<PAGE>
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)
<TABLE>
<S> <C> <C>
DELAWARE 2799 13-3785856
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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: [ ]
--------------
<TABLE>
<CAPTION>
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
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 1/2% Senior Notes Due 2008 ......... $115,000,000 100% $115,000,000 $33,925 (3)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
===============================================================================
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
----------------
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
<PAGE>
------------
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
PREDECESSOR
--------------------------------------------------------
FISCAL YEAR ENDED JUNE THREE MONTHS JULY 1, 1997
30, ENDED TO
------------------------- SEPTEMBER 30, DECEMBER 15,
1996 1997 1997 1997
------------ ------------ --------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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
<CAPTION>
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)
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY
---------------------------
AT AT
JUNE 30, SEPTEMBER 30,
1998 1998
---------- --------------
<S> <C> <C>
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
</TABLE>
11
<PAGE>
- ----------
(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
<PAGE>
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."
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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
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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
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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."
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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
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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."
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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.
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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.
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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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
----------------------
(IN THOUSANDS)
<S> <C>
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
=========
</TABLE>
26
<PAGE>
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
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
<CAPTION>
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)
<S> <C> <C> <C> <C>
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
</TABLE>
- ---------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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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.
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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.
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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."
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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
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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
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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.
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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
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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.
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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.
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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.
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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.
<TABLE>
<CAPTION>
YEAR OF PATENT TARGET
PRODUCT INTRODUCTION ORIGIN PROTECTION MARKET
- -------------------------------- -------------- ---------------------- ---------------- -------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
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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.
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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
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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
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<PAGE>
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."
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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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------- --------------------
FISCAL SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION(1)
- ----------------------------------- -------- ----------- ---------- -------------------- ----------------
<S> <C> <C> <C> <C> <C>
Roger L. Barnett .................. 1998 $367,083 $ -- 32,500(2) $3,670
President, Chief Executive Officer 1997 210,000 275,000 -- 5,700
and Director 1996 210,000 225,000 -- 6,856
Hugh F. Brown (3) ................. 1998 145,000 100,000 -- 3,384
Executive Vice President 1997 145,000 100,000 -- 5,700
Manufacturing 1996 145,000 100,000 -- 5,636
Kenneth A. Budde .................. 1998 120,000 75,000 -- --
Chief Financial Officer 1997 100,000 50,000 -- --
1996 100,000 20,000 -- --
</TABLE>
- ----------
(1) Represents amounts contributed on behalf of the named executive to the
Company's 401(k) retirement savings plan.
(2) Option to purchase shares of Acquisition Corp. Common Stock. See
"--Equity-Based Compensation."
(3) Mr. Brown resigned from the Company in July 1998. Mr. Brown is expected
to become a consultant to the Company.
The following table contains information concerning the share options
grants made to each of the named executive officers of the Company during the
fiscal year ended June 30, 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
SHARE PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (2)
-------------------------------------------------------- -----------------------
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS IN FISCAL BASE PRICE EXPIRATION
GRANTED(1) YEAR ($/SH) DATE 5% 10%
------------ ----------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Roger L. Barnett ......... 32,500 100 $ 1.00 06/17/2008 $20,439 $51,797
Hugh F. Brown ............ -- -- -- -- -- --
Kenneth A. Budde ......... -- -- -- -- -- --
</TABLE>
- ----------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
SHARES ACQUISITION CORP.
BENEFICIAL OWNER BENEFICIALLY OWNED COMMON STOCK
---------------- ------------------ ------------
<S> <C> <C>
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
</TABLE>
- ----------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---- ----------------
<S> <C>
2003 ............... 106.750%
2004 ............... 103.375%
2005 ............... 100.000%
</TABLE>
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.
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<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003 ......................... 105.250%
2004 ......................... 102.625%
2005 and thereafter .......... 100.000%
</TABLE>
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
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<PAGE>
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
<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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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;
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(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
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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.
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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."
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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.
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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.
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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
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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.
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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
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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
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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
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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.
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"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,
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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.
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"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
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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
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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,
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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).
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"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.
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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
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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
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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
<PAGE>
(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
<PAGE>
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
<PAGE>
INDEX TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
P-1
<PAGE>
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
<PAGE>
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
<PAGE>
AKI, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
PRO FORMA
ACQUISITION FOR
AKI, INC. ADJUSTMENTS ACQUISITION
--------- ----------- -----------
<S> <C> <C> <C>
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)
<CAPTION>
PRO FORMA
FOR 3M
REFINANCING ACQUISITION AND ACQUISITION
ADJUSTMENTS REFINANCING ADJUSTMENTS(H) PRO FORMA
----------- ----------- -------------- ---------
<S> <C> <C> <C> <C>
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)
</TABLE>
See notes to unaudited pro forma consolidated statements of operations.
P-4
<PAGE>
AKI, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
PRO FORMA
ACQUISITION FOR
AKI, INC. ADJUSTMENTS ACQUISITION
--------- ----------- -----------
<S> <C> <C> <C>
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
<CAPTION>
PRO FORMA
FOR 3M
REFINANCING ACQUISITION AND ACQUISITION
ADJUSTMENTS REFINANCING ADJUSTMENTS(H) PRO FORMA
----------- ----------- -------------- ---------
<S> <C> <C> <C> <C>
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)
</TABLE>
See notes to unaudited pro forma consolidated statements of operations.
P-5
<PAGE>
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
<TABLE>
<CAPTION>
3M 3M
HISTORICAL ADJUSTMENTS ADJUSTED
---------- ----------- --------
<S> <C> <C> <C>
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
====== =========== =======
</TABLE>
P-6
<PAGE>
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
<TABLE>
<CAPTION>
3M 3M
HISTORICAL ADJUSTMENTS ADJUSTED
---------- ----------- --------
<S> <C> <C> <C>
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
======== =========== ========
</TABLE>
- --------------
(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
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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
</TABLE>
F-1
<PAGE>
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
<PAGE>
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
<PAGE>
AKI, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.)
CONSOLIDATED BALANCE SHEET
(dollars in thousands, except share information)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------- -------------------------------------
JUNE 30, 1997 JUNE 30, 1998 SEPTEMBER 30, 1998
--------------- --------------- -------------------
(UNAUDITED)
<S> <C> <C> <C>
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
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
AKI, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
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)
<TABLE>
<CAPTION>
ADDITIONAL STOCK
COMMON STOCK PAID-IN PURCHASE
SHARES DOLLARS CAPITAL WARRANTS
-------- --------- ------------ ----------
PREDECESSOR
------------------------------------------
<S> <C> <C> <C> <C>
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 $ --
====== === ======== ======
<CAPTION>
ACCUMULATED
OTHER CARRYOVER
RETAINED COMPREHENSIVE BASIS
EARNINGS INCOME ADJUSTMENT TOTAL
------------ --------------- ------------- ------------
PREDECESSOR
-------------------------------------------------------
<S> <C> <C> <C> <C>
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
======== ====== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
AKI, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
PREDECESSOR
------------------------------------------------------
JULY 1, 1997 THREE MONTHS
YEAR ENDED JUNE 30, THROUGH ENDED
----------------------- DECEMBER 15, SEPTEMBER 30,
1996 1997 1997 1997
----------- ----------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
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 $ -- $ -- $ --
<CAPTION>
SUCCESSOR
---------------------------------------
DECEMBER 16, 1997 THREE MONTHS
THROUGH ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
------------------- -------------------
(UNAUDITED)
<S> <C> <C>
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 .............. $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<S> <C>
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
=========
</TABLE>
F-12
<PAGE>
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:
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA RESULTS
FOR THE YEAR ENDED
----------------------------
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Revenue ........................ $87,771 $ 81,831
Income from operations ......... 15,247 13,324
Interest expense ............... 12,961 13,049
Net loss ....................... (121) (1,423)
</TABLE>
4. ACCOUNTS RECEIVABLE
The following table details the components of accounts receivable:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
5. INVENTORY
The following table details the components of inventory:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
------ ------
<S> <C> <C>
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
====== ======
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
ESTIMATED JUNE 30, JUNE 30,
USEFUL LIVES 1997 1998
------------ ---- ----
<S> <C> <C> <C>
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
========= ========
</TABLE>
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:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
------ ------
<S> <C> <C>
Machinery and equipment ............... $3,555 $3,000
Less accumulated depreciation ......... (762) (275)
------ ------
$2,793 $2,725
====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
PAYMENT INTEREST
------- --------
<S> <C> <C>
1999 ......... $ 774 $165
2000 ......... 774 107
2001 ......... 839 17
------ ----
$2,387 $289
====== ====
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
JUNE 30,
1997
------------
<S> <C>
Senior Loan ............................. $ 7,906
Senior Subordinated Loans ............... 30,594
Less unamortized debt discounts ......... (608)
---------
37,892
Less current portion .................... (37,892)
---------
$ --
=========
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<S> <C>
1999 ............ $ 243
2000 ............ 162
2001 ............ 138
-----
$ 543
=====
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
JULY 1, 1997 DECEMBER 16, 1997
JUNE 30, THROUGH THROUGH
--------------------- DECEMBER 15, JUNE 30,
1996 1997 1997 1998
--------- --------- -------------- ------------------
<S> <C> <C> <C> <C>
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)
====== ====== ====== ========
</TABLE>
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
JULY 1, 1997 DECEMBER 16, 1997
JUNE 30, THROUGH THROUGH
----------------------- DECEMBER 15, JUNE 30,
1996 1997 1997 1998
--------- ----------- -------------- ------------------
<S> <C> <C> <C> <C>
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)
====== ======= ====== ===========
</TABLE>
F-19
<PAGE>
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:
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1998
------------------------ -----------------------
CURRENT NONCURRENT CURRENT NONCURRENT
--------- ------------ --------- -----------
<S> <C> <C> <C> <C>
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)
==== ========== ==== =========
</TABLE>
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:
<TABLE>
<CAPTION>
JULY 1, 1997 DECEMBER 16, 1997
JUNE 30, THROUGH THROUGH
--------------------- DECEMBER 15, JUNE 30,
1996 1997 1997 1998
--------- --------- -------------- ------------------
<S> <C> <C> <C> <C>
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)
====== ====== ====== ========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1997
----------------------- ----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- ----------- --------- ----------
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
UNITED STATES FRANCE TOTAL
------------- ------ -----
<S> <C> <C> <C>
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
</TABLE>
F-23
<PAGE>
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.
<TABLE>
<CAPTION>
PREDECESSOR
-------------------------------------------------------------------------------
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED FULL
SEPTEMBER 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997 JUNE 30, 1997 YEAR
-------------------- ------------------- ---------------- --------------- -------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
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
-------------------- ------------------- ------------------- ---------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
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)
</TABLE>
F-24
<PAGE>
===============================================================================
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
===============================================================================
===============================================================================
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
===============================================================================
<PAGE>
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
<PAGE>
[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
<PAGE>
[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
<PAGE>
[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
<PAGE>
[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
<PAGE>
[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
<PAGE>
[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
<PAGE>
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
<PAGE>
[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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
===============================================================================
===============================================================================
NEW 10 1/2% SENIOR NOTES
DUE 2008
AKI, INC.
----------------
PROSPECTUS
----------------
, 1998
===============================================================================
A-9
<PAGE>
<PAGE>
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
<TABLE>
<S> <C>
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.+
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
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.*
</TABLE>
(b) Financial Statement Schedules
Schedule II -- Allowance for Doubtful Accounts*
- ----------
* Filed herewith.
+ Previously filed.
II-2
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/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
</TABLE>
* /s/ Roger L. Barnett
- -------------------------
Roger L. Barnett
Attorney-in-Fact
II-4
<PAGE>
SCHEDULE II
AKI, INC. AND SUBSIDIARIES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(dollars in thousands)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
YEAR BEGINNING END OF
ENDED OF PERIOD ADDITIONS(1) DEDUCTIONS(2,3) PERIOD
----- --------- ------------ --------------- ------
<S> <C> <C> <C> <C>
1996 379 337 (249) 467
1997 467 120 (268) 319
1998 319 0 (42) 277
</TABLE>
- ----------
(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.
<PAGE>
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").
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
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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
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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.
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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
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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
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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;
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(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
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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
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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.
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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.
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"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
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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
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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
<PAGE>
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
<PAGE>
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-
<PAGE>
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-
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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;
<PAGE>
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
<PAGE>
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
<PAGE>
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.]
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
=================================================================
CREDIT AGREEMENT
DATED AS OF APRIL 30, 1996
Between
ARCADE, INC.
as Borrower
and
HELLER FINANCIAL, INC.
as Lender
=================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
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
<PAGE>
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
<PAGE>
SECTION 10
DEFINITIONS .................................................39
10.1 Certain Defined Terms .........................................................................39
10.2 Other Definitional Provisions .................................................................44
</TABLE>
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Defined Term Defined in Section
<S> <C>
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
<PAGE>
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
</TABLE>
<PAGE>
.
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;
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(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
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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.
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"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.
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(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
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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
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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
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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.
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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
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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
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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.
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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
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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
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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
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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
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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:
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(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
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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
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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
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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
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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.
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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.
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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
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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
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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
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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.
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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,
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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.
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(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.
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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
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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
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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
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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
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(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,
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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.
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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
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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
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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
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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
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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;
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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
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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
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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
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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,
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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.
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"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.
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"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
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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.
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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
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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
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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
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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:
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(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.
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(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:
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(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
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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
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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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
[Remainder of this page intentionally left blank.]
20
<PAGE>
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
<PAGE>
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)."
<PAGE>
(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
<PAGE>
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
<PAGE>
SECURITIES PURCHASE AGREEMENT
dated as of
December 15, 1997
among
AHC I ACQUISITION CORP.
AHC I MERGER CORP.
and
SCRATCH & SNIFF FUNDING, INC.
<PAGE>
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>
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
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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
<PAGE>
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.
<PAGE>
"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
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"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
<PAGE>
"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
<PAGE>
"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
<PAGE>
"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
<PAGE>
"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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
"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
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"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
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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,
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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.
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(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
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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
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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.
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(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.
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(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,
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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
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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.
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(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;
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(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
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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.
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(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.
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(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;
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(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,
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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
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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
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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
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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.
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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
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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
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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
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(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
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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;
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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
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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
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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
<PAGE>
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
<PAGE>
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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<PAGE>
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
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<PAGE>
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-
<PAGE>
(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,
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<PAGE>
(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
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<PAGE>
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".
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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
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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
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(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).
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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
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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
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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),
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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.
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(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
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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
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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
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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
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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
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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
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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,
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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
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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
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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,
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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.
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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
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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.
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(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
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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
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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
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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
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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
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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.
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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.
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(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.
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(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.
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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
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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.
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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-
<PAGE>
(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-
<PAGE>
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-
<PAGE>
/s/ Roger L. Barnett
-------------------------------
Roger L. Barnett
/s/ Victor J. Barnett
-------------------------------
Victor J. Barnett
-41-
<PAGE>
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:
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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),
<PAGE>
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
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
(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.
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<PAGE>
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.
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<PAGE>
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
-----------------------------
<PAGE>
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.
<PAGE>
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
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<PAGE>
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.
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
UK INVESTMENT PLAN 1997 PARTNERS
By: DONALDSON LUFKIN & JENRETTE, INC.
By: /s/ David Wittels
------------------------------------
David Wittels
Attorney-in-Fact
6
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
UK INVESTMENT PLAN 1997 PARTNERS
By: DONALDSON LUFKIN & JENRETTE, INC.
By: /s/ David Wittels
------------------------------------
David Wittels
Attorney-in-Fact
6
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
UK INVESTMENT PLAN 1997 PARTNERS
By: DONALDSON LUFKIN & JENRETTE, INC.
By: /s/ David M. Wittels
------------------------------------
David M. Wittels
Attorney-in-Fact
<PAGE>
EXHIBIT 12.1
AKI, INC AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(dollars in thousands)
<TABLE>
<CAPTION>
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
----------- ----------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
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
<CAPTION>
THE COMPANY
-------------------------------------------
PRO FORMA
-------------
DECEMBER 16, FISCAL YEAR THREE MONTHS
1997 THROUGH ENDED ENDED
JUNE 30, JUNE 30, SEPTEMBER 30,
1998 1998 1998
-------------- ------------- --------------
<S> <C> <C> <C>
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
</TABLE>
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.
<PAGE>
[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
<PAGE>
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
<PAGE>
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)
<PAGE>
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
<PAGE>
(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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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................................................$2,186,800
<PAGE>
LIABILITIES
13. Deposits:
a. In domestic offices.........................................$ 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-
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-1-1995
<PERIOD-END> JUN-30-1996
<CASH> 626
<SECURITIES> 0
<RECEIVABLES> 12,707
<ALLOWANCES> 467
<INVENTORY> 2,236
<CURRENT-ASSETS> 16,392
<PP&E> 26,671
<DEPRECIATION> 7,046
<TOTAL-ASSETS> 82,395
<CURRENT-LIABILITIES> 21,077
<BONDS> 41,387
0
8,678
<COMMON> 1
<OTHER-SE> 7,931
<TOTAL-LIABILITY-AND-EQUITY> 82,395
<SALES> 73,486
<TOTAL-REVENUES> 73,486
<CGS> 49,862
<TOTAL-COSTS> 49,862
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 337
<INTEREST-EXPENSE> 6,762
<INCOME-PRETAX> 4,279
<INCOME-TAX> 2,101
<INCOME-CONTINUING> 2,178
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,178
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> JUN-30-1997
<CASH> 303
<SECURITIES> 0
<RECEIVABLES> 10,362
<ALLOWANCES> 319
<INVENTORY> 2,786
<CURRENT-ASSETS> 13,934
<PP&E> 29,017
<DEPRECIATION> 10,861
<TOTAL-ASSETS> 77,142
<CURRENT-LIABILITIES> 50,871
<BONDS> 3,399
0
8,678
<COMMON> 1
<OTHER-SE> 11,224
<TOTAL-LIABILITY-AND-EQUITY> 77,142
<SALES> 77,723
<TOTAL-REVENUES> 77,723
<CGS> 49,467
<TOTAL-COSTS> 49,467
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 120
<INTEREST-EXPENSE> 6,203
<INCOME-PRETAX> 7,117
<INCOME-TAX> 3,135
<INCOME-CONTINUING> 3,982
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,982
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,641
<SECURITIES> 0
<RECEIVABLES> 13,782
<ALLOWANCES> 277
<INVENTORY> 2,078
<CURRENT-ASSETS> 23,656
<PP&E> 20,789
<DEPRECIATION> 1,853
<TOTAL-ASSETS> 211,064
<CURRENT-LIABILITIES> 10,811
<BONDS> 116,489
0
0
<COMMON> 0
<OTHER-SE> 79,621
<TOTAL-LIABILITY-AND-EQUITY> 211,064
<SALES> 71,252
<TOTAL-REVENUES> 71,252
<CGS> 47,327
<TOTAL-COSTS> 47,327
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,915
<INCOME-PRETAX> (4,253)
<INCOME-TAX> (592)
<INCOME-CONTINUING> (3,661)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,661)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,514
<SECURITIES> 0
<RECEIVABLES> 15,886
<ALLOWANCES> 349
<INVENTORY> 3,428
<CURRENT-ASSETS> 21,317
<PP&E> 29,465
<DEPRECIATION> 11,952
<TOTAL-ASSETS> 83,518
<CURRENT-LIABILITIES> 57,170
<BONDS> 1,951
0
8,678
<COMMON> 1
<OTHER-SE> 12,859
<TOTAL-LIABILITY-AND-EQUITY> 83,518
<SALES> 21,928
<TOTAL-REVENUES> 21,928
<CGS> 13,622
<TOTAL-COSTS> 13,622
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 1,451
<INCOME-PRETAX> 3,083
<INCOME-TAX> 1,287
<INCOME-CONTINUING> 1,796
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,796
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,341
<SECURITIES> 0
<RECEIVABLES> 21,639
<ALLOWANCES> 278
<INVENTORY> 3,984
<CURRENT-ASSETS> 28,059
<PP&E> 21,473
<DEPRECIATION> 2,894
<TOTAL-ASSETS> 213,725
<CURRENT-LIABILITIES> 13,615
<BONDS> 116,328
0
0
<COMMON> 0
<OTHER-SE> 80,090
<TOTAL-LIABILITY-AND-EQUITY> 213,725
<SALES> 24,024
<TOTAL-REVENUES> 24,024
<CGS> 15,421
<TOTAL-COSTS> 15,421
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,121
<INCOME-PRETAX> 1,201
<INCOME-TAX> 844
<INCOME-CONTINUING> 357
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 357
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
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
<TABLE>
<CAPTION>
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
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)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
- -------------------------------------------------------------------------------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
- -------------------------------------------------------------------------------
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
<PAGE>
- -------------------------------------------------------------------------------
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
<PAGE>
- -------------------------------------------------------------------------------
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
<PAGE>
- -------------------------------------------------------------------------------
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
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
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
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.
</TABLE>
18
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
<S> <C> <C>
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
</TABLE>
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.
<PAGE>
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
<PAGE>
Please print name(s) and address(es)
Name(s):
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Capacity:
Address(es):
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3
<PAGE>
- -------------------------------------------------------------------------------
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
<PAGE>
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.
