tender have been cured or waived. The Company, any affiliates or assigns of the Company, the Exchange Agent, or any other person shall not be under any duty to give notification of any irregularities in tenders or incur any liability for failure to give such notification. 8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES. Questions and requests for assistance may be directed to the Exchange Agent at its address and telephone number set forth on the front of this Letter of Transmittal. Additional copies of the Prospectus, the Notice of Guaranteed Delivery and the Letter of Transmittal may be obtained from the Exchange Agent or from your broker, dealer, commercial bank, trust company or other nominee. 9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9. Under U.S. Federal income tax law, a holder whose tendered Old Notes are accepted for exchange is required to provide the Exchange Agent with such holder's correct taxpayer identification number ("TIN") on Substitute Form W-9 below. If the Exchange Agent is not provided with the correct TIN, the Internal Revenue Service (the "IRS") may subject the holder or other payee to a $50 penalty. In addition, payments to such holders or other payees with respect to Old Notes exchanged pursuant to the Exchange Offer may be subject to 31% backup withholding. The box in Part 2 of the Substitute Form W-9 may be checked if the tendering holder has not been issued a TIN and has applied for a TIN or intends to apply for a TIN in the near future. If the box in Part 2 is checked, the holder or other payee must also complete the Certificate of Awaiting Taxpayer Identification Number below in order to avoid backup withholding. Notwithstanding that the box in Part 2 is checked and the Certificate of Awaiting Taxpayer Identification Number is completed, the Exchange Agent will withhold 31% of all payments made prior to the time a properly certified TIN is provided to the Exchange Agent. The Exchange Agent will retain such amounts withheld during the 60 day period following the date of the Substitute Form W-9. If the holder furnishes the Exchange Agent with its TIN within 60 days after the date of the Substitute Form W-9, the amounts retained during the 60 day period will be remitted to the holder and no further amounts shall be retained or withheld from payments made to the holder thereafter. If, however, the holder has not provided the Exchange Agent with its TIN within such 60 day period, amounts withheld 15 will be remitted to the IRS as backup withholding. In addition, 31% of all payments made thereafter will be withheld and remitted to the IRS until a correct TIN is provided. The holder is required to give the Exchange Agent the TIN (e.g., social security number or employer identification number) of the registered owner of the Old Notes or of the last transferee appearing on the transfers attached to, or endorsed on, the Old Notes. If the Old Notes are registered in more than one name or are not in the name of the actual owner, consult the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for additional guidance on which number to report. Certain holders (including, among others, corporations, financial institutions and certain foreign persons) may not be subject to these backup withholding and reporting requirements. Such holders should nevertheless complete the attached Substitute Form W-9 below, and write "exempt" on the face thereof, to avoid possible erroneous backup withholding. A foreign person may qualify as an exempt recipient by submitting a properly completed IRS Form W-8, signed under penalties of perjury, attesting to that holder's exempt status. Please consult the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for additional guidance on which holders are exempt from backup withholding. Backup withholding is not an additional U.S. Federal income tax. Rather, the U.S. Federal income tax liability of a person subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained. 10. WAIVER OF CONDITIONS. The Company reserves the absolute right to waive satisfaction of any or all conditions enumerated in the Prospectus. 11. NO CONDITIONAL TENDERS. No alternative, conditional, irregular or contingent tenders will be accepted. All tendering holders of Old Notes, by execution of this Letter of Transmittal, shall waive any right to receive notice of the acceptance of their Old Notes for exchange. Neither the Company, the Exchange Agent nor any other person is obligated to give notice of any defect or irregularity with respect to any tender of Old Notes nor shall any of them incur any liability for failure to give any such notice. 12. LOST, DESTROYED OR STOLEN CERTIFICATES. If any Certificate(s) representing Old Notes have been lost, destroyed or stolen, the holder should promptly notify the Exchange Agent. The holder will then be instructed as to the steps that must be taken in order to replace the Certificate(s). This Letter of Transmittal and related documents cannot be processed until the procedures for replacing lost, destroyed or stolen Certificate(s) have been followed. 13. SECURITY TRANSFER TAXES. Holders who tender their Old Notes for exchange will not be obligated to pay any transfer taxes in connection therewith. If, however, New Notes are to be delivered to, or are to be issued in the name of, any person other than the registered holder of the Old Notes tendered, or if a transfer tax is imposed for any reason other than the exchange of Old Notes in connection with the Exchange Offer, then the amount of any such transfer tax (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of 16 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. 17
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE. TO BE COMPLETED BY ALL TENDERING SECURITY HOLDERS (See Instruction 9) PAYER'S NAME: IBJ SCHRODER BANK & TRUST COMPANY - ------------------------------------------------------------------------------------------------------------------------ SUBSTITUTE PART 1-PLEASE PROVIDE YOUR TIN ON THE LINE AT RIGHT TIN: _________________________ FORM W-9 AND CERTIFY BY SIGNING AND DATING BELOW Social Security Number or Employer Identification Number DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE ------------------------------------------------------------------------------------------------- PART 2 - TIN Applied for [ ] ------------------------------------------------------------------------------------------------- PAYOR'S REQUEST FOR CERTIFICATION - UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT: TAXPAYER IDENTIFICATION NUMBER (1) the number shown on this form is my correct taxpayer identification number (or I am waiting ("TIN") AND for a number to be issued to me), CERTIFICATION (2) I am not subject to backup withholding either because (i) I am exempt from backup withholding, (ii) I have not been notified by the Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (iii) the IRS has notified me that I am no longer subject to backup withholding, and (3) any other information provided on this form is true and correct. Signature ________________________________ Date _______________, 1998 - ------------------------------------------------------------------------------------------------------------------------ You must cross out item (iii) in Part (2) above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax return and you have not been notified by the IRS that you are no longer subject to backup withholding. - ------------------------------------------------------------------------------------------------------------------------ NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY IN CERTAIN CIRCUMSTANCES RESULT IN BACKUP WITHHOLDING OF 31% OF ANY AMOUNTS PAID TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
18 YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 2 OF SUBSTITUTE FORM W-9 - ------------------------------------------------------------------------------- CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (1) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (2) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number by the time of payment, 31% of all payments made to me on account of the New Notes shall be retained until I provide a taxpayer identification number to the Exchange Agent and that, if I do not provide my taxpayer identification number within 60 days, such retained amounts shall be remitted to the Internal Revenue Service as backup withholding and 31% of all reportable payments made to me thereafter will be withheld and remitted to the Internal Revenue Service until I provide a taxpayer identification number. Signature Date , 1998 ------------------------------------ ------------------- - --------------------------------------------- Name (Please Print) - ------------------------------------------------------------------------------- 19 EX-99.2 23 FORM OF NOTICE OF GUARANTEED DELIVERY OFFER TO EXCHANGE NEW 10 1/2% SENIOR NOTES DUE 2008 FOR AN EQUAL PRINCIPAL AMOUNT AT MATURITY OF OUTSTANDING 10 1/2% SENIOR NOTES DUE 2008 OF AKI, INC. This Notice of Guaranteed Delivery, or one substantially equivalent to this form, must be used by a holder of the 10 1/2% Senior Notes due 2008 (the "Old Notes") of AKI, Inc. who wishes to tender Old Notes to the Exchange Agent pursuant to the guaranteed delivery procedures described in The "Exchange Offer--Guaranteed Delivery Procedures" of the Prospectus dated October __, 1998 (as the same may be amended or supplemented from time to time, the "Prospectus") and in Instruction 1 to the Letter of Transmittal. In addition, in order to utilize the guaranteed delivery procedure to tender Old Notes pursuant to the Exchange Offer, a completed, signed and dated Letter of Transmittal relating to the Old Notes (or facsimile thereof) must also be received by the Exchange Agent prior to the Expiration Date. Capitalized terms not defined herein have the meanings assigned to them in the Prospectus or the Letter of Transmittal. The Exchange Agent for the Exchange Offer is: IBJ SCHRODER BANK & TRUST COMPANY
By Registered or Certified Mail: Facsimile Transmissions: By Hand or Overnight Delivery: (Eligible Institutions Only) IBJ Schroder Bank & Trust Company (212) 858-2611 IBJ Schroder Bank & Trust Company P.O. Box 84 One State Street Bowling Green Station New York, New York 10004 New York, New York 10274-0084 Attn.: Securities Processing Window, Subcellar One (SC-1) For Information Call: (212) 858-2103
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE SIGNATURE BOX ON THE LETTER OF TRANSMITTAL. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLLY. Ladies and Gentlemen: The undersigned hereby tenders to AKI, Inc., upon the terms and subject to the conditions set forth in the Prospectus and the related Letter of Transmittal (which together constitute the "Exchange Offer"), receipt of which is hereby acknowledged, the principal amount of Old Notes set forth below pursuant to the guaranteed delivery procedures set forth in the Prospectus under the caption "The Exchange Offer--Procedure for Tendering" and in Instruction 1 of the Letter of Transmittal. Aggregate Principal Name(s) of Registered Holder(s): Amount Tendered: $ --------------------- ------------------------------------ Certificate No.(s) (if known): ---------------------------- (Total Principal Amount Represented by Old Notes Certificate(s)) $ - --------------------------------------- [ ] The Depositary Trust Company ("DTC") (Check if Old Notes will be tendered by book-entry transfer and provide the following information): DTC Account Number: -------------------- Date: ---------------------------------- All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned and every obligation of the undersigned hereunder shall be binding upon the heirs personal representatives, successors and assigns of the undersigned. PLEASE SIGN HERE X ------------------------------------- ---------------------------------- X ------------------------------------- ---------------------------------- Signature(s) of Owner(s) Date or Authorized Signatory Area Code and Telephone Number: ------------------------------- 2 Please print name(s) and address(es) Name(s): ------------------------------------------------------------------- ------------------------------------------------------------------- ------------------------------------------------------------------- Capacity: Address(es): ------------------------------------------------------------------- ------------------------------------------------------------------- ------------------------------------------------------------------- ------------------------------------------------------------------- 3 - ------------------------------------------------------------------------------- THE GUARANTEE ON THE REVERSE SIDE MUST BE COMPLETED GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a firm which is a member of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or is a commercial bank or trust company having an office or correspondent in the United States, or is otherwise an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, hereby guarantees deposit with the Exchange Agent, at one of its addresses set forth above, either the Old Notes tendered hereby in proper form for transfer, or confirmation of the book-entry transfer of such Old Notes to the Exchange Agent's account at DTC, pursuant to the procedures for book-entry transfer set forth in the Prospectus, in either case together with one or more properly completed and duly executed Letter(s) of Transmittal (or facsimile thereof) and any other required documents within three business days after the date of execution of this Notice of Guaranteed Delivery. The undersigned acknowledges that it must deliver the Letter(s) of Transmittal and the Old Notes tendered hereby to the Exchange Agent within the time period set forth above and that failure to do so could result in a financial loss to the undersigned. - ------------------------------------ ------------------------------------ Name of Firm Authorized Signature - ------------------------------------ ------------------------------------ Address Title - ------------------------------------ ------------------------------------ Zip Code (Please Type or Print) Area Code and Telephone No. Dated: --------- ------------------------------ - ------------------------------------------------------------------------------- NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. ACTUAL SURRENDER OF OLD NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, AN EXECUTED LETTER OF TRANSMITTAL. 4 INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY 1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly completed and duly executed copy of this Notice of Guaranteed Delivery and any other documents required by this Notice of Guaranteed Delivery must be received by the Exchange Agent at its address set forth herein prior to the Expiration Date. The method of delivery of this Notice of Guaranteed Delivery and any other required documents to the Exchange Agent is at the election and risk of the holder, and the delivery will be deemed made only when actually received by the Exchange Agent. If delivery is by mail, registered mail with return receipt requested, properly insured, is recommended. Instead of delivery by mail, it is recommended that the holder use an overnight or hand delivery service. In all cases sufficient time should be allowed to assure timely delivery. For a description of the guaranteed delivery procedure, see Instruction 1 of the Letter of Transmittal. 2. SIGNATURES ON THIS NOTICE OF GUARANTEED DELIVERY. If this Notice of Guaranteed Delivery is signed by the registered holder(s) of the Old Notes referred to herein, the signature must correspond with the name(s) written on the face of the Old Notes without alteration, enlargement, or any change whatsoever. If this Notice of Guaranteed Delivery is signed by a person other than the registered holder(s) of any Old Notes listed, this Notice of Guaranteed Delivery must be accompanied by appropriate bond powers, signed as the name of the registered holder(s) appears on the Old Notes. If this Notice of Guaranteed Delivery is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation, or other person acting in a fiduciary or representative capacity, such person should so indicate when signing. 3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for assistance and requests for additional copies of the Prospectus may be directed to the Exchange Agent at the address specified in the Prospectus. Holders may also contact their broker, dealer, commercial bank, trust company, or other nominee for assistance concerning the Exchange Offer. -----END PRIVACY-ENHANCED MESSAGE-----