<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1998.
REGISTRATION NO. 333-60991
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
AKI HOLDING CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 2799 74-2883163
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification
organization) Code Number) Number)
1815 EAST MAIN STREET
CHATTANOOGA, TENNESSEE 37404
(423) 624-3301
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
KENNETH A. BUDDE
CHIEF FINANCIAL OFFICER
AKI HOLDING CORP.
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: [ ]
---------------
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.
===============================================================================
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EXPLANATORY NOTE
This Registration Statement covers the registration of an aggregate
principal amount of $50,000,000 of 13 1/2% Senior Discount Debentures due 2009
(the "New Debentures") of AKI Holding Corp. ("Holding") that may be exchanged
for equal principal amounts of Holding's outstanding 13 1/2% Senior Discount
Debentures due 2009 (the "Old Debentures") (the "Exchange Offer"). This
exchange offer registration statement (the "Exchange Offer Registration
Statement") also covers the registration of the New Debentures 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 Debentures" to be used in lieu of the section entitled "Risk
Factors--No Public Market for the New Debentures," a new section entitled "Use
of Proceeds" and alternate sections entitled "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 Holders of the Old
Debentures" 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 Debentures 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 12, 1998
PROSPECTUS
OFFER TO EXCHANGE
NEW 13 1/2% SENIOR DISCOUNT DEBENTURES DUE 2009 FOR UP TO $50,000,000
IN PRINCIPAL AMOUNT OUTSTANDING
13 1/2% SENIOR DISCOUNT DEBENTURES DUE 2009
OF
AKI HOLDING CORP.
----------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998, UNLESS EXTENDED
AKI Holding Corp., a Delaware corporation ("Holding"), 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 13 1/2% Senior Discount Debentures due 2009 (the "New
Debentures") for each $1,000 principal amount of the outstanding 13 1/2% Senior
Discount Debentures due 2009 (the "Old Debentures") of Holding, of which $50.0
million principal amount is outstanding from the holders thereof (the
"Holders"). The New Debentures will be obligations of Holding issued pursuant
to the Indenture under which the Old Debentures were issued (the "Indenture").
The form and terms of the New Debentures are the same as the form and terms of
the Old Debentures except that (i) the New Debentures 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 Debentures will not be
entitled to certain rights of Holders of the Old Debentures 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 Debentures and
the Old Debentures are collectively referred to herein as the "Debentures."
The New Debentures will mature on July 1, 2009. The New Debentures will be
issued at a substantial discount from their principal amount. The New
Debentures will accrete at a rate of 13 1/2%, compounded semi-annually to an
aggregate principal amount of $50.0 million at July 1, 2003. Thereafter, the
New Debentures will accrete interest at the rate of 13 1/2% per annum, payable
semi-annually on January 1 and July 1 of each year, commencing on January 1,
2004. The New Debentures will be redeemable at the option of Holding, 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, Holding may on any one or more
occasions redeem up to 35% of the aggregate principal amount of New Debentures
originally issued at a redemption price equal to 113.5% of the Accreted Value
(as defined herein) thereof on the date of redemption, plus Liquidated Damages,
if any, 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 Debentures originally issued remains
outstanding immediately after the occurrence of any such redemption. See
"Description of New Debentures--Optional Redemption." In addition, upon the
occurrence of a Change of Control (as defined herein), 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. See "Description of New Debentures--Repurchase at the Option of
Holders--Change of Control." There can be no assurance that, in the event of a
Change of Control, Holding would have sufficient funds to purchase all
Debentures 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 DEBENTURES IN THE EXCHANGE OFFER.
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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 Debentures will be general unsecured obligations of Holding, will
rank pari passu in right of payment to all existing and future senior unsecured
indebtedness of Holding and will rank senior in right of payment to all
existing and future subordinated indebtedness of Holding. The New Debentures,
however, will be (i) effectively subordinated to all secured obligations of
Holding, to the extent of the assets securing such obligations and (ii)
structurally subordinated to all obligations of Holding's subsidiaries. As of
September 30, 1998, Holding had no outstanding indebtedness other than the
Debentures. Holding's subsidiaries had $116.9 million of outstanding
indebtedness and $16.7 million of other outstanding liabilities (including
trade payables, accrued liabilities and deferred taxes), all of which
effectively ranks senior to the Debentures.
The New Debentures are being offered hereunder in order to satisfy certain
obligations of Holding contained in the Registration Rights Agreement. The Old
Debentures 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 Debentures 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, Holding believes
that New Debentures issued pursuant to the Exchange Offer in exchange for Old
Debentures 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 Debentures directly from Holding to resell pursuant to Rule
144A or any other available exemption under the Securities Act or (ii) a person
that is an affiliate of Holding 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 Debentures 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
Debentures. Eligible Holders wishing to accept the Exchange Offer must
represent to Holding that such conditions have been met. Each broker-dealer
that receives New Debentures 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 Debentures. 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 Debentures received in exchange for Old Debentures where
such Old Debentures were acquired by such broker-dealer as a result of
market-making activities or other trading activities. Holding 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 Debentures acquired by broker-dealers for
their own accounts as a result of market-making activities or other trading
activities have been exchanged for New Debentures and resold by such
broker-dealers. See "The Exchange Offer" and "Plan of Distribution."
Any Old Debentures not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that Old Debentures are tendered and accepted
in the Exchange Offer, a holder's ability to sell untendered Old Debentures
could be adversely affected. Following consummation of the Exchange Offer, the
holders of Old Debentures will continue to be subject to the existing
restrictions on transfer thereof and Holding will have no further obligation to
such holders to provide for the registration under the Securities Act of the
Old Debentures. See "Risk Factors--Consequences of Exchange Offer on
Non-Tendering Holders of the Old Debentures."
Prior to the Exchange Offer, there has been only a limited secondary
market and no public market for the Old Debentures. If a market for the New
Debentures should develop, the New Debentures could trade at a discount from
their principal amount. Holding does not intend to list the New Debentures on a
national securities exchange or to apply for quotation of the New Debentures
through the National Association of Securities Dealers Automated Quotation
System. Accordingly, there can be no assurance as to the development or
liquidity of any public market for the New Debentures. Holding has been
i
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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 Debentures. However, the Initial Purchaser is not
obligated to do so and any market-making activities with respect to the New
Debentures may be discontinued at any time without notice. See "Risk
Factors--No Public Market for the New Debentures" and "Plan of Distribution."
Holding will not receive any proceeds from the Exchange Offer. See "Use of
Proceeds." Holding will accept for exchange any and all Old Debentures 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 Debentures for Old
Debentures will be made promptly following the Expiration Date. Tenders of Old
Debentures 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 Debentures
being tendered for exchange. However, the Exchange Offer is subject to certain
conditions which may be waived by Holding. See "The Exchange Offer." Holding
has agreed to pay the expenses of the Exchange Offer (which shall not include
the expenses of any Holder of the Debentures in connection with resales of the
New Debentures).
Old Debentures 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 Debentures exchanged for Old Debentures represented by the
global Debentures will be represented by one or more global New Debentures in
registered form, registered in the name of the nominee of DTC. New Debentures
in global form will trade in DTC's Same-Day Funds Settlement System, and
secondary market trading activity in such New Debentures will therefore settle
in immediately available funds. See "Description of New Debentures--Form,
Denomination and Book-Entry Procedures."
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THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL HOLDING ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD DEBENTURES 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.
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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 HOLDING.
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 HOLDING SINCE THE
DATE HEREOF.
ii
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AVAILABLE INFORMATION
Holding 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 Debentures 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 Debentures were, and
the New Debentures will be issued, Holding 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 Debentures remain outstanding, it will furnish to the
Trustee and Holders of the Debentures (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 Holding 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 Holding's certified independent public accountants and (ii)
all reports that would be required to be filed with the Commission on Form 8-K
if Holding was required to file such reports. Following the consummation of the
Exchange Offer, Holding 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 Debentures remain outstanding,
Holding has agreed to make available to any prospective purchaser of the
Debentures or Holder of the Debentures in connection with any sale thereof, the
information required by Rule 144A(d)(4) under the Securities Act.
iii
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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 Holding, 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 Holding's specific market areas; changes in prevailing interest
rates; inflation; changes in costs of goods and services; economic conditions
in general and in Holding'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 Holding to
effectively implement its cost reduction program; the ability to attract and
retain qualified personnel; the significant indebtedness of Holding; labor
disturbances; changes in Holding'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
Debentures are cautioned not to place undue reliance on such forward-looking
statements. Holding 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
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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 "Debenture
Offering" shall mean the offering of the Old Debentures. 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.
HOLDING
Holding is a holding company whose only significant asset is all of the
capital stock of the Company. Holding conducts all of its business through the
Company.
THE COMPANY
The Company is a 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
1
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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 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 Debentures 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 Debentures in Exchange for
New Debentures. Certain of the considerations the Holders should consider
include: (i) the substantial amount of Holding's outstanding debt and debt
service obligations; (ii) the effective subordination of the Debentures to the
debt of Holding's subsidiaries and the limitations on the payment of dividends
by its subsidiaries to Holding in connection with such debt; (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 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.
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.
o Superior customer service. Managing sampling programs is highly service
intensive and the Company has the most experienced customer service
representatives in the industry.
2
<PAGE>
o Sole global provider. The Company is the only sampling company to provide
local sales, service and production capabilities on a global basis.
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 makeup 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.
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
continue to 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
of 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 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." 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 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; Conflicts of
Interest," 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 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, Holding consummated the Debenture Offering. The Old
Debentures 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, the Company issued and sold $115,000,000 in aggregate
principal amount at maturity of notes (the "Notes") (the "Note Offering"). The
Notes were sold pursuant to exemptions from, or in transactions not subject to,
the registration requirements of the Securities Act. The consummation of the
Debenture Offering occurred concurrently with and was conditioned upon, the
consummation of the Note 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 $50,000,000 aggregate
principal amount of Old Debentures for up to an equal aggregate principal
amount of New Debentures. The form and terms of the New Debentures are
identical in all material respects to the form and terms of the Old Debentures
except (i) that the New Debentures have been registered under the Securities
Act, (ii) that the New Debentures are not entitled to certain registration
rights which are applicable to the Old Debentures under the Registration Rights
Agreement and (iii) for certain contingent Liquidated Damages provisions. The
Old Debentures and the New Debentures are collectively referred to herein as
the "Debentures." See "Description of New Debentures."
THE EXCHANGE OFFER.......... $1,000 principal amount of New Debentures will
be issued in exchange for each $1,000 principal
amount of Old Debentures validly tendered
pursuant to the Exchange Offer. The exchange of
New Debentures for Old Debentures will be made
with respect to all Old Debentures validly
tendered and not withdrawn on or prior to the
Expiration Date promptly following the Expiration
Date. As of , 1998, the Accreted Value of
the Old Debentures was $ .
RESALE...................... Based on interpretations by the staff of the
Commission set forth in no-action letters issued
to unrelated third parties, Holding believes that
New Debentures issued pursuant to the Exchange
Offer in exchange for Old Debentures 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
Debentures 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 Debentures. 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 Debentures for
its own account in exchange for Old Debentures,
where such Old Debentures 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
Debentures. 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 Debentures 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."
CONDITION TO THE
EXCHANGE OFFER.............. The Exchange Offer is subject to a customary
condition, which may be waived by Holding in
whole or in part and from time to time in its
sole discretion. See "The Exchange Offer--
Condition." The Exchange Offer is not
conditioned upon any minimum aggregate principal
amount of Old Debentures being tendered for
exchange.
PROCEDURE FOR TENDERING OLD
DEBENTURES.................. Each Holder of Old Debentures 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 Debentures
(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 Debentures 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 Debentures,
either make appropriate arrangements to register
ownership of the Old Debentures 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 Debentures who wish to tender
their Old Debentures and whose Old Debentures are
not immediately available or who cannot deliver
their Old Debentures, 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 Debentures
according to the guaranteed delivery procedures
set forth in "The Exchange Offer--Guaranteed
Delivery Procedures."
6
<PAGE>
WITHDRAWAL RIGHTS........... Tenders of Old Debentures 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 DEBENTURES
AND DELIVERY OF NEW
DEBENTURES.................. Holding will accept for exchange any and all
Old Debentures which are validly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Debentures
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 Debentures who do not exchange
their Old Debentures for New Debentures pursuant
to the Exchange Offer will continue to be subject
to the restrictions on transfer of such Old
Debentures as set forth on the legend thereon. In
addition, if the Exchange Offer is consummated,
Holding does not intend to file further
registration statements for the sale or other
disposition of the Old Debentures. See "Risk
Factors--No Public Market for the New Debentures"
and "Risk Factors--Consequences of the Exchange
Offer on Non-Tendering Holders of the Old
Debentures."
REGISTRATION RIGHTS
AGREEMENT; EFFECT ON HOLDERS The Old Debentures were sold by Holding on June
25, 1998 to DLJ, as the Initial Purchaser
pursuant to a Purchase Agreement dated June 22,
1998 between Holding and the Initial Purchaser
(the "Purchase Agreement"). The Initial Purchaser
subsequently sold the Old Debentures 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, Holding 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 Debentures certain exchange
and registration rights. The Exchange Offer is
being made to satisfy this contractual obligation
of Holding. The Holders of New Debentures are not
entitled to any exchange or registration rights
with respect to the New Debentures. 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 Holding, the
exchange of Old Debentures for New Debentures 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."
7
<PAGE>
EXCHANGE AGENT.............. State Street Bank and 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 778, Boston,
Massachusetts 02102, Attention: Corporate Trust
Department. Hand and overnight deliveries should
be directed to the Exchange Agent at Two
International Plaza, Fourth Floor, Boston,
Massachusetts 02110, Attention: Corporate Trust
Department. For information with respect to the
Exchange Offer, call (617) 664-5587. See "The
Exchange Offer--Exchange Agent."
USE OF PROCEEDS............. Holding will not receive any cash proceeds from
the exchange of the New Debentures for the Old
Debentures pursuant to the Exchange Offer. The
net proceeds from the sale of Old Debentures of
approximately $24.7 million (after deducting
underwriting discounts and expenses of the
Offering) have been used to fund the Equity
Contribution, which, together with the net
proceeds from the concurrent Note Offering, have
been used by the Company (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 THE NEW DEBENTURES
SECURITIES OFFERED.......... $50.0 million in principal amount at maturity
of Holding's 13 1/2% New Senior Discount
Debentures due 2009 (the "New Debentures").
MATURITY DATE............... July 1, 2009.
ACCRETION................... The New Debentures will accrete at a rate of 13
1/2%, compounded semi-annually to an aggregate
principal amount of $50.0 million at July 1,
2003.
INTEREST.................... The New Debentures will 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.
OPTIONAL REDEMPTION......... The New Debentures will be 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 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,
Holding may on any one or more occasions redeem
up to 35% of the aggregate principal amount at
maturity of New 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;
provided that at least 65% of the original
aggregate principal amount at maturity of
Debentures remains outstanding immediately after
the occurrence of such redemption. See
"Description of New Debentures--Optional
Redemption."
CHANGE OF CONTROL........... Upon the occurrence of a Change of Control,
each holder of Debentures will have the right to
require Holding to repurchase all or any part of
such holder's New 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. See "Description of New
Debentures--Repurchase at the Option of
Holders--Change of Control." There can be no
assurance that, in the event of a Change of
Control, Holding would have sufficient funds to
purchase all New Debentures tendered. See "Risk
Factors--Limitations on Ability to Make Change
of Control Payment."
RANKING..................... The New Debentures will be general unsecured
obligations of Holding, will rank pari passu in
right of payment to all existing and future
senior unsecured indebtedness of Holding and will
rank senior in right of payment to all existing
and future
9
<PAGE>
subordinated indebtedness of Holding. The New
Debentures, however, will be effectively
subordinated to all indebtedness of the Company
and its subsidiaries. As of September 30, 1998,
Holding had no outstanding indebtedness other
than the Debentures and Holding's subsidiaries
had $116.9 million of outstanding indebtedness
and $16.7 million of other outstanding
liabilities (including trade payables, accrued
liabilities and deferred taxes), all of which
effectively ranks senior to the Debentures. See
"Description of Certain Indebtedness."
ORIGINAL ISSUE DISCOUNT..... The New Debentures are being issued with
original issue discount for U.S. federal income
tax purposes. Thus, although interest will not be
payable on the New Debentures prior to July 1,
2003, Holders will be required to include amounts
in gross income for U.S. federal income tax
purposes in advance of receipt of the cash
payments to which such income is attributable.
See "U.S. Federal Income Tax Considerations."
CERTAIN COVENANTS........... The Indenture contains certain covenants that
will limit, among other things, the ability of
Holding and its Restricted Subsidiaries 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
their respective assets, (iv) create liens on
assets and (v) enter into certain transactions
with affiliates or related persons. See
"Description of New Debentures--Certain
Covenants."
---------------------
Holding is a wholly owned subsidiary of Acquisition Corp. and is a holding
company whose sole subsidiary is the Company. The Company operates under the
trade name "Arcade Marketing, Inc." Holding's and the Company's principal
executive offices are located at 1815 East Main Street, Chattanooga, Tennessee
37404 and their 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 Holding 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 Holding as of June 30, 1998
and for the period from December 16, 1997 through June 30, 1998 have been
derived from the audited consolidated financial statements of Holding. The
summary historical consolidated financial data of Holding as of September 30,
1998 and three months then ended have been derived from the unaudited
consolidated interim financial statements of Holding. In the opinion of
management, the unaudited consolidated interim financial statements of the
Predecessor and Holding 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," Holding's Unaudited
Pro Forma Condensed Consolidated Statements of Operations and the notes
thereto, the Predecessor's Consolidated Financial Statements and the notes
thereto and the other information contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR HOLDING
-------------------------------------------------------- -----------------------------------------
PRO FORMA
-----------
DECEMBER 16, FISCAL
THREE MONTHS JULY 1, 1997 1997 YEAR THREE MONTHS
FISCAL YEAR ENDED JUNE 30, ENDED THROUGH THROUGH ENDED ENDED
-------------------------- SEPTEMBER 30, DECEMBER 15, JUNE 30, JUNE 30, SEPTEMBER 30,
1996 1997 1997 1997 1998 1998 1998
------------ ------------ ------------- ------------- ------------ ----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales .................. $ 73,486 $ 77,723 $ 21,928 $ 35,186 $36,066 $81,831 $ 24,024
Cost of goods sold ......... 49,862 49,467 13,622 22,809 24,518 52,127 15,421
-------- -------- -------- -------- ------- ------- --------
Gross profit ............... 23,624 28,256 8,306 12,377 11,548 29,704 8,603
Selling, general and
administrative
expenses .................. 10,655 13,353 3,322 5,712 5,601 12,350 3,121
Amortization of
goodwill .................. 1,214 1,214 304 559 2,087 4,030 1,008
-------- -------- -------- -------- ------- ------- --------
Income from operations 11,755 13,689 4,680 6,106 3,860 13,324 4,474
Interest Expense ........... 6,762 6,203 1,451 2,646 11,327 16,730 4,096
OTHER DATA(1):
Capital
expenditures .............. 2,051 2,462 448 807 514 1,321 678
Ratio of earnings to
fixed charges(2) .......... 1.6x 2.1x 3.1x 2.2x -- -- 1.1x
</TABLE>
<TABLE>
<CAPTION>
HOLDING
-------------------------------
AT JUNE 30, AT SEPTEMBER 30,
1998 1998
------------- -----------------
<S> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents ........... $ 3,842 $ 1,341
Working capital ..................... 15,046 14,444
Total assets ........................ 214,547 215,626
Total debt .......................... 144,448 143,849
Total stockholder's equity .......... 57,084 55,093
</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 Holding was $7,814 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 Holding's
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 or 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 Holding
was $(8,821) for December 16, 1997 through June 30, 1998, and $1,517
for the three months ended September 30, 1998. Net cash provided by
operating activities for Holding 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 Holding 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 Holding
was $154,580 for December 16, 1997 through June 30, 1998 and $(3,340)
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 Holding 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 $7,545 and $7,775 for the period
from December 16, 1997 through June 30, 1998 and the pro forma fiscal
year ended June 30, 1998, respectively.
12
<PAGE>
RISK FACTORS
Holders of Old Debentures should carefully consider the following factors,
together with the other information set forth in this Prospectus, before
tendering Old Debentures in exchange for New Debentures. However, the list of
risk factors set forth herein may not be exhaustive and these or other factors
could have a material adverse effect on the ability of Holding to service its
indebtedness, including principal and interest payments on the New Debentures.
SUBSTANTIAL LEVERAGE; RESTRICTIVE COVENANTS
Holding has substantial indebtedness and debt service obligations. Holding
had total consolidated indebtedness of approximately $143.8 million as of
September 30, 1998. Holding's deficiency of earnings available to cover fixed
charges for Fiscal 1998, on a pro forma basis for the Acquisition and the
Refinancing was $7.8 million. In addition, as of September 30, 1998 the Company
had a maximum of $19.4 million of availability under the Credit Agreement. The
Indenture permits Holding and its Restricted Subsidiaries and the indenture
governing the Notes (the "Notes Indenture" and, together with the Indenture,
the "Indentures") and the Credit Agreement permits Holding and its Restricted
Subsidiaries, in each case, to incur additional indebtedness, subject to
certain limitations.
The level of Holding's indebtedness could have important consequences to
holders of the Debentures, 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) each of Holding and
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 Holding to pay principal and interest on the New Debentures
will depend upon Holding's future operating performance, which will be affected
by prevailing economic conditions and financial, business and other factors,
certain of which are beyond Holding's control. Holding anticipates that
operating cash flow from its subsidiaries, together with borrowings by the
Company under the Credit Agreement, will be sufficient to meet its operating
expenses and to service its debt requirements as they become due. However, if
Holding is unable to service its indebtedness, Holding may be required to take
action such as reducing or delaying capital expenditures by the Company,
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 Indentures and the Credit Agreement contain certain covenants that,
among other things, limit the ability of Holding 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 Holding; (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. Holding's ability to meet those financial ratios and tests can
be affected by events beyond its control, and there can be no assurance that
Holding will meet those tests. See "Description of New Debentures" and
"Description of Certain Indebtedness."
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION OF DEBENTURES TO
INDEBTEDNESS OF SUBSIDIARIES
Holding is a holding company and does not have any material operations or
assets other than ownership of all of the capital stock of the Company.
Accordingly, the New Debentures will be effectively subordinated to all
existing and future liabilities of Holding's subsidiaries, including
indebtedness under the Credit Agreement and the Notes. As of September 30,
1998, Holding's subsidiaries had $116.9 million of indebtedness and $16.7
million of other outstanding liabilities (including trade payables, accrued
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liabilities and deferred taxes), all of which effectively ranks senior to the
Debentures. At September 30, 1998, Holding had no outstanding indebtedness
other than the Debentures. Holding and its subsidiaries may incur additional
indebtedness in the future, subject to certain limitations contained in the
instruments governing their indebtedness.
Any right of Holding to participate in any distribution of assets of its
subsidiaries upon the liquidation, reorganization or insolvency of any such
subsidiary (and the consequent right of the holders of the New Debentures to
participate in the distribution of those assets) will be subject to the prior
claims of the respective subsidiary's creditors. See "Description of Certain
Indebtedness."
LIMITATION ON THE PAYMENT OF FUNDS TO HOLDING BY ITS SUBSIDIARIES
Holding's cash flow, and consequently its ability to service debt,
including its obligations under the Indenture, is dependent upon the cash flows
of its subsidiaries and the payment of funds by such subsidiaries to Holding in
the form of loans, dividends or otherwise. Holding's subsidiaries have no
obligations, contingent or otherwise, to pay any amounts due pursuant to the
Debentures or to make any funds available therefor. In addition, the Company's
Credit Agreement and the Notes Indenture impose, and agreements entered into in
the future may impose, significant restrictions on the payment of dividends and
the making of loans by the Company and its subsidiaries to Holding. See
"Description of Certain Indebtedness--The Credit Agreement" and "--The Notes."
Accordingly, repayment of the New Debentures may depend upon the ability of
Holding to effect an equity offering or to refinance the New Debentures.
FEDERAL INCOME TAX CONSEQUENCES OF ORIGINAL ISSUE DISCOUNT
The New Debentures will be issued at a substantial original issue discount
from their principal amount. Consequently, Holders of the New Debentures will
be required to include amounts in gross income for federal income tax purposes
in advance of receipt of any cash payment on the Debentures to which the income
is attributable. See "U.S. Federal Income Tax Considerations" for a more
detailed discussion of the federal income tax consequences to the Holders of
the Debentures resulting from the purchase, ownership or disposition thereof.
Under the Indenture, in the event of an acceleration of the maturity of
the New Debentures upon the occurrence of an Event of Default, the Holders of
New Debentures may be entitled to recover only the amount which may be declared
due and payable pursuant to the Indenture, which will be less than the
principal amount at maturity of such New Debentures. See "Description of New
Debentures--Events of Default and Remedies."
If a bankruptcy case is commenced by or against Holding under the United
States Bankruptcy Code (the "Bankruptcy Code") after the issuance of the New
Debentures, the claim of a Holder of New Debentures with respect to the
principal amount thereof will likely be limited to an amount equal to the sum
of (i) the issue price of the New Debentures as of the date of issuance of the
New Debentures and (ii) that portion of the original issue discount that is not
deemed to constitute "unmatured interest" for purposes of the Bankruptcy Code.
Accordingly, Holders of the New Debentures under such circumstances may, even
if sufficient funds are available, receive a lesser amount than they would be
entitled to under the express terms of the Indenture. In addition, there can be
no assurance that a bankruptcy court would compute the accrual of interest
under the same rules as those used for the calculation of original issue
discount under federal income tax law and, accordingly, a Holder might be
required to recognize gain or loss in the event of a distribution related to
such bankruptcy case.
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
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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 cosmetics 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 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
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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 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
Holding and the Company are substantially dependent on the personal
efforts, relationships and abilities of Roger L. Barnett, Holding's and 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 Debentures may base an evaluation of his performance. The
Company has entered into employment agreements with Messrs. Barnett and Miller.
Holding and the Company do not maintain key person life insurance on any member
of senior management of Holding or 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 Holding and 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.
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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 the New Debentures. The net
proceeds from the Offering have been used to fund the Equity Contribution and,
together with the net proceeds from the Notes Offering, have been used by the
Company 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 Debentures
will have the right to require Holding to purchase all or any part of such
Holder's New Debentures 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. In the event that a Change
of Control occurs, Holding would likely be required to refinance the
indebtedness outstanding under the New Debentures. There can be no assurance
that Holding would be able to refinance such indebtedness or, if such
refinancing were to occur, that such refinancing would be on terms favorable to
Holding. See "Description of New Debentures--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."
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 Holding did not receive fair
consideration or reasonably equivalent value for issuing the New Debentures
and, at the time of the incurrence of indebtedness represented by the New
Debentures, Holding 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 Holding or take other action detrimental to the holders of the
New Debentures. 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 dependant 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
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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 DEBENTURES
There has previously been only a limited secondary market and no public
market for the Old Debentures, and there can be no assurance as to the
liquidity of any market that may develop for the New Debentures, the ability of
Holders of the New Debentures to sell their New Debentures, or the prices at
which the Holders of the New Debentures would be able to sell their New
Debentures. In addition, because the Exchange Offer is not conditioned upon any
minimum number of Old Debentures being tendered for exchange, the number of New
Debentures tendered could be quite small which could have an adverse effect on
the liquidity of the New Debentures. The Initial Purchaser has advised Holding
that it currently intends to make a market in the New Debentures. The Initial
Purchaser is not obligated to do so, however, and any market-making with
respect to the New Debentures may be discontinued at any time without notice.
Also, to the extent that Old Debentures are tendered and accepted in the
Exchange Offer, a holder's ability to sell untendered Old Debentures could be
adversely affected. Therefore, no assurance can be given as to the liquidity of
the trading market for the New Debentures. Holding does not intend to list the
New Debentures on a national securities exchange or to apply for quotation of
the New Debentures through the National Association of Securities Dealers
Automated Quotation System. However, it is expected that the New Debentures
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
DEBENTURES
Holding intends for the Exchange Offer to satisfy its registration
obligations under the Registration Rights Agreement. If the Exchange Offer is
consummated, Holding does not intend to file further registration statements
for the sale or other disposition of Old Debentures. Old Debentures that are
not exchanged for New Debentures will remain restricted securities within the
meaning of Rule 144 of the Securities Act. Consequently, following completion
of the Exchange Offer, Holders of Old Debentures 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 Debentures.
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USE OF PROCEEDS
Holding will not receive any cash proceeds from the exchange of the New
Debentures for the Old Debentures pursuant to the Exchange Offer. As
consideration for issuing the New Debentures offered hereby, Holding will
receive, in exchange, Old Debentures in like principal amount which will be
canceled and as such will not result in any increase in indebtedness of
Holding.
The net proceeds to Holding from the sale of the Debentures, after
deducting discounts and commissions and other estimated expenses of the
Offering, were approximately $24.7 million. Approximately $22.5 million of the
net proceeds from the Offering were used to fund the Equity Contribution which,
together with the net proceeds from the Note Offering, were used by the Company
(i) to repay on June 25, 1998 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 their 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 Debentures were sold by Holding on the Closing Date to the Initial
Purchaser, pursuant to the Purchase Agreement. The Initial Purchaser
subsequently resold the Old Debentures 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, Holding and the Initial Purchasers entered into the
Registration Rights Agreement on June 25, 1998. The Registration Rights
Agreement required Holding 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 Debentures would be offered in
exchange for the then outstanding Old Debentures tendered at the option of the
Holders thereof. The form and terms of the New Debentures are identical in all
material respects to the form and terms of the Old Debentures except (i) that
the New Debentures have been registered under the Securities Act, (ii) that the
New Debentures are not entitled to certain registration rights which are
applicable to the Old Debentures under the Registration Rights Agreement, and
(iii) that certain contingent interest rate provisions applicable to the Old
Debentures are generally not applicable to the New Debentures. In the event
that the applicable interpretations of the staff of the Commission do not
permit Holding to effect the Exchange Offer, Holding agreed to use its
reasonable best efforts to cause to become effective a shelf registration
statement with respect to the resale of the Old Debentures ("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 Holding under the Registration Rights
Agreement. The Holders of any Old Debentures not tendered in the Exchange Offer
will not be entitled to require Holding to file the Shelf Registration
Statement.
The Registration Rights Agreement provides that (i) Holding will file an
Exchange Offer Registration Statement with the Commission on or prior to 45
days after the Closing Date, (ii) Holding 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,
Holding 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
Debentures in exchange for all Debentures tendered prior thereto in the
Exchange Offer and (iv) if obligated to file the Shelf Registration Statement,
Holding 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)
Holding 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) Holding 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 Holding will pay liquidated damages
("Liquidated Damages") to each Holder of Debentures, 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
Debentures held by such Holder. The amount of the Liquidated Damages will
increase by an additional $.05 per week per $1,000 principal amount of
Debentures 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 Debentures. All accrued Liquidated
Damages will be paid by Holding on each Damages Payment Date to the Global
Debentures Holder by wire transfer of immediately available funds or by federal
funds check and to Holders of Certificated Debentures 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, Holding believes the New
Debentures issued pursuant to the Exchange Offer in exchange for Old Debentures
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 Debentures 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 Debentures. See "Shearman & 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 Debentures for its own account in exchange for Old
Debentures, where such Old Debentures 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 Debentures. 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
Debentures 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) Holding having exchanged New Debentures for all
outstanding Old Debentures (other than Old Debentures held by a Restricted
Holder) pursuant to such Exchange Offer and (ii) Holding having exchanged,
pursuant to such Exchange Offer, New Debentures for all Old Debentures that
have been validly tendered and not withdrawn on the Expiration Date. In such
event, Holders of Old Debentures 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, Holding will accept all Old
Debentures validly tendered prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange of New Debentures for Old Debentures will be made
with respect to all Old Debentures validly tendered and not withdrawn on or
prior to the Expiration Date, promptly following the Expiration Date. The New
Debentures issued pursuant to the Exchange Offer will be delivered promptly
following the Expiration Date. Holding will issue $1,000 principal amount of
New Debentures in exchange for $1,000 principal amount of outstanding Old
Debentures accepted in the Exchange Offer. Holders may tender some or all of
their Old Debentures 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, the Accreted Value of the Old
Debentures is $ .
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered Holders of Old Debentures as of , 1998 (the "Record Date").
Holding shall be deemed to have accepted validly tendered Old Debentures
when, as and if Holding has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
of Old Debentures for the purpose of receiving New Debentures from Holding and
delivering New Debentures to such Holders.
If any tendered Old Debentures 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 Debentures 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 Holding.
21
<PAGE>
Holding 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 Debentures pursuant to the Exchange Offer. See "--Fees and
Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean , 1998, unless Holding, 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, Holding will notify the Exchange
Agent of any extension by oral or written notice and will mail to the record
Holders of Old Debentures 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.
Holding reserves the right (i) to delay acceptance of Old Debentures, to
extend the Exchange Offer or to terminate the Exchange Offer and to refuse to
accept Old Debentures 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 Debentures. 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 Holding to
constitute a material change, Holding will promptly disclose such amendment in
a manner reasonably calculated to inform the Holders of the Old Debentures of
such amendment, and if appropriate, Holding will file a post-effective
amendment to the Registration Statement of which this Prospectus forms part.
Without limiting the manner in which Holding may choose to make public
announcements of any delay in acceptance, extension, termination or amendment
of the Exchange Offer, Holding 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.
ACCRETION OF NEW DEBENTURES
The Debentures will accrete at a rate of 13 1/2%, compounded semi-annually
to an aggregate principal amount of $50.0 million at July 1, 2003.
INTEREST ON NEW DEBENTURES
The Debentures will accrete interest at a rate of 13 1/2% per annum,
payable semi-annually in cash and arrears on January 1 and July 1 of each year,
commencing on January 1, 2004.
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 Debentures
(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 Debentures 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.
22
<PAGE>
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book-entry delivery of the Old Debentures by
causing DTC to transfer such Old Debentures into the Exchange Agent's account
in accordance with DTC's procedure for such transfer. Although delivery of Old
Debentures 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 Debentures will constitute an agreement
between such Holder and Holding 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 DEBENTURES 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 DEBENTURES
SHOULD BE SENT TO HOLDING.
Only a Holder of Old Debentures may tender such Old Debentures in the
Exchange Offer. The term "Holder" with respect to the Exchange Offer means any
person in whose name Old Debentures are registered on the books of Holding or
any other person who has obtained a properly completed bond power from the
registered holder or any person whose Old Debentures are held of record by DTC
who desires to deliver such Old Debentures at DTC.
Any beneficial Holder whose Old Debentures are registered in the name of
his broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender his Old Debentures 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 Debentures, either make appropriate arrangements to register
ownership of the Old Debentures 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 Debentures listed therein, such Old Debentures
must be endorsed or accompanied by appropriate bond powers which authorize such
person to tender the Old Debentures on behalf of the registered holder, in
either case signed as the name of the registered Holder or Holders appears on
the Old Debentures.
If the Letter of Transmittal or any Old Debentures 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
Holding, evidence satisfactory to Holding 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 Debentures will be
determined by Holding in its sole discretion, which determination will be final
and binding. Holding reserves the absolute right to reject any and all Old
Debentures not validly tendered or any Old Debentures Holding's acceptance of
which would, in the opinion of counsel for Holding, be unlawful. Holding also
reserves the absolute right to waive any irregularities or conditions of tender
as to particular Old Debentures. Holding'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
23
<PAGE>
of Old Debentures must be cured within such time as Holding shall determine.
Neither Holding, the Exchange Agent nor any other person shall be under any
duty to give notification of defects or irregularities with respect to tenders
of Old Debentures nor shall any of them incur any liability for failure to give
such notification. Tenders of Old Debentures will not be deemed to have been
made until such irregularities have been cured or waived. Any Old Debentures
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 Debentures
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
By tendering, each Holder will represent to Holding that, among other
things (i) the New Debentures 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
Debentures, (iii) such Holder is not an "affiliate," as defined under Rule 405
of the Securities Act, of Holding and (iv) such Holder is not a broker-dealer
who acquired Old Debentures directly from Holding 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 Debentures and (i) whose Old
Debentures are not immediately available or (ii) who cannot deliver their Old
Debentures, 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
Debentures, the certificate number or numbers of such Old Debentures and the
principal amount of Old Debentures, the certificate number or numbers of such
Old Debentures and the principal amount of Old Debentures 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 Debentures 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 Debentures in proper form for transfer (or confirmation of a book-entry
transfer into the Exchange Agent's account at DTC of Old Debentures 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 Debentures 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 Debentures 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 Holding. Any
such notice of withdrawal must (i) specify the name of the person having
deposited the Old Debentures to be withdrawn (the "Depositor"), (ii) identify
the Old Debentures to be withdrawn (including the certificate number or numbers
and principal amount of such Old Debentures), (iii) be signed by the Depositor
in the same manner as the original signature on the Letter of Transmittal by
which such Old Debentures were tendered (including required signature
guarantees) or be accompanied by documents of
24
<PAGE>
transfer sufficient to permit the trustee with respect to the Old Debentures to
register the transfer of such Old Debentures into the name of the Depositor
withdrawing the tender and (iv) specify the name in which any such Old
Debentures 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 Holding, whose determination
shall be final and binding on all parties. Any Old Debentures so withdrawn will
be deemed not to have been validly tendered for purposes of the Exchange Offer
and no New Debentures will be issued with respect thereto unless the Old
Debentures so withdrawn are validly retendered. Any Old Debentures 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 Debentures 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, Holding will not be
obligated to consummate the Exchange Offer if the New Debentures 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 Holding with an opinion of
counsel reasonably satisfactory to Holding to the effect that the New
Debentures 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. Holding may waive this condition.
If the condition described above exists, Holding will be entitled to
refuse to accept any Old Debentures and, in the case of such refusal, will
return tendered Old Debentures to exchanging holders of Old Debentures. See
"--Terms of the Exchange Offer."
EXCHANGE AGENT
State Street Bank and 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 in Boston:
State Street Bank and Trust Company
Two International Place
Fourth Floor, Corporate Trust Department
Boston, Massachusetts 02110
Overnight Courier:
State Street Bank & Trust Company
Two International Place
Boston, Massachusetts 02110
Attention: Corporate Trust Department
Kellie Mullen
By Hand in New York (as Drop Agent):
State Street Bank and Trust Company, N.A.
61 Broadway, 15th Floor
Corporate Trust Window
New York, New York 10006
25
<PAGE>
By Registered or Certified Mail:
State Street Bank and Trust Company
P.O. Box 778
Boston, Massachusetts 02102
Attention: Corporate Trust Department
Kellie Mullen
Telephone: (617) 664-5587
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by Holding. 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 Holding and its affiliates in person, by
facsimile or telephone.
Holding will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. Holding, 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 Holding. Holding 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 Debentures
pursuant to the Exchange Offer. If, however, certificates representing New
Debentures or Old Debentures 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 Debentures tendered,
or if tendered Old Debentures 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 Debentures 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 Holding upon
the consummation of the Exchange Offer. The expenses of the Exchange Offer will
be amortized by Holding over the term of the New Debentures under generally
accepted accounting principles.
26
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated cash and cash equivalents
and capitalization of Holding at September 30, 1998 on a historical basis
(which includes the effects of the Acquisition, the Refinancing and the 3M
Acquisition each of which 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 Holding'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:
Debentures ................................ 26,898
Notes ..................................... 115,000
Capital lease obligation .................. 1,951
---------
Total debt .............................. 143,849
---------
Stockholder's equity:
Common stock .............................. --
Additional paid-in capital ................ 78,364
Accumulated deficit ....................... (7,596)
Cumulative translation adjustment ......... 55
Carryover basis adjustment ................ (15,730)
---------
Total stockholder's equity .............. 55,093
---------
Total capitalization ....................... $ 198,942
=========
</TABLE>
27
<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 Holding. 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 Holding. 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
Holding, 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 THROUGH 1993 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) -- 2.2x 1.6x 2.1x
<CAPTION>
PREDECESSOR HOLDING
------------------------------ -----------------------------
THREE MONTHS JULY 1, 1997 DECEMBER 16, THREE MONTHS
ENDED THROUGH 1997 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 11,327 4,096
Fees to
stockholders .......... 118 215 125 63
Other, net ............. 28 11 (47) --
Income tax expense
(benefit) ............. 1,287 1,441 (2,052) 555
---------- -------- -------- --------
Net income (loss) ...... $ 1,796 $ 1,793 $ (5,493) $ (240)
========== ======== ======== ========
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and cash
equivalents ........... $ 1,514 $ 4,481 $ 3,842 $ 1,341
Working capital
(deficit) ............. (35,853) (4,959) 15,046 14,444
Total assets ........... 83,518 77,399 214,547 215,626
Total debt and
redeemable
preferred stock ....... 59,142 55,408 144,448 143,849
Total stockholder's
equity ................ 12,860 12,716 57,084 55,093
OTHER DATA:
Capital
expenditures .......... 448 807 514 678
Ratio of earnings to
fixed charges (1)...... 3.1x 2.2x -- 1.1x
</TABLE>
- ----------
(1) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" represents 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 $7,545 for the periods from November 4,
1993 through June 30, 1994 and from December 16, 1997 through June 30,
1998, respectively.
(2) Due to the change in the capital structure of the Original Predecessor as
a result of its acquisition by the Predecessor, the ratio of earnings to
fixed charges for the period prior to such acquisition is not comparable
to or meaningful in the context of future periods.
28
<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 capital stock of the Company accounts for all of Holding's assets.
Holding conducts all of its business through the Company. 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 new product launches. However, industry consolidation
has also negatively impacted the sampling market
29
<PAGE>
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 sampling industry, the composition of the
customer base of the Company and the relative stability of the Company's and
3M's customers over the last 20 years. 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 discussion of the
results of operations for Fiscal 1998 compared to Fiscal 1997, 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.
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
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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 $2.6 million, or 173.3% to $4.1 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 17.1% 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 $0.7 million or 53.8% to $0.6 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 43.5%
in the three months ended September 30, 1998 and 38.0% in the three months
ended September 30, 1997. The increase in the effective tax rate in the three
months ended September 30, 1998 was due to non-deductible interest expense.
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 domestic sales of products for fragrance
sampling. These decreases were partially offset by increased
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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 $7.8 million,
or 125.8% to $14.0 million as compared to $6.2 million for Fiscal 1997.
Interest expense as a percentage of net sales increased to 19.6% 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
1996. 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. The increase in
selling, general and administrative expenses was primarily attributable to an
increase in
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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 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
Holding has substantial indebtedness and significant debt service
obligations. As of September 30, 1998, Holding had consolidated indebtedness in
an aggregate amount of $143.8 million. For certain information regarding
Holding's outstanding indebtedness, see "Description of Certain Indebtedness"
and "Description of New Debentures." The Indenture under which the Old
Debentures were and the New Debentures will be issued and the Credit Agreement
referred to below permit Holding 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 Holding 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 Holding or
the Company, as the case may be; (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
Debentures--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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Holding is a holding company whose only asset is all of the outstanding
capital stock of the Company. Holding conducts all of its business through the
Company. Holding's cash flow, and consequently its ability to service debt,
including its obligations under the Indenture, is dependent upon the cash flows
of its subsidiaries and the payment of funds by such subsidiaries to Holding in
the form of loans, dividends or otherwise. Holding's subsidiaries have no
obligations, contingent or otherwise, to pay any amounts due pursuant to the
New Debentures or to make any funds available therefor. In addition, the
Company's Credit Agreement and the Notes Indenture imposes, and agreements
entered into in the future may impose, significant restrictions on the payment
of dividends and the making of loans by the Company and its subsidiaries to
Holding. Accordingly, repayment of the New Debentures may depend upon the
ability of Holding to effect an equity offering or to refinance the Debentures.
Holding's principal liquidity requirements are for debt service
requirements under the Debentures. 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 $1.5
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 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.
In August, 1998, Acquisition Corp. repurchased 80,000 shares of preferred
stock of Acquisition Corp. for $2.0 million in cash pursuant to the exercise of
Mr. Barnett's Put Option (as defined herein) on July 30, 1998 with the proceeds
of a dividend from Holding. See "Certain Relationships and Related
Transactions--Employment Arrangements."
At September 30, 1998, the total indebtedness of Holding on a consolidated
basis was approximately $143.8 million, of which approximately $116.9 million
is a direct obligation of Holding's subsidiaries. Holding's subsidiaries also
have $16.7 million in additional outstanding liabilities (including trade
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payables, accrued liabilities and deferred taxes). Payment of the Debentures is
not guaranteed by Holding's subsidiaries. Because Holding is a holding company
with no substantive operations, it is dependent upon the cash flows of its
subsidiaries and the payment of funds by its subsidiaries to Holdings in the
form of loans, dividends or otherwise to pay its obligations. See "Risk
Factors--Limitation on the Payment of Funds to Holding by its Subsidiaries."
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. Holding believes that, in the absence of future acquisitions, cash
flows from existing operations and available borrowings will be sufficient to
fund budgeted capital expenditures, working capital requirements and interest
and principal payments on its indebtedness, including the Debentures 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
Activitites" 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
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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 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.
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o ScentStrip Plus: Adds a powdery texture to the microencapsulated
fragrance of ScentStrip.
o Resealable ScentStrip: Adds an innovative closure to ScentStrip that
opens and reseals up to 25 times.
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.
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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.
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."
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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 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
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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
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 consumer 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
46
<PAGE>
Prelude, Rotocon, Drescher Ascent, and Appliquesence. The Company also competes
with numerous manufacturers 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."
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.
47
<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; Conflicts of Interest" 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, Holding consummated the Debenture Offering. The Old
Debentures 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, the Company consummated the Note Offering. The Notes were
sold pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act. The consummation of the
Debenture Offering occurred concurrently with and was conditioned upon, the
consummation of the Note 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.
48
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF HOLDING AND THE COMPANY
The following table sets forth certain information with respect to the
directors and executive officers of Holding and 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.
49
<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) $3,670
President, Chief Executive Officer 1997 210,000 275,000 -- 5,700
and Director 1996 210,000 225,000 -- 6,856
Hugh F. Brown (3) ................. 1998 145,000 100,000 -- 3,384
Executive Vice President 1997 145,000 100,000 -- 5,700
Manufacturing 1996 145,000 100,000 -- 5,636
Kenneth A. Budde .................. 1998 120,000 75,000 -- --
Chief Financial Officer 1997 100,000 50,000 -- --
1996 100,000 20,000 -- --
</TABLE>
- ----------
(1) Represents amounts contributed on behalf of the named executive to the
Company's 401(k) retirement savings plan.
(2) Option to purchase shares of Acquisition Corp. Common Stock. See
"--Equity-Based Compensation."
(3) Mr. Brown resigned from the Company in July 1998. Mr. Brown is expected
to become a consultant to the Company.
The following table contains information concerning the share options
grants made to each of the named executive officers of the Company during the
fiscal year ended June 30, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
SHARE PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(2)
-------------------------------------------------------- -----------------------
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS IN FISCAL BASE PRICE EXPIRATION
GRANTED(1) YEAR ($/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.
50
<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 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
51
<PAGE>
defined therein) of Acquisition Corp., each option may, at the discretion of
the Committee, be terminated upon notice to the holder thereof and each such
holder will receive, in respect of each share of Acquisition Corp. Common Stock
for which such option is then exercisable, an amount equal to the excess of the
then fair market value of such share of Acquisition Corp. Common Stock over the
per share exercise price.
On June 17, 1998, Acquisition Corp. granted to Mr. Barnett options to
purchase 32,500 shares of Acquisition Corp. Common Stock under the Option Plan,
pursuant to option letter agreements between Acquisition Corp. and Mr. Barnett
(the "Option Agreements"). Under the terms of the Option Agreements, 16,250 of
the options granted to Mr. Barnett are designated as "time-vesting" options
(the "Time-Vesting Options") and 16,250 of the options granted to Mr. Barnett
are designated as "standard" options (the "Standard Options"). All of the
Time-Vesting and Standard Options have an exercise price of $1.00 per share.
The Time-Vesting Options become exercisable as to one-third of the
Acquisition Corp. Common Shares subject thereto on June 30, 1999, and are
thereafter exercisable as to an additional one-third of such Acquisition Corp.
Common Shares on June 30, 2000 and 2001, respectively. To the extent not
previously exercised or exercisable, upon a Change In Control (as defined in
the Option Agreements), the Time-Vesting Options shall immediately become
exercisable to purchase 100% of the Acquisition Corp. Common Shares subject
thereto.
The Standard Options become exercisable as to various percentages of the
Acquisition Corp. Common Shares subject thereto beginning June 30, 1999 and on
June 30, 2000 and June 30, 2001, based on the achievement of certain
established financial performance targets for the years then ended; provided
that the Standard Options become exercisable as to 100% of the Shares subject
thereto on June 16, 2006. Upon a Change In Control, 100% of the Standard
Options eligible to become vested on the date of such Change In Control shall
automatically vest and become exercisable if DLJMBII shall have realized
certain returns on their equity investment in Acquisition Corp.
While no final determinations have been made, it is expected that Mr.
Miller and certain other members of management will be granted options under
the Option Plan to purchase shares of Acquisition Corp. Common Stock. It is
expected that a portion of these options will be Time-Vesting Options and the
remainder will be Standard Options.
52
<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.
53
<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 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 are believed to be 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 terms of the Bridge Notes and the fees paid in
connection therewith are believed to be 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.
54
<PAGE>
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.
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, 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."
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<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 Debentures. 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 covenants 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 June 30, 1988, 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 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.
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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 Note Offering. See "Use of
Proceeds."
THE NOTES
The Notes generated gross proceeds to the Company of approximately $115.0
million (before deducting discounts and commissions). The Notes were issued
under an Indenture dated as of June 25, 1998 (the "Note Indenture") between the
Company and IBJ Schroder Bank & Trust Company as trustee (the "Note Trustee"),
and are senior unsecured general obligations of the Company and are
structurally senior to the Debentures. The Notes bear interest at a rate of 10
1/2% per annum and are payable in arrears on January 1 and July 1 of each year,
commencing January 1, 1999.
In the future, the Notes may be unconditionally guaranteed on a senior
basis by the Subsidiary Guarantors, which will consist of Restricted
Subsidiaries of the Company that incur Indebtedness or Guarantee or pledge
assets to secure the payment of any other Indebtedness of the Company of any
Restricted Subsidiary, subject to certain conditions (as defined in the Note
Indenture). The Subsidiary Guarantees may be released under certain
circumstances.
The 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 below, plus accrued and unpaid interest and Liquidated Damages, if
any, thereon to the date of redemption if redeemed during the 12-month period
commencing on July 1 of the years set forth below.
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
------------------------------------------------ -----------------
<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 use the net proceeds of one or more Public Equity Offerings (as
defined in the Note Indenture) to redeem up to 35% of the Notes issued under
the Note Indenture at a redemption price equal to 110.5% of the aggregate
principal amount thereof plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the redemption date; provided that at least 65% of
the aggregate principal amount of the Notes originally issued remains
outstanding immediately after each such redemption.
In the event of a Change of Control (as defined in the Note Indenture),
each holder of Notes has the right to require the repurchase of such holder's
Notes at a purchase price equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the purchase date.
The Note Indenture contains covenants that, among other things, limit the
ability of the Company to enter into certain mergers or consolidations or incur
certain liens and of the Company and its subsidiaries to incur additional
indebtedness, pay dividends, redeem capital stock or make certain other
restricted payments and engage in certain transactions with affiliates. The
restrictions under the Note Indenture or the ability of the Company to pay
dividends and make other restricted payments to Holding and incur additional
indebtedness are similar to the restrictions under the Indenture on the ability
of Holding to pay dividends and make other restricted payments and incur
additional indebtedness, except that under the Note Indenture, the Fixed Charge
Coverage Ratio applicable to the ability of the Company to incur additional
indebtedness must be at least 2.0 to 1. See "Description of New
Debentures--Covenants."
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Under certain circumstances, the Company will be required to make an offer to
purchase the Notes at a price equal to 100% of the principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages, if any, to the date of
purchase with the proceeds of certain asset sales. The Note Indenture contains
certain events of default customary for securities of this nature, which will
include the failure to pay interest and principal, the failure to comply with
certain covenants in the Notes or the Note Indenture, an acceleration under
certain indebtedness, the imposition of certain final judgments or warrants of
attachment and certain events occurring under bankruptcy laws. See "Risk
Factors--Limitation on the Payment of Funds to Holding by its Subsidiaries;
Holding Company Structure; Effective Subordination of Debentures to
Indebtedness of Subsidiaries."
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<PAGE>
DESCRIPTION OF NEW DEBENTURES
GENERAL
The Old Debentures were, and the New Debentures will be, issued pursuant
to an indenture (the "Indenture") between Holding and the Trustee dated as of
June 25, 1998. See "Notice to Investors." The form and terms of the New
Debentures are identical in all material respects to the form and terms of the
Old Debentures except (i) the New Debentures will have been registered under
the Securities Act, and (ii) Holders of the New Debentures will not be entitled
to certain rights of Holders of the Old Debentures under the Registration
Rights Agreement. The terms of the Debentures include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Debentures
are subject to all such terms, and Holders of Debentures 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 Debentures will be general unsecured obligations of Holding, will
rank pari passu in right of payment with all existing and future senior
unsecured Indebtedness of Holding and will rank senior in right of payment to
all existing and future subordinated Indebtedness of Holding. The Debentures,
however, will be (i) effectively subordinated to all secured obligations of
Holding, to the extent of the assets securing such obligations and (ii)
structurally subordinated to all obligations of Holding's subsidiaries. As of
September 30, 1998, Holding had no outstanding secured obligations and
Holding's subsidiaries had $116.9 million of outstanding indebtedness and $16.7
million of other outstanding liabilities (including trade payables, accrued
liabilities and deferred taxes), all of which effectively ranks senior to the
Debentures. The Indenture will permit the incurrence of additional Indebtedness
in the future.
Holding is a holding Company whose sole subsidiary is the Company.
Currently, each of the Company and its subsidiaries, Arcade Europe S.A.R.L and
Scent Seal Inc., are Restricted Subsidiaries. However, under certain
circumstances, Holding 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 Debentures are limited in aggregate principal amount to $50.0 million
at maturity and will mature on July 1, 2009. The Debentures will accrete at a
rate of 13 1/2% per annum, compounded semi-annually to an aggregate principal
amount of $50.0 million on July 1, 2003. Thereafter, interest on the Debentures
will accrue at the rate of 13 1/2% per annum and will be payable semi-annually
in arrears on January 1 and July 1 of each year, commencing on January 1, 2004,
to Holders of record on the immediately preceding December 15 and June 15. No
cash interest will be payable on the Debentures prior to July 1, 2003. Interest
on the Debentures will accrue from the most recent date to which interest has
been paid or, if no interest has been paid, from July 1, 2003. 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
Debentures will be payable at the office or agency of Holding maintained for
such purpose within the City and State of New York or, at the option of
Holding, payment of interest and Liquidated Damages, if any, may be made by
check mailed to the Holders of the Debentures at their respective addresses set
forth in the register of Holders of Debentures; provided that all payments of
principal, premium and Liquidated Damages, if any, and interest with respect to
Debentures represented by one or more permanent global Debentures 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 Holding, Holding's office or agency in New York will be the office of the
Trustee maintained for such purpose. The New Debentures will be issued in
denominations of $1,000 and integral multiples thereof.
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OPTIONAL REDEMPTION
Except as provided below, the Debentures will not be redeemable at
Holding's option prior to July 1, 2003. Thereafter, the Debentures will be
subject to redemption at any time at the option of Holding, 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 ........................................... 106.750%
2004 ........................................... 103.375%
2005 and thereafter ............................ 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to July 1, 2001, Holding
may on one or more occasions redeem up to 35% of the aggregate principal amount
at maturity of Debentures originally issued at a redemption price equal to
113.5% of the Accreted Value (determined at the date of redemption) thereof,
plus Liquidated Damages thereon, if any, to the redemption date, with the net
cash proceeds of one or more Public Equity Offerings; provided that at least
65% of the original aggregate principal amount at maturity of Debentures
remains outstanding immediatley after the occurrence of such redemption;
provided, further that such redemption shall occur within 90 days of the date
of the closing of such Public Equity Offering.
SELECTION AND NOTICE
If less than all of the Debentures are to be redeemed at any time,
selection of Debentures for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Debentures are listed, or, if the Debentures are not so
listed, on a pro rata basis, by lot or by such method as the Trustee shall deem
fair and appropriate; provided that no Debentures 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
Debentures to be redeemed at its registered address. Notices of redemption may
not be conditional. If any Debenture is to be redeemed in part only, the notice
of redemption that relates to such Debenture shall state the portion of the
principal amount thereof to be redeemed. A new Debenture in principal amount
equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original Debenture. Debentures called
for redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on Debentures or portions of them
called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders,"
Holding is not required to make mandatory redemption or sinking fund payments
with respect to the Debentures.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Debentures will
have the right to require Holding to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Debentures pursuant to
the offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the Accreted Value thereof on the date of repurchase (if
such date of repurchase is prior to July 1, 2003) or 101% of the aggregate
principal amount thereof (if such date of repurchase is on or after July 1,
2003) plus, in each case, accrued and unpaid interest and Liquidated Damages
thereon, if any, to the date of repurchase (the "Change of Control Payment").
Within 60 days following any Change of Control, Holding will mail a notice to
each Holder describing the transaction or
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transactions that constitute the Change of Control and offering to repurchase
Debentures on the date specified in such notice, which date shall be no earlier
than 30 days and no later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by the
Indenture and described in such notice. Holding will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Debentures as a result of a
Change of Control. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the Indenture relating to such
Change of Control Offer, Holding will comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
described in the Indenture by virtue thereof.
On the Change of Control Payment Date, Holding will, to the extent lawful,
(1) accept for payment all Debentures or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Debentures or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Debentures so accepted together with an Officers' Certificate
stating the aggregate principal amount of Debentures or portions thereof being
purchased by Holding. The Paying Agent will promptly mail to each Holder of
Debentures so tendered the Change of Control Payment for such Debentures, and
the Trustee will promptly authenticate and mail (or cause to be transferred by
book entry) to each Holder a new Debenture equal in principal amount to any
unpurchased portion of the Debentures surrendered, if any; provided that each
such new Debenture will be in a principal amount of $1,000 or an integral
multiple thereof.
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 Debentures to require that
Holding repurchase or redeem the Debentures in the event of a takeover,
recapitalization or similar transaction.
Holding 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 Holding
and purchases all Debentures 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 Holding 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 Debentures to require
Holding to repurchase such Debentures as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of Holding and
its Subsidiaries taken as a whole to another Person or group may be uncertain.
Asset Sales
The Indenture provides that Holding will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) Holding (or
the Restricted Subsidiary, as the case may be) receives consideration at the
time of such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 75% of the consideration therefor
received by Holding or such Restricted Subsidiary is in the form of cash or
Cash Equivalents; provided that the amount of (x) any liabilities (as shown on
Holding's or such Restricted Subsidiary's most recent balance sheet) of Holding
or any Restricted Subsidiary (other than contingent liabilities and liabilities
that are by their terms subordinated to the Debentures or any guarantee
thereof) that are assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases Holding or such Restricted
Subsidiary from further liability and (y) any securities, notes or other
obligations received by Holding or any such Restricted Subsidiary from such
transferee that are converted by Holding or such Restricted Subsidiary into
cash or Cash Equivalents within 180 days (to the extent of
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the cash received), shall be deemed to be cash for purposes of this provision;
and provided further that the 75% limitation referred to in clause (ii) above
will not apply to any Asset Sale in which the cash or Cash Equivalents portion
of the consideration received therefrom, determined in accordance with the
foregoing proviso, is equal to or greater than what the after-tax proceeds
would have been had such Asset Sale complied with the aforementioned 75%
limitation.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
Holding or any such Restricted Subsidiary may apply such Net Proceeds, at its
option, (a) to repay or repurchase pari passu Indebtedness of Holding or any
Indebtedness of any Restricted Subsidiary or (b) to the acquisition of a
controlling interest in another business, the making of a capital expenditure
or the acquisition of other long-term assets, in each case, in a Permitted
Business. Pending the final application of any such Net Proceeds, Holding may
temporarily reduce the revolving Indebtedness under the Credit Agreement or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested
as provided in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $10.0 million, Holding will be required to make an offer to all Holders
of Debentures (an "Asset Sale Offer") to purchase the maximum principal amount
of Debentures that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the Accreted Value thereof on the
date of repurchase (if such date of repurchase is prior to July 1, 2003) or
100% of the principal amount thereof (if such date of repurchase is on or after
July 1, 2003) plus, in each case, accrued and unpaid interest and Liquidated
Damages thereon, if any, to the date of purchase, in accordance with the
procedures set forth in the Indenture. To the extent that the aggregate amount
of Debentures tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, Holding may use any remaining Excess Proceeds for general corporate
purposes. If the aggregate principal amount of Debentures surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Debentures to be purchased on a pro rata basis. Upon completion of such
offer to purchase, the amount of Excess Proceeds shall be reset at zero.
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, Holding 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.
COVENANTS
Restricted Payments
The Indenture provides that from and after the date of the Indenture
Holding 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 Holding's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment on
such Equity Interests in connection with any merger or consolidation involving
Holding) or to the direct or indirect holders of Holding's or any of its
Restricted Subsidiaries' Equity Interests in their capacity as such (other than
dividends or distributions payable in Equity Interests (other than Disqualified
Stock) of Holding); (ii) purchase, redeem or otherwise acquire or retire for
value (including without limitation, in connection with any merger or
consolidation involving Holding) any Equity Interests of Holding or any direct
or indirect parent of Holding (other than any such Equity Interests owned by
Holding or any Restricted Subsidiary of Holding); (iii) make any payment on or
with respect to, or purchase, redeem, defease or otherwise acquire or retire
for value any Indebtedness that is subordinated to the Debentures, except
scheduled payments of interest or principal at Stated Maturity of such
Indebtedness; or (iv) make any Restricted Investment (all such payments and
other actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless, at the time of and after giving
effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
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<PAGE>
(b) Holding would, after giving pro forma effect thereto as if such
Restricted Payment had been made at the beginning of the applicable
four-quarter period, have been permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of 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 Holding and its Restricted Subsidiaries after
the date of the Indenture (excluding Restricted Payments permitted by clauses
(i), (ii), (iii), (iv), (viii) (other than those permitted by clause (f) of the
definition of "Permitted Investments"), (ix), (xii) and (xiii) of the next
succeeding paragraph), is less than the sum of (i) 50% of the Consolidated Net
Income of Holding 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 Holding's most recently ended fiscal quarter for which
internal financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a deficit, less
100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds
received by Holding as a contribution to Holding's capital or received by
Holding from the issue or sale since the date of the Indenture of Equity
Interests of Holding (other than Disqualified Stock) or of Disqualified Stock
or debt securities of Holding that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or debt
securities) sold to a Restricted Subsidiary of Holding and other than
Disqualified Stock or convertible debt securities that have been converted into
Disqualified Stock), plus (iii) to the extent that any Restricted Investment
that was made after the date of 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 Holding 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 Holding in
exchange for, or out of the net cash proceeds of the substantially concurrent
sale or issuance (other than to a Restricted Subsidiary of Holding) of, other
Equity Interests of Holding (other than Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be excluded from
clause (c)(ii) of the preceding paragraph; (iii) the defeasance, redemption,
repurchase or other acquisition of subordinated Indebtedness with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the
payment of any dividend by a Restricted Subsidiary of Holding to the holders of
its Equity Interests on a pro rata basis; (v) the declaration or payment of
dividends to Acquisition Corp. for expenses incurred by Acquisition Corp. in
its capacity as a holding company or for services rendered on behalf of
Holding, including, without limitation, (a) customary salary, bonus and other
benefits payable to officers and employees of Acquisition Corp., (b) fees and
expenses paid to members of the Board of Directors of Acquisition Corp., (c)
general corporate overhead expenses of Acquisition Corp., (d) management,
consulting or advisory fees paid to Acquisition Corp. not to exceed $4.0
million in any fiscal year, and (e) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of Acquisition
Corp. held by any member or former member of Acquisition Corp.'s or Holding'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 Holding from any reissuance of Equity
Interests by Acquisition Corp. to members of management of Holding and its
Restricted Subsidiaries; (vi) Investments in any Person (other than Holding or
a Restricted Subsidiary)
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engaged in a Permitted Business in an amount not to exceed $5.0 million; (vii)
other Investments in Unrestricted Subsidiaries having an aggregate fair market
value, taken together with all other Investments made pursuant to this clause
(vii) that are at that time outstanding, not to exceed $2.0 million; (viii)
Permitted Investments; (ix) the declaration or payment of dividends or other
payments to Acquisition Corp. pursuant to any tax sharing agreement or other
arrangement among Acquisition Corp. and other members of the affiliated
corporations of which Acquisition Corp. is the common parent; (x) other
Restricted Payments in an aggregate amount not to exceed $10.0 million; (xi) so
long as no Default or Event of Default has occurred and is continuing, the
declaration and payment of dividends on Disqualified Stock issued or after the
date of 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. to satisfy any required purchase price adjustment payment
arising out of the Acquisition; and (xiii) the declaration or payment of
dividends or other payments to Acquisition Corp. in an amount not to exceed
$2.0 million to satisfy redemption obligations in respect of Equity Interests
of Acquisition Corp. that are held by management of Acquisition Corp., Holding
or the Company; provided that such amount shall not be applied against expenses
incurred pursuant to clasue (v)(e) above.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by Holding
and its Restricted Subsidiaries (except to the extent repaid in cash) in the
Subsidiary so designated will be deemed to be Restricted Payments at the time
of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount equal to the
fair market value of such Investments at the time of such designation (as
determined in good faith by the Board of Directors). Such designation will only
be permitted if such Restricted Payment would be permitted at such time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by Holding or such Subsidiary,
as the case may be, pursuant to the Restricted Payment. The fair market value
of any non-cash Restricted Payment shall be determined in good faith by the
Board of Directors whose resolution with respect thereto shall be delivered to
the Trustee; such determination will be based upon an opinion or appraisal
issued by an accounting, appraisal or investment banking firm of national
standing if such fair market value exceeds $10.0 million. Not later than the
date of making any Restricted Payment, Holding shall deliver to the Trustee an
Officers' Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by 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 Holding 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 Holding will not issue any Disqualified Stock and will
not permit any of its Subsidiaries to issue any shares of preferred stock;
provided, however, that Holding may incur Indebtedness (including Acquired
Debt) or issue shares of Disqualified Stock or preferred stock and Holding's
Restricted Subsidiaries may incur Indebtedness (including Acquired Debt) and
issue Disqualified Stock or preferred stock if the Fixed Charge Coverage Ratio
for Holding's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such Disqualified Stock or preferred
stock is issued would have been at least 1.5 to 1, determined on a pro forma
basis (including a pro forma application of the net proceeds therefrom), as if
the additional Indebtedness had been incurred, or the Disqualified Stock or
preferred stock had been issued, as the case may be, at the beginning of such
four-quarter period.
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The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company of Indebtedness and letters of credit
pursuant to the Credit Agreement; provided that the aggregate principal amount
of all such Indebtedness (with letters of credit being deemed to have a
principal amount equal to the maximum potential liability of the Company
thereunder) then classified as having been incurred in reliance on this clause
(i) that remains outstanding under the Credit Agreement after giving effect to
such incurrence does not exceed the sum of $20.0 million.
(ii) the incurrence by Holding and its Restricted Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by Holding of Indebtedness represented by the
Debentures and the incurrence by the Company of Indebtedness represented by the
Notes;
(iv) the incurrence by Holding or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings or
purchase money obligations, in each case incurred for the purpose of financing
all or any part of the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of Holding or such Restricted
Subsidiary (whether through the direct purchase of assets or the Capital Stock
of any Person owning such Assets), in an aggregate principal amount or accreted
value, as applicable, not to exceed $10.0 million;
(v) the incurrence by Holding or any of its Restricted Subsidiaries of
Indebtedness in connection with the acquisition of assets or a new Restricted
Subsidiary; provided that such Indebtedness was incurred by the prior owner of
such assets or such Restricted Subsidiary prior to such acquisition by Holding
or one of its Subsidiaries and was not incurred in connection with, or in
contemplation of, such acquisition by Holding or one of its Subsidiaries;
provided further that the principal amount (or accreted value, as applicable)
of such Indebtedness, together with any other outstanding Indebtedness incurred
pursuant to this clause (v), does not exceed $5.0 million;
(vi) the incurrence by Holding or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness that was permitted
by the Indenture to be incurred;
(vii) the incurrence by Holding or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among Holding and any of its Restricted
Subsidiaries; provided, however, that (i) if Holding is the obligor on such
Indebtedness, such Indebtedness is expressly subordinated to the prior payment
in full in cash of all Obligations with respect to the Debentures and (ii)(A)
any subsequent issuance or transfer of Equity Interests that results in any
such Indebtedness being held by a Person other than Holding or a Restricted
Subsidiary and (B) any sale or other transfer of any such Indebtedness to a
Person that is not either Holding or a Restricted Subsidiary shall be deemed,
in each case, to constitute an incurrence of such Indebtedness by Holding or
such Restricted Subsidiary, as the case may be;
(viii) the incurrence by Holding or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging (i)
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of this Indenture to be outstanding or (ii) exchange
rate risk with respect to any agreement or Indebtedness of such Person payable
in a currency other than U.S. dollars;
(ix) the Guarantee by Holding or any of its Restricted Subsidiaries of
Indebtedness of Holding or a Restricted Subsidiary of Holding that was
permitted to be incurred by another provision of this covenant;
(x) the incurrence by Holding's Unrestricted Subsidiaries of Non-Recourse
Debt; provided, however, that if any such Indebtedness ceases to be
Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to
constitute an incurrence of Indebtedness by a Restricted Subsidiary of Holding;
(xi) Indebtedness incurred by Holding or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters of
credit issued in the ordinary course of business, including without limitation
to letters of credit in respect to workers' compensation claims or
self-insurance, or
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other Indebtedness with respect to reimbursement type obligations regarding
workers' compensation claims; provided, however, that upon the drawing of such
letters of credit or the incurrence of such Indebtedness, such obligations are
reimbursed within 30 days following such drawing or incurrence;
(xii) Indebtedness arising from agreements of Holding or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with the
disposition of any business, asset or Subsidiary, other than guarantees of
Indebtedness incurred by any Person acquiring all or any portion of such
business, assets or Subsidiary for the purpose of financing such acquisition;
provided that (x) such Indebtedness is not reflected on the balance sheet of
Holding or any Restricted Subsidiary (contingent obligations referred to in a
footnote or footnotes to financial statements and not otherwise reflected on
the balance sheet will not be deemed to be reflected on such balance sheet for
purposes of this clause (x)) and (y) the maximum assumable liability in respect
of such Indebtedness shall at no time exceed 50% of the gross proceeds
including non-cash proceeds (the fair market value of such non-cash proceeds
being measured at the time received and without giving effect to any such
subsequent changes in value) actually received by Holding and/or such
Restricted Subsidiary in connection with such disposition;
(xiii) obligations in respect of performance and surety bonds and
completion guarantees provided by Holding or any Restricted Subsidiary in the
ordinary course of business;
(xiv) guarantees incurred in the ordinary course of business in an
aggregate principal amount not to exceed $5.0 million at any time outstanding;
and
(xv) the incurrence by Holding or any of its Restricted Subsidiaries of
additional Indebtedness, including Attributable Debt incurred after the date of
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,
Holding 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, Holding may, at any time,
change the classification of an item of Indebtedness (or any portion thereof)
to any other clause or to the first paragraph hereof provided that Holding
would be permitted to incur such item of Indebtedness (or portion thereof)
pursuant to such other clause or the first paragraph hereof, as the case may
be, at such time of reclassification. Accrual of interest, accretion or
amortization of original issue discount and the accretion of accreted value
will not be deemed to be an incurrence of Indebtedness for purposes of this
covenant.
Liens
The Indenture provides that Holding 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 Holding 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 Holding or any of its Restricted Subsidiaries (1) on its
Capital Stock or (2) with respect to any other interest or participation in, or
measured by, its profits, or (b) pay any Indebtedness owed to Holding or any of
its Restricted Subsidiaries, (ii) make loans or advances to Holding or any of
its Restricted Subsidiaries or (iii) transfer any of its properties or assets
to Holding or any of its Restricted Subsidiaries, except for such encumbrances
or restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the date of the Indenture, (b) the Credit Agreement as in effect as
of the date
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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
Holding's Board of Directors) with respect to such dividend and other payment
restrictions than those contained in the Credit Agreement as in effect on the
date of the Indenture, (c) the Indenture and the Debentures and the Note
Indenture and the Notes, (d) any applicable law, rule, regulation or order, (e)
any instrument of a Person acquired by Holding or any of its Restricted
Subsidiaries as in effect at the time of such acquisition (except to the extent
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties
or assets of any Person, other than the Person, or the property or assets of
the Person, so acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of 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 Holding's
Board of Directors, taken as a whole, to the Holders of Debentures than those
contained in the agreements governing the Indebtedness being refinanced, (i)
contracts for the sale of assets, including without limitation customary
restrictions with respect to a Subsidiary pursuant to an agreement that has
been entered into for the sale or disposition of all or substantially all of
the Capital Stock or assets of such Subsidiary, (j) restrictions on cash or
other deposits or net worth imposed by customers under contracts entered into
in the ordinary course of business and (k) other Indebtedness or Disqualified
Stock of Restricted Subsidiaries permitted to be incurred subsequent to the
Issuance Date pursuant to the provisions of the covenant described under
"--Incurrence of Indebtedness and Issuance of Preferred Stock."
Merger, Consolidation, or Sale of Assets
The Indenture provides that Holding may not consolidate or merge with or
into (whether or not Holding is the surviving corporation), or sell, assign,
transfer, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another Person
unless (i) Holding is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than Holding) or to which
such sale, assignment, transfer, lease, conveyance or other disposition shall
have been made is a corporation organized or existing under the laws of the
United States, any state thereof or the District of Columbia; (ii) the entity
or Person formed by or surviving any such consolidation or merger (if other
than Holding) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of Holding under the Debentures and 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) Holding or the entity or Person formed by or surviving any such
consolidation or merger (if other than Holding), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (a) will, at the time of such transaction and after giving pro forma
effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of 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 Holding and its
subsidiaries immediately prior to the transaction. The foregoing clause (iv)
will not prohibit (a) a merger between Holding and a Wholly Owned Subsidiary of
Acquisition Corp. created for the purpose of holding the Capital Stock of
Holding, (b) a merger between Holding and a Wholly Owned Subsidiary or (c) a
merger between Holding and an Affiliate incorporated solely for the purpose of
reincorporating Holding in another state of the United States so long as, in
each case, the amount of Indebtedness of Holding and its Restricted
Subsidiaries is
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not increased thereby. The Indenture will also provide that Holding may not,
directly or indirectly, lease all or substantially all of its properties or
assets, in one or more related transactions, to any other Person. The
provisions of this covenant will not be applicable to a sale, assignment,
transfer, conveyance or other disposition of assets between or among Holding
and its Wholly Owned Restricted Subsidiaries.
Transactions with Affiliates
The Indenture provides that Holding 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
Holding or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by Holding or such Restricted Subsidiary
with an unrelated Person and (ii) Holding delivers to the Trustee (a) with
respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $1.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
either aggregate consideration in excess of $5.0 million or an aggregate
consideration in excess of $3.0 million where there are no disinterested
members of the Board of Directors, an opinion as to the fairness to the Holders
of such Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing; provided
that the following shall not be deemed Affiliate Transactions: (q) customary
directors' fees, indemnification or similar arrangements or any employment
agreement or other compensation plan or arrangement entered into by Holding or
any of its Restricted Subsidiaries in the ordinary course of business and
consistent with the past practice of Holding or such Restricted Subsidiary, (r)
transactions between or among Holding and/or its Restricted Subsidiaries, (s)
Permitted Investments and Restricted Payments that are permitted by 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 Holding 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 Holding and its
Restricted Subsidiaries than the contract or agreement as in effect on the
Issue Date, (v) transactions between Holding or its Restricted Subsidiaries on
the one hand, and Donaldson, Lufkin & Jenrette Securities Corporation or its
Affiliates ("DLJ") on the other hand, involving the provision of financial,
advisory, placement or underwriting services by DLJ; provided that fees payable
to DLJ do not exceed the usual and customary fees of DLJ for similar services,
(w) insurance arrangements among Acquisition Corp., Holding and its
Subsidiaries that are not less favorable to Holding or any of its Subsidiaries
than those that are in effect on the date hereof provided such arrangements are
conducted in the ordinary course of business consistent with past practices,
(x) payments under any tax sharing agreement or other arrangement among
Acquisition Corp., Holding and other members of the affiliated group of
corporations of which either is the common parent and (y) payments in
connection with the Refinancing (including the payment of fees and expenses
with respect thereto).
Sale and Leaseback Transactions
The Indenture provides that Holding will not, and will not permit any of
its Restricted Subsidiaries to, enter into any sale and leaseback transaction;
provided that Holding or any Restricted Subsidiary may enter into a sale and
leaseback transaction if (i) Holding or such Restricted Subsidiary could have
(a) incurred Indebtedness in an amount equal to the Attributable Debt relating
to such sale and leaseback transaction pursuant to 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
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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 Holding applies the proceeds of such
transaction in compliance with, the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales."
Business Activities
Holding 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 Holding 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 Debentures are outstanding,
Holding will furnish to the Trustee and Holders of Debentures (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 Holding were required to
file such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by Holding's certified independent
accountants and (ii) all current reports that would be required to be filed
with the Commission on Form 8-K if Holding were required to file such reports.
In addition, following the consummation of the exchange offer contemplated by
the Registration Rights Agreement, whether or not required by the rules and
regulations of the Commission, Holding 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
securities analysts and prospective investors upon request. In addition, for so
long as any of the Debentures remain outstanding, Holding has agreed to make
available to any prospective purchaser of the Debentures or Holder of the
Debentures in connection with the sale thereof, the information required by
Rule 144A(d)(4) under the Securities Act.
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 Debentures; (ii) default in payment
when due of the principal of or premium, if any, on the Debentures; (iii)
failure by Holding 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 Holding for 30 days after notice from
the Trustee or at least 25% in principal amount of the Debentures then
outstanding to comply with the provisions described under the captions
"--Restricted Payments" or "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; (v) failure by Holding for 60 days after notice from the
Trustee or holders of at least 25% in principal amount of the Debentures then
outstanding to comply with any of its other agreements in the Indenture or the
Debentures; (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 Holding or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by Holding or any of its
Restricted Subsidiaries) whether such Indebtedness or Guarantee now exists, or
is created after the date of the Indenture, which default (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 Holding or any of its Subsidiaries to
pay final judgments aggregating in excess of $5.0 million, which judgments are
not paid, discharged or stayed for a period of 60 days; and (viii) certain
events of bankruptcy or insolvency with respect to Holding 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 Debentures
may declare all the Debentures to be due and
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payable immediately. Notwithstanding the foregoing, in the case of an Event of
Default arising from certain events of bankruptcy or insolvency, with respect
to Holding or any of its Subsidiaries all outstanding Debentures will become
due and payable without further action or notice. Holders of the Debentures may
not enforce the Indenture or the Debentures except as provided in the
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Debentures may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
Debentures 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 Holding with the
intention of avoiding payment of the premium that the Company would have had to
pay if Holding then had elected to redeem the Debentures 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 Debentures. If an Event of Default occurs prior to
July 1, 2003 by reason of any willful action (or inaction) taken (or not taken)
by or on behalf of Holding with the intention of avoiding the prohibition on
redemption of the Debentures prior to 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 Debentures.
The Holders of a majority in aggregate principal amount of the Debentures
then outstanding by notice to the Trustee may on behalf of the Holders of all
of the Debentures 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 Debentures.
Holding is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and Holding is required upon becoming
aware of any Default or Event of Default to deliver to the Trustee a statement
specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of Holding, as
such, shall have any liability for any obligations of Holding under the
Debentures, the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Debentures by
accepting a Debenture waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Debentures. 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
Holding may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Debentures ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Debentures to
receive payments in respect of the principal of, premium and Liquidated
Damages, if any, and interest on such Debentures when such payments are due
from the trust referred to below, (ii) Holding's obligations with respect to
the Debentures concerning issuing temporary Debentures, registration of
Debentures, mutilated, destroyed, lost or stolen Debentures 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 Holding's obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. In addition, Holding may, at its option and at any
time, elect to have the obligations of Holding 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 Debentures. 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 Debentures.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
Holding must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Debentures, cash in U.S. dollars,
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non-callable Government Securities, or a combination thereof, in such amounts
as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium and Liquidated
Damages, if any, and interest on the outstanding Debentures on the stated
maturity or on the applicable redemption date, as the case may be, and Holding
must specify whether the Debentures are being defeased to maturity or to a
particular redemption date; (ii) in the case of Legal Defeasance, Holding shall
have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) Holding has received
from, or there has been published by, the Internal Revenue Service a ruling or
(B) since the date 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 Debentures will not recognize
income, gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, Holding
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 Debentures will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Covenant Defeasance had not occurred; (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
Holding or any of its Subsidiaries is a party or by which Holding or any of its
Subsidiaries is bound; (vi) Holding must have delivered to the Trustee an
opinion of counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of Section 547 of the United
States Bankruptcy Code or any analogous New York State law provision to any
other applicable federal or New York bankruptcy, insolvency, reorganization or
similar law affecting creditors' rights generally; (vii) Holding must deliver
to the Trustee an Officers' Certificate stating that the deposit was not made
by Holding with the intent of preferring the Holders of Debentures over the
other creditors of Holding with the intent of defeating, hindering, delaying or
defrauding creditors of Holding or others; and (viii) Holding 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 Debentures 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 Holding
may require a Holder to pay any taxes and fees required by law or permitted by
the Indenture. Holding is not required to transfer or exchange any Debenture
selected for redemption. Also, Holding is not required to transfer or exchange
any Debenture for a period of 15 days before a selection of Debentures to be
redeemed.
The registered Holder of a Debenture 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 Debentures may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the Debentures then
outstanding (including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for, Debentures), and any
existing default or compliance with any provision of the Indenture or the
Debentures may be waived with the consent of the Holders of a majority in
principal amount of the then outstanding Debentures (including consents
obtained in connection with a tender offer or exchange offer for Debentures).
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Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any Debentures held by a non-consenting Holder): (i)
reduce the principal amount of Debentures whose Holders must consent to an
amendment, supplement or waiver; (ii) reduce the principal of or change the
fixed maturity of any Debenture or alter the provisions with respect to the
redemption of the Debentures (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
Debenture; (iv) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest on the Debentures (except a rescission of
acceleration of the Debentures by the Holders of at least a majority in
aggregate principal amount of the Debentures and a waiver of the payment
default that resulted from such acceleration); (v) make any Debenture payable
in money other than that stated in the Debentures; (vi) make any change in the
provisions of the Indenture relating to waivers of (a) past Defaults or (b) the
rights of Holders of Debentures to receive payments of principal of or premium,
if any, or interest on the Debentures; (vii) waive a redemption payment with
respect to any Debenture (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
Debentures, Holding and the Trustee may amend or supplement the Indenture or
the Debentures to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Debentures in addition to or in place of certificated
Debentures, to provide for the assumption of Holding's obligations to Holders
of Debentures in the case of a merger or consolidation or the sale of all or
substantially all of the assets of Holding, to make any change that would
provide any additional rights or benefits to the Holders of Debentures 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 Debentures.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of Holding, 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
Debentures 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 Debentures, 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 Holding Corp.,
1815 East Main Street, Chattanooga, Tennessee 37404; Attention: Chief Financial
Officer.
FORM, DENOMINATION AND BOOK-ENTRY PROCEDURES
The Old Debentures were initially sold to qualified institutional buyers
in reliance on Rule 144A under the Securities Act ("Rule 144A Debentures"). Old
Debentures also were offered and sold in offshore transactions in reliance on
Regulation S ("Regulation S Debentures"). Rule 144A Debentures and Regulation S
Debentures were each initially represented by one or more Debentures in
registered, global form without interest coupons (the "Old Global Debentures").
The Old Global Debentures were
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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 Debentures 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 Debentures will be represented by one or more new debentures in
registered, global form without interest coupons (collectively, the "New Global
Debentures") and deposited with the Trustee as custodian and registered in the
name of a nominee of DTC. The Old Global Debentures, 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 Debentures 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
Debentures, but Holding may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
New Debentures issued to non-qualified institutional buyers in exchange
for Old Debentures held by such investors, if any, will be issued only in
certificated, fully registered, definitive form. The New Global Debenture will,
upon request, be exchangeable for other New Debentures 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 Debenture will also be exchangeable in certain other limited
circumstances. See "--Exchange of Book-Entry Notes for Certificated
Debentures." Holding, 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 Debenture for all purposes.
Depositary Procedures
DTC has advised Holding that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between 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 Holding that pursuant to procedures established by
it, (i) upon deposit of the New Global Debenture, DTC will credit the accounts
of Participants designated by the Participants with portions of the principal
amount of the Old Global Debentures and (ii) ownership of such interests in the
New Global Debenture 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 Debenture).
Investors in the New Global Debenture 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 Debenture, 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 Debenture 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 Debenture to pledge such interests
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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 Debentures, see "--Exchange of Book-Entry
Debentures for Certificated Debentures."
Except as described below, owners of interests in the New Global Debenture
will not have New Debentures registered in their names, will not receive
physical delivery of New Debentures 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 Debenture 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,
Holding and the Trustee will treat the persons in whose names the New
Debentures, including the New Global Debenture, are registered as the owners
thereof for the purpose of receiving such payments and for any and all other
purposes whatsoever. Consequently, neither Holding, the Trustee or any agent of
Holding 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 Debenture, 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 Debenture, 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 Holding that its current practice, upon receipt of any
payment in respect of securities such as the New Debentures (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 Debentures will be
governed by standing instructions and customary practices and will not be the
responsibility of DTC, the Trustee or Holding. Neither Holding nor the Trustee
will be liable for any delay by DTC or any of the Participants in identifying
the beneficial owners of the New Notes, and Holding 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 Debenture for all
purposes.
DTC has advised Holding that it will take any action permitted to be taken
by a holder of Debentures only at the direction of one or more Participants to
whose account with DTC interests in the Old Global Debentures or the New Global
Debenture are credited and only in respect of such portion of the aggregate
principal amount of the Debentures 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 Debentures for Certificated Debentures" occurs, DTC
reserves the right to exchange the New Global Debenture for New Debentures in
certificate form and to distribute such New Debentures to its Participants.
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures
to facilitate transfers of interests in the Old Global Debentures and the New
Global Debenture 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
Holding or the Trustee nor any agent of Holding 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 DEBENTURES FOR CERTIFICATED DEBENTURES
The New Global Debenture is exchangeable for definitive New Debentures in
registered certificated form if (i) DTC (x) notifies Holding that it is
unwilling or unable to continue as depository for the New Global Debenture and
Holding thereupon fails to appoint a successor depository or (y) has ceased to
be a clearing agency registered under the Exchange Act, (ii) Holding, at its
option, notifies the Trustee in
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writing that it elects to cause the issuance of the New Debentures 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 Debentures delivered in exchange for the New Global Debenture
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 Debentures, New Debentures in
definitive form will be issued upon the resale, pledge or other transfer of any
New Debentures 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 Holding believes to be reliable, but
Holding takes no responsibility for the accuracy thereof.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Debentures
represented by the Global Debenture (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
Debenture Holder. With respect to Certificated Debentures, Holding 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. Holding expects that secondary
trading in the Certificated Debentures 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.
"Accreted Value" means for each $1,000 of Debentures, as of any date of
determination prior to July 1, 2003, the sum of (i) the initial offering price
of each Debenture and (ii) that portion of the excess of the principal amount
of each Debenture over such initial offering price which shall have been
accreted thereon through such date, such amount to be so accreted on a daily
basis and compounded semi-annually on each January 1 and July 1 at the rate of
13 1/2% per annum from the date of issuance of the Debentures through the date
of determination.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"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 Holding 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
Holding or any of its
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Restricted Subsidiaries of Equity Interests of any of Holding's Restricted
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $3.0 million or (b) for net proceeds in excess of $3.0
million. Notwithstanding the foregoing the following items shall not be deemed
to be Asset Sales: (i) a disposition of assets by Holding to a Restricted
Subsidiary or by a Restricted Subsidiary to Holding or to another Restricted
Subsidiary, (ii) an issuance of Equity Interests by a Restricted Subsidiary to
Holding or to another Restricted Subsidiary, (iii) a Restricted Payment that is
permitted by 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.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of Holding and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act) other than the Principals or their Related Parties (as defined below),
(ii) the adoption of a plan relating to the liquidation or dissolution of
Holding, (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than the Principals and their Related
Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3
and Rule 13d-5 under the Exchange Act, directly or indirectly, of more than 50%
of the Voting Stock of 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 Holding 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
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Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net
Income, plus (iii) consolidated interest expense of such Person and its
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance costs
and original issue discount, non-cash interest payments, the interest component
of any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging Obligations), to the
extent that any such expense was deducted in computing such Consolidated Net
Income, plus (iv) depreciation, amortization (including amortization of
goodwill and other intangibles but excluding amortization of prepaid cash
expenses that were paid in a prior period) and other non-cash charges
(excluding any such non-cash charge to the extent that it represents an accrual
of or reserve for cash expenses in any future period or amortization of a
prepaid cash expense that was paid in a prior period) of such Person and its
Subsidiaries for such period to the extent that such depreciation, amortization
and other non-cash expenses were deducted in computing such Consolidated Net
Income, plus (v) expenses and charges of Holding or the Company related to the
Refinancing which are paid, taken or otherwise accounted for within 90 days of
the consummation of the Refinancing, plus (vi) any non-capitalized transaction
costs incurred in connection with actual or proposed financings, acquisitions
or divestitures (including, but not limited to, financing and refinancing fees
and costs incurred in connection with the Refinancing). Notwithstanding the
foregoing, the provision for taxes on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a Subsidiary of
the referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in the same proportion) that Net
Income of such Subsidiary was included in calculating Consolidated Net Income
of such Person.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication, (a) the interest expense of such
Person and its Restricted Subsidiaries for such period, on a consolidated
basis, determined in accordance with GAAP (including amortization of original
issue discount, non-cash interest payments, the interest component of all
payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments, if any, pursuant to Hedging Obligations; provided that in no
event shall any amortization of deferred financing costs be included in
Consolidated Interest Expense); and (b) the consolidated capitalized interest
of such Person and its Restricted Subsidiaries for such period, whether paid or
accrued. Notwithstanding the foregoing, the Consolidated Interest Expense with
respect to any Restricted Subsidiary that is not a Wholly Owned Restricted
Subsidiary shall be included only to the extent (and in the same proportion)
that the net income of such Restricted Subsidiary was included in calculating
Consolidated Net Income.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that (i) the Net Income (but not loss) of any Person that
is not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition
shall be excluded, (iv) the cumulative effect of a change in accounting
principles shall be excluded and (v) the Net Income of any Unrestricted
Subsidiary shall be excluded, whether or not distributed to Holding or one of
its Restricted Subsidiaries for purposes of 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 Holding or one of its Restricted Subsidiaries.
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"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of Holding who (i) was a member of such Board of
Directors on the date of 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 Debentures mature; provided,
however, that any Capital Stock that would not qualify as Disqualified Stock
but for change of control provisions shall not constitute Disqualified Stock if
the provisions are not more favorable to the holders of such Capital Stock than
the provisions described under "--Change of Control" applicable to the Holders
of the Debentures.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of Holding 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 Holding, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal, in each case,
on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that Holding
or any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems
any Indebtedness (other than revolving credit borrowings) or issues preferred
stock subsequent to the commencement of the period for which the Fixed Charge
Coverage Ratio is being calculated but prior to the date on which the event for
which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, Guarantee or redemption
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to above,
(i) acquisitions that have been made by Holding or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be calculated to include the Consolidated Cash Flow of the acquired
entities on a pro forma basis after giving effect to cost savings resulting
from employee terminations, facilities consolidations and closings,
standardization of employee benefits and compensation policies, consolidation
of property, casualty and other insurance
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coverage and policies, standardization of sales and distribution methods,
reductions in taxes other than income taxes and other cost savings reasonably
expected to be realized from such acquisition, shall be deemed to have occurred
on the first day of the four-quarter reference period and Consolidated Cash
Flow for such reference period shall be calculated without giving effect to
clause (iii) of the proviso set forth in the definition of Consolidated Net
Income, (ii) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, shall be excluded, and (iii) the
Fixed Charges attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the
obligations giving rise to such Fixed Charges will not be obligations of the
referent Person or any of its Restricted Subsidiaries following the Calculation
Date.
"Foreign Subsidiary" means any Subsidiary of Holding that is not organized
under the laws of a state or territory of the United States or the District of
Columbia.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of 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 well as all indebtedness of others secured
by a Lien on any asset of such Person (whether or not such Indebtedness is
assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person; provided that
Indebtedness shall not include the pledge by Holding of the Capital Stock of an
Unrestricted Subsidiary of Holding to secure Non-Recourse Debt of such
Unrestricted Subsidiary. The amount of any Indebtedness outstanding as of any
date shall be (i) the accreted value thereof, in the case of any Indebtedness
that does not require current payments of interest, and (ii) the principal
amount thereof, together with any interest thereon that is more than 30 days
past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If Holding or any Restricted Subsidiary of Holding sells or otherwise disposes
of any Equity Interests of any direct or
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indirect Restricted Subsidiary of Holding such that, after giving effect to any
such sale or disposition, such Person is no longer a Restricted Subsidiary of
Holding, Holding shall be deemed to have made an Investment on the date of any
such sale or disposition equal to the fair market value of the Equity Interests
of such Restricted Subsidiary not sold or disposed of in an amount determined
as provided in the final paragraph of 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 Holding or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), the amounts required to be applied to the payment of
Indebtedness (other than Indebtedness incurred pursuant to the Credit
Agreement) secured by a Lien on the asset or assets that were the subject of
the Asset Sale, and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither Holding nor
any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other than
the Debentures being offered hereby and the Notes offered in the Notes
Offering) of Holding or any of its Restricted Subsidiaries to declare a default
on such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity; and (iii) as to which the lenders have
been notified in writing that they will not have any recourse to the stock
(other than stock of an Unrestricted Subsidiary pledged by Holding to secure
debt of such Unrestricted Subsidiary) or assets of Holding or any of its
Restricted Subsidiaries.
"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 Holding and its
respective 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 Holding or in a
Restricted Subsidiary of Holding that is engaged in a Permitted Business; (b)
any Investment in Cash Equivalents; (c) any Investment by Holding or any
Restricted Subsidiary of Holding in a Person, if as a result of such Investment
(i) such Person becomes a Restricted Subsidiary of Holding that is engaged in a
Permitted Business or (ii) such Person is merged, consolidated or amalgamated
with or into, or transfers or conveys
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substantially all of its assets to, or is liquidated into, Holding or a
Restricted Subsidiary of Holding that is engaged in a Permitted Business; (d)
any Restricted Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with 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 Holding;
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 Holding; (iii) Liens on property of a
Person existing at the time such Person is merged into or consolidated with
Holding or any Restricted Subsidiary of Holding, provided that such Liens were
not incurred in contemplation of such merger or consolidation and do not extend
to any assets other than those of the Person merged into or consolidated with
Holding or any Restricted Subsidiary; (iv) Liens on property existing at the
time of acquisition thereof by Holding or any Restricted Subsidiary of Holding,
provided that such Liens were in existence prior to the contemplation of such
acquisition; (v) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business; (vi) Liens existing on the date of
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 Holding or any Restricted Subsidiary of Holding with respect to
obligations that do not exceed $5.0 million at any one time outstanding and
that (a) are not incurred in connection with the borrowing of money or the
obtaining of advances or credit (other than trade credit in the ordinary course
of business) and (b) do not in the aggregate materially detract from the value
of the property or materially impair the use thereof in the operation of
business by Holding or such Restricted Subsidiary; and (xi) Liens on assets of
Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted
Subsidiaries.
"Permitted Refinancing Indebtedness" means any Indebtedness of Holding or
any of its Restricted Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of Holding or any of its Restricted Subsidiaries; provided that:
(i) the principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount of (or accreted
value, if applicable), plus accrued interest on, the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus the amount of
reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date no earlier than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Debentures, such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and is subordinated in right of payment to, the Debentures on
terms at least as favorable to the Holders of Debentures as those contained in
the documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"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.
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"Public Equity Offering" means a public offering of Equity Interests
(other than Disqualified Stock) of (i) Holding or (ii) Acquisition Corp. to the
extent the net proceeds thereof are contributed to Holding as a capital
contribution, that, in each case, results in net proceeds to Holding of at
least $25.0 million.
"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).
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with Holding or any Restricted
Subsidiary of Holding unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to Holding or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of Holding; (c) is a Person with respect to
which neither Holding nor any of its Restricted Subsidiaries has any direct or
indirect obligation (x) to subscribe for additional Equity Interests or (y) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results; and (d) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of Holding or any of its Restricted Subsidiaries. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by 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 Holding 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," Holding
shall be in default of such covenant). The Board of Directors of Holding may at
any time designate any Unrestricted Subsidiary to
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be a Restricted Subsidiary; provided that such designation shall be deemed to
be an incurrence of Indebtedness by a Restricted Subsidiary of Holding of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall be permitted only if (i) such Indebtedness is permitted under the
covenant described under 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 CONSIDERATIONS
Subject to the qualifications set forth below, the opinion of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., tax counsel to Holding, with respect to the
anticipated material U.S. federal income tax consequences applicable to the
exchange of Old Debentures for New Debentures and the ownership and disposition
of New Debentures by Holders who acquire the New Debentures pursuant to the
Exchange Offer is as follows. The discussion does not address the federal
income tax consequences of ownership of Debentures 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 Debentures 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, except to the limited extent discussed under
"Non-U.S. Holders," 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 DEBENTURES IS URGED TO
CONSULT ITS OWN TAX ADVISOR AS TO PARTICULAR TAX CONSEQUENCES TO IT OF
PURCHASING, HOLDING AND DISPOSING OF DEBENTURES OF HOLDING AS WELL AS THE
EXCHANGE OF DEBENTURES 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 Debentures for New Debentures pursuant to the Exchange
Offer will not be treated as an exchange or other tax event for U.S. federal
income tax purposes because the New Debentures will not be considered to differ
materially in kind or extent from the Old Debentures. A Holder will have the
same adjusted basis and holding period in the New Debentures immediately after
the Exchange Offer as it had in the Old Debentures immediately before the
Exchange Offer.
U.S. HOLDERS
The following discussion is limited to the federal income tax consequences
relevant to a Holder that is (i) a citizen or resident (as defined in Section
7701(b)(1) of the Code) of the United States, (ii) a corporation organized
under the laws of the United States or any political subdivision thereof or
therein, (iii) an estate the income of which is subject to federal income tax
regardless of its source, or (iv) a trust with respect to which a court within
the United States is able to exercise primary supervision over its
administration and one or more U.S. persons have the authority to control all
of its substantial decisions (a "U.S. Holder"). Certain federal income tax
consequences relevant to a Holder other than a U.S. Holder are discussed
separately below.
In addition, this discussion is generally limited to the tax consequences
to initial Holders that purchased the Debentures at the "issue price." For this
purpose, the "issue price" of a Debenture is the first price at which a
substantial part of the Debentures are sold to the public for money (excluding
sales to bond houses, brokers, or similar persons or organizations acting in
the capacity of underwriters, placement agents or wholesalers).
ORIGINAL ISSUE DISCOUNT
The Debentures have been issued with original issue discount ("OID") for
U.S. federal income tax purposes. Accordingly, each U.S. Holder of a Debenture
will be required to include OID in gross income
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as it accrues on a yield-to-maturity basis over the term of the Debentures in
advance of the receipt of any cash payment attributable to such income
(regardless of whether the U.S. Holder is a cash or accrual basis taxpayer).
The amount of OID with respect to a Debenture will be the excess of the stated
redemption price at maturity of such Debenture over its issue price. The stated
redemption price at maturity of a Debenture generally will include all payments
required to be made on the Debenture, whether denominated a principal or
interest. The issue price of a Debenture will be the first price at which a
substantial amount of the Debentures is sold for money (other than sales to
bond houses, brokers, similar persons or organizations acting in the capacity
of underwriters, placement agents, or wholesalers).
A U.S. Holder of a debt instrument that bears OID is required to include
in gross income an amount equal to the sum of the daily portions of OID for
each day during the taxable year in which the debt instrument is held. The
daily portions of OID are determined by allocating to each day in an accrual
period the pro rata portion of the OID that is allocable to the accrual period.
The amount of OID that is allocable to an accrual period is equal to the
product of the adjusted issue price of the Debentures at the beginning of the
accrual period (the issue price of the Debentures determined as described
above, generally increased by all prior accruals of OID and decreased by the
amount of any payments made on the Debentures) and the Debentures' yield to
maturity (the discount rate, which, when applied to all payments under the
Debentures, results in a present value equal to the issue price of the
Debentures). In the case of the final accrual period, the allocable OID is the
difference between the amount payable at maturity and the adjusted issue price
at the beginning of the accrual period.
Holding will furnish annually to the Internal Revenue Service (the
"Service") and to U.S. Holders (other than with respect to certain exempt
holders, including, in particular, corporations) information with respect to
the OID accruing while the Debentures were held by the U.S. Holders. U.S.
Holders may be required to include different amounts of OID in gross income
based on their individual circumstances, such as the acquisition of a Debenture
for an amount in excess of its adjusted issue price.
Holding does not intend to treat the possibility of an optional redemption
or repurchase of the Debentures as giving rise to any additional accrual of OID
or recognition of ordinary income upon redemption, sale or exchange of a
Debenture. U.S. Holders may wish to consider that United States Treasury
Regulations regarding the treatment of certain contingencies were recently
issued and may wish to consult their tax advisors in this regard.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS
The Debentures are "applicable high yield discount obligations"
("AHYDOs"), as defined in the Code, because the yield to maturity of such
Debentures exceeds by more than five percentage points the "applicable federal
rate" ("AFR") in effect at the time such Debentures were issued. Under the
rules applicable to AHYDOs, the interest expense deduction to Holding otherwise
attributable to a portion of the OID that accrues on the Debentures will be
permanently disallowed (the "non-deductible portion"). Such non-deductible
portion of the OID will be an amount that bears the same ratio to such OID as
(i) the excess of the yield to maturity of the Debentures over the AFR plus six
percentage points bears to (ii) the yield to maturity of the Debentures. To the
extent the non-deductible portion of OID would have been treated as a dividend
if it had been distributed with respect to Holding's stock, it will be treated
as a dividend to Holders of the Debentures for purposes of the rules relating
to the dividends-received deduction for corporate Holders. Any remaining OID on
the Debentures (the "deductible portion") will not be deductible by Holding
until such OID is actually paid.
TAX BASIS
A U.S. Holder's adjusted tax basis in a Debenture at a given date will be
equal to the purchase price paid by such U.S. Holder for such Debenture,
increased by the amount of OID previously included in income with respect to
the Debentures and decreased by all prior payments received on the Debentures.
SALE OR REDEMPTION OF DEBENTURES
Unless a nonrecognition provision applies, the sale, exchange, redemption
(including pursuant to an offer by Holding) or other disposition of a Debenture
will be a taxable event for federal income tax
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purposes ("Taxable Disposition"). In such event, a U.S. Holder generally will
recognize gain or loss equal to the difference between (i) the amount of cash
plus the fair market value of any other property received upon the Taxable
Disposition and (ii) the U.S. Holder's adjusted tax basis therein. Such gain or
loss generally will be capital gain or loss and generally will be long-term
capital gain or loss if the Debenture was held by the U.S. Holder for more than
one year at the time of such sale, exchange, redemption or other disposition.
The deductibility of capital losses is subject to certain limitations.
BACKUP WITHHOLDING
A U.S. Holder of Debentures may be subject to "backup withholding" at a
rate of 31% with respect to certain "reportable payments" including interest
payments and, under certain circumstances, principal payments on the
Debentures. These backup withholding rules apply if the U.S. Holder, among
other things, (i) fails to furnish a social security number or other taxpayer
identification number ("TIN") certified under penalties of perjury within a
reasonable time after the request therefor, (ii) furnishes an incorrect TIN,
(iii) fails to report properly interest, or (iv) under certain circumstances,
fails to provide a certified statement, signed under penalties of perjury, that
the TIN furnished is the correct number and that such Holder is not subject to
backup withholding. A U.S. Holder who does not provide Holding with its correct
TIN also may be subject to penalties imposed by the Service. Any amount
withheld from a payment to a U.S. Holder under the backup withholding rules is
creditable against the U.S. Holder's federal income tax liability, provided the
required information is furnished to the Service. Backup withholding will not
apply, however, with respect to payments made to certain Holders, including
corporations and tax-exempt organizations, provided their exemption from backup
withholding is properly established.
Holding will report to the U.S. Holders of Debentures and to the Service
the amount of any "reportable payments" for each calendar year and the amount
of tax withheld, if any, with respect to such payments. U.S. Holders are
advised to consult their tax advisors regarding the applicability of the
aforementioned backup withholding rules to the U.S. Holder's particular
situation.
NON-U.S. HOLDERS
The following discussion is limited to the federal income tax consequences
relevant to a Holder of a Debenture that is not a U.S. Holder, as defined above
(a "Non-U.S. Holder").
For purposes of withholding tax on interest discussed below, a
non-resident alien or other non-resident fiduciary of an estate or trust will
be considered a Non-U.S. Holder. For purposes of the following discussion,
interest (including OID) from the Debentures, as well as gain on the sale,
exchange or other disposition of Debentures, 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 Non-U.S.
Holder that is a resident of a nation with which the United States has entered
into an income tax treaty, attributable to a permanent establishment (or, in
the case of an individual, a fixed base) in the United States.
INTEREST
Any interest (including OID) paid to a Non-U.S. Holder that is not U.S.
trade or business income will not be subject to federal income tax if the
interest qualifies as "portfolio interest". Interest on the Debentures will
generally qualify as portfolio interest if (i) the Non-U.S. Holder does not
actually or constructively own 10% or more of the total voting power of all
voting stock of Holding and is not a "controlled foreign corporation" with
respect to which Holding is a "related person" within the meaning of the Code,
and (ii) the beneficial owner (a) under penalties of perjury, certifies that
the beneficial owner is not a U.S. person and such certificate provides the
beneficial owner'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 to a Non-U.S. Holder that neither
qualify for the portfolio interest exception nor are U.S. trade or business
income will be subject to federal income tax at the rate
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<PAGE>
of 30%, unless a United States income tax treaty applies to reduce or eliminate
withholding. U.S. trade or business income will be taxed at regular federal
income tax 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 the benefit of a tax treaty or
to claim exemption from withholding because the income is U.S. trade or
business income, the Non-U.S. Holder must provide a properly executed Form 1001
or 4224 (or such successor forms as the Service designates), as applicable,
prior to the payment of interest. These forms must be periodically updated.
Under final Treasury Regulations that will be effective for payments after
December 31, 1999, subject to certain transition rules (the "Final
Regulations"), the Forms 1001 and 4224 may be replaced by Form W-8. Also, under
the Final Regulations, a Non-U.S. Holder who is claiming the benefit of a
treaty in certain circumstances may be required to obtain a federal TIN and to
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.
SALE, EXCHANGE OR REDEMPTION OF DEBENTURES
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange,
redemption or other disposition of a Debenture will not be subject to federal
income tax, provided that (i) such gain is not U.S. trade or business income;
(ii) the Non-U.S. Holder is not an individual who holds the Debenture as a
capital asset, is present in the United States for 183 days or more in the
taxable year of the disposition and who meets certain other requirements; and
(iii) the Non-U.S. Holder is not subject to tax pursuant to the provisions of
federal tax law applicable to certain U.S. expatriates (including certain
former citizens or residents of the United States).
FEDERAL ESTATE TAX
Debentures 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 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 Holding and (ii) income on the
Debentures was not U.S. trade or business income.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Holding must report annually to the Service and to each Non-U.S. Holder
any interest that is subject to withholding, exempt from federal withholding
tax pursuant to a tax treaty, or exempt from federal income tax under the
portfolio interest exception. Copies of such information returns may also be
made available under the provisions of a specific treaty or agreement to the
tax authorities of the country in which the Non-U.S. Holder resides.
The Treasury Regulations provide that backup withholding and information
reporting will not apply to payments of principal on the Debentures by Holding
to a Non-U.S. Holder, if the Holder certifies, under penalties of perjury, as
to its non-U.S. status or otherwise establishes an exemption (provided that
neither Holding nor its paying 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 Debentures to or
through the U.S. office of any U.S. or foreign broker will be subject to
information reporting and possible backup withholding unless the owner
certifies, under penalties of perjury, as to its non-U.S. status 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
exemptions are not, in fact, satisfied). The payment of the proceeds from the
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<PAGE>
disposition of a Debenture 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 United States (a
"U.S. related person").
In the case of the payment of proceeds from the disposition of the
Debentures 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 Treasury Regulations require information
reporting (but not backup withholding) on the payments 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.
Any amounts withheld under the backup withholding rules from a payment to
a Non-U.S. Holder will be allowed as a refund or credit against such Non-U.S.
Holder's federal income tax liability, provided that the requisite procedures
are followed.
The Final Regulations discussed above do not significantly alter the
substantive withholding and information reporting requirements but rather unify
current certification procedures and forms and clarify reliance standards.
Non-U.S. Holders should consult their own tax advisors with respect to the
impact, if any, of the Final Regulations.
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PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Purchase Agreement
dated June 22, 1998, Holding sold the Old Debentures to the Initial Purchaser.
The Initial Purchaser received a 2.1% discount and commissions totalling
$1,038,480 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, Holding 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 affiliates of the Initial Purchaser own
significant amounts of Acquisition Corp. Common Stock. See "Use of 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 Debentures 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 Debentures. 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 Debentures received in
exchange for Old Debentures where such Old Debentures were acquired as a result
of market-making activities or other trading activities. Holding 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 Debentures
acquired by broker-dealers for their own accounts as a result of market-making
activities or other trading activities have been exchanged for New Debentures
and resold by such broker-dealers.
Holding will not receive any proceeds from any sale of New Debentures by
broker-dealers. New Debentures 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 Debentures 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 Debentures. Any
broker-dealer that resells New Debentures 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 Debentures may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Debentures 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 Debentures acquired by broker-dealers for their own accounts as a
result of market-making activities or other trading activities have been
exchanged for New Debentures and resold by such broker-dealers, Holding 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. Holding 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 Debentures, except as expressly set forth in the
Registration Rights Agreement and will indemnify the Holders of the Debentures
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
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NOTICE TO HOLDERS
The New Debentures may not be sold or transferred to, and each Holder of
Old Debentures, by its exchange of Old Debentures for New Debentures shall be
deemed to have represented and covenanted that it is not acquiring the New
Debentures for or on behalf of, and will not transfer the New Debentures 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 Prohibited
Transaction Class Exemption 91-38 issued by the Department of Labor are
satisfied;
(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 Debentures are outstanding, 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 of all assets in such pooled
separate account and the conditions of Section III of Prohibited
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 Debentures
will be passed upon for Holding by Akin, Gump, Strauss, Hauer & Feld, L.L.P.,
New York, New York.
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EXPERTS
The consolidated financial statements of AKI Holding Corp. 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.
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.
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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 HOLDING CORP. 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. Subsequent to the Acquisition,
Acquisition Corp. contributed all of its equity interest in AKI, Inc. to AKI
Holding Corp. ("Holding" or the "Company").
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 Holding or the Predecessor as adjusted to give effect to the
Acquisition, the 3M Acquisition and the issuance by Holding of the Senior
Discount Debentures, together with the concurrent issuance by AKI, Inc. of
Senior Notes 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 Holding 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 Holding or
the Predecessor to account for the Acquisition and the 3M Acquisition under the
purchase method of accounting and the Refinancing. In accordance with the
consensus reached by the Emerging Issues Task Force of the Financial Accounting
Standards Board in Issue 88-16, "Basis in Leveraged Buyout Transactions," the
purchase price allocation required an adjustment for the continuing interest
attributable to management's ownership interest in Predecessor carried over in
connection with the Acquisition. As a result, a reduction in stockholder's
equity was recorded which represents the difference between the fair value of
the Company's assets and the related book value attributable to the interest of
the continuing 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 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 value 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.
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
P-2
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
(dollars in thousands)
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 statements of operations, the Company has adjusted the
historical operating results of this business to reflect the cost of producing
and selling such products by the Company. The adjustments to 3M's historical
results are based on the Company's historical production and selling, general
and administrative cost structure, modified as described to account for the
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 statement of
operations does 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 HOLDING CORP. 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
HOLDING 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 affiliates ..... 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 ............. (198) (f) 4,169 -- 4,169
Management fees to
stockholders and affiliates ..... -- 63 -- 63
Other, net ........................ -- 28 -- 28
--------- -------- ------ --------
Income (loss) before
income taxes ................... 198 (53) 1,098 1,045
Income tax expense (benefit) ....... 121 (g) 401 413 814
--------- -------- ------ --------
Net income (loss) ............... $ 77 $ (454) $ 685 $ 231
========= ======== ====== ========
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 HOLDING CORP. 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
HOLDING 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 ............ 13,973 3,558 (c) 17,531
Management fees to
stockholders and affiliate ..... 340 (90)(d) 250
Other, net ....................... (36) -- (36)
---------- ---------- ---------
Income (loss) before
income taxes .................. (4,311) (4,265) (8,576)
Income tax expense (benefit) ...... (611) (1,156)(e) (1,767)
---------- ---------- ---------
Net income (loss) .............. $ (3,700) $ (3,109) $ (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 ............. 154,637 (143,937) 10,700
<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 ............ (801) (f) 16,730 -- 16,730
Management fees to
stockholders and affiliate ..... -- 250 -- 250
Other, net ....................... -- (36) -- (36)
--------- --------- -------- ---------
Income (loss) before
income taxes .................. 801 (7,775) 4,155 (3,620)
Income tax expense (benefit) ...... 488 (g) (1,279) 1,564 285
--------- --------- -------- ---------
Net income (loss) .............. $ 313 $ (6,496) $ 2,591 $ (3,905)
========= ========= ======== =========
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 ............. (11,357) (657) -- (657)
</TABLE>
See notes to unaudited pro forma consolidated statements of operations.
P-5
<PAGE>
AKI HOLDING CORP. 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 $3,558 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, 1997 and $90 for the year ended June 30, 1998).
(e) Reflects incremental income tax benefit relating to pro forma
consolidated statement of operations' adjustments in (c) and (d) above ($1,007
for the three months ended September 30, 1997 and $1,156 for the year ended
June 30, 1998). Goodwill is not tax deductible.
REFINANCING ADJUSTMENTS
(f) Reflects incremental reduction in interest expense and amortization of
deferred charges ($198 for the three months ended September 30, 1997 and 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 ($121 for the
three months ended September 30, 1997 and $488 for the year ended June 30,
1998) on the incremental reduction in interest expense associated with the
Refinancing. This adjustment takes into account the effect of the permanently
non-deductible original issue discount interest associated with the Senior
Discount Debentures of $186.
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.
P-6
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS--(CONTINUED)
(dollars in thousands)
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>
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
P-7
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS--(CONTINUED)
(dollars in thousands)
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-8
<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 Holding Corp. 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 Holding Corp. and Subsidiaries (a wholly-owned
subsidiary of AHC I Acquisition Corp.) 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 Holding Corp. 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 HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION 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 $ 3,842 $ 1,341
Accounts receivable, net ................................... 10,200 13,577 21,449
Inventory .................................................. 2,786 2,078 3,984
Income tax refund receivable ............................... -- 5,155 132
Prepaid expenses ........................................... 221 378 326
Deferred income taxes ...................................... 424 827 827
------- --------- ---------
TOTAL CURRENT ASSETS .................................... 13,934 25,857 28,059
Property, plant and equipment, net ......................... 18,156 18,936 18,579
Goodwill, net .............................................. 44,293 159,131 158,123
Deferred charges ........................................... 555 6,535 6,822
Deferred income taxes ...................................... -- 3,888 3,840
Other assets ............................................... 204 200 203
------- --------- ---------
TOTAL ASSETS ............................................ $77,142 $ 214,547 $ 215,626
======= ========= =========
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 3,982 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
Senior discount debentures ................................. 26,020 26,898
Other notes payable, net ................................... 1,301 -- --
Deferred income taxes ...................................... 2,949 4,143 3,692
------- --------- ---------
57,239 157,463 160,533
Commitments and contingencies (see Note 14)
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
Common stock, $0.01 par, 1,000 shares authorized; 1,000
shares issued and outstanding at June 30, 1998 ............ -- --
Additional paid-in capital ................................. 4,889 78,364 78,364
Stock purchase warrants .................................... 1,923
Retained earnings (deficit) ................................ 4,565 (5,493) (7,596)
Accumulated other comprehensive income ..................... (153) (57) 55
Carryover basis adjustment ................................. -- (15,730) (15,730)
------- --------- ---------
TOTAL STOCKHOLDER(S) EQUITY ............................. 11,225 57,084 55,093
------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDER(S) EQUITY ............. $77,142 $ 214,547 $ 215,626
======= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
---------------------------------------------------- ----------------------------------
JULY 1, 1997 THREE MONTHS DECEMBER 16, 1997 THREE MONTHS
YEAR ENDED JUNE 30, THROUGH ENDED THROUGH ENDED
--------------------- DECEMBER 15, SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
1996 1997 1997 1997 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 1,007 503 221 542 4,096
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 (7,545) 315
Income tax expense (benefit) .......... 2,101 3,135 1,441 1,287 (2,052) 555
------- ------- ------- ------- -------- -------
Net income (loss) .................. $ 2,178 $ 3,982 $ 1,793 $ 1,796 $ (5,493) $ (240)
======= ======= ======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER(S) EQUITY
(dollars in thousands, except share information)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL 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
====== ==== ======= ======
<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
======== ====== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCK
------------------ PAID-IN PURCHASE
SHARES DOLLARS CAPITAL WARRANTS
-------- --------- ------------ ----------
<S> <C> <C> <C> <C>
SUCCESSOR
------------------------------------------
Balances, December 16, 1997 .............. -- $ -- $ -- $ --
Initial capitalization ................... 1,000 -- 78,364 --
Carryover basis adjustment ............... -- -- -- --
Net loss ................................. -- -- -- --
Other comprehensive income, net of tax:
Foreign currency translation
adjustment ............................. -- -- -- --
Comprehensive income .....................
------ ---- ------- ------
Balances, June 30, 1998 .................. 1,000 -- 78,364 --
Net income (unaudited) ................... -- -- -- --
Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited) ................. -- -- -- --
Comprehensive income (unaudited) .........
Dividend to AHC I Acquisition Corp.
(unaudited) ............................. -- -- -- --
------
Balances, September 30, 1998
(unaudited) ............................. 1,000 $ -- $78,364 $ --
====== ==== ======= ======
<CAPTION>
ACCUMULATED
OTHER CARRYOVER
RETAINED COMPREHENSIVE BASIS
EARNINGS INCOME ADJUSTMENT TOTAL
------------ --------------- ------------- ------------
SUCCESSOR
-------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, December 16, 1997 .............. $ -- $ -- $ -- $ --
Initial capitalization ................... -- -- -- 78,364
Carryover basis adjustment ............... -- -- (15,730) (15,730)
Net loss ................................. (5,493) -- -- (5,493)
Other comprehensive income, net of tax:
Foreign currency translation
adjustment ............................. -- (57) -- (57)
----------
Comprehensive income ..................... 5,550
----------
Balances, June 30, 1998 .................. (5,493) (57) (15,730) 57,084
Net income (unaudited) ................... (240) -- -- (240)
Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited) ................. -- 112 -- 112
-------- ------ --------- ----------
Comprehensive income (unaudited) ......... (128)
Dividend to AHC I Acquisition Corp.
(unaudited) ............................. (1,863) -- -- (1,863)
Balances, September 30, 1998
(unaudited) ............................. $ (7,596) $ 55 $ (15,730) $ 55,093
======== ====== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION 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 senior discount
debentures, 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)
Dividend paid to AHC I
Acquisition Corporation ............................... -- -- -- --
--------- --------- -------- ----------
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
----------------------------------
THREE MONTHS
DECEMBER 16, 1997 ENDED
THROUGH SEPTEMBER 30,
JUNE 30, 1998 1998
------------------- --------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................... $ (5,493) $ (240)
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 ......................... 139 878
Amortization of loan closing costs .................... 3,808 143
Deferred income taxes ................................. (2,035) (403)
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) (387)
Income taxes ......................................... 767 6,011
Accounts payable and accrued expenses ................ (5,406) 3,132
----------- ---------
Net cash provided by (used in) operating
activities ......................................... (8,821) 1,517
----------- ---------
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 senior discount
debentures, net of offering costs ..................... 24,699 --
Proceeds from issuance of common stock ................. 76,001 --
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) --
Dividend paid to AHC I
Acquisition Corporation ............................... -- (1,863)
----------- ---------
Net cash provided by (used in) financing
activities ......................................... 154,580 (3,340)
----------- ---------
Net increase (decrease) in cash and cash equivalents .... 3,842 (2,501)
Cash and cash equivalents, beginning of period .......... -- 3,842
----------- ---------
Cash and cash equivalents, end of period ................ $ 3,842 $ 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 HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION 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 11). 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 13) and $2,363 of non-cash
consideration in the form of an option to purchase Senior Preferred Stock of
Acquisition Corp. (see Note 17). 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 17) 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
Acquisition was accounted for using the purchase method of accounting.
Subsequent to the Acquisition, Acquisition Corp. contributed $1 of cash and all
of its ownership interest in AKI to AKI Holding Corp. ("Holding," the
"Successor" or the "Company"). Since all companies are under common control and
since Holding and Acquisition Corp. have no operations other than those related
to AKI, 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, AKI's and Holding'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 HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION 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 to
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 HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION 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 HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION 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 provisions 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 17). 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 Senior Discount Debenture offering (see Note 10)
(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 17) 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
F-11
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share information)
3. SIGNIFICANT ACQUISITIONS (CONTINUED)
into the Predecessor and the combined entity assumed the name AKI. Subsequent
to the Acquisition, Acquisition Corp. contributed $1 of cash and 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 17) ............................. 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 HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION 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 ............... 16,640 16,730
Net loss ....................... (2,558) (3,905)
</TABLE>
4. ACCOUNTS RECEIVABLE
The following table details the components of accounts receivable:
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1998
--------------- --------------
<S> <C> <C>
$ 10,36
Trade accounts receivable .................................... 2 $ 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, 1997 JUNE 30, 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 HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION 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 HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION 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
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).
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%
F-15
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share information)
8. LOANS PAYABLE TO STOCKHOLDER (CONTINUED)
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, AKI completed a private placement of $115,000 of Senior
Notes (the "Senior Notes"). The Senior Notes are general unsecured obligations
of AKI 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 AKI, 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 AKI 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 by AKI to Holding and limitations on the incurrence of
additional indebtedness.
10. SENIOR DISCOUNT DEBENTURES
On June 25, 1998, Holding completed a private placement of Senior Discount
Debentures (the "Debentures") with a stated value of $50,000. The Debentures
are general, unsecured obligations of Holding and mature on July 1, 2009. The
Debentures do not accrue or pay interest until July 1, 2003 and were issued
with an original issuance discount of $24,038. The placement of the Debentures
yielded the Company net proceeds of $24,699 after deducting offering expenses
of $1,263, including $1,038 of underwriting fees paid to an affiliate of the
stockholder. The original issuance discount of $24,038 on the Debentures 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 may be redeemable at the option of Holding, in whole or in part, at
any time on or after July 1, 2003 at a price equal to 106.75% of the
outstanding principal balance plus accrued and unpaid interest. The Debentures
contain certain customary covenants including restrictions on the declaration
and payment of dividends and limitations on the incurrence of additional
indebtedness.
11. 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.
F-16
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share information)
11. OTHER NOTES PAYABLE (CONTINUED)
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.
12. 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 the Predecessor on December 15, 1997 (see Note 3),
all outstanding preferred stock was redeemed at $1,000 per share plus accrued
and unpaid dividends.
13. 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 the 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 were contributed by Acquisition Corp. to AKI in exchange for 1,000
shares of the AKI's Common Stock. Subsequent to the capitalization of AKI,
Acquisition Corp. contributed $1 of cash and all of its ownership interest in
AKI to Holding.
Acquisition Corp. has no other operations other than the Company. Absent
addition financing by Acquisition Corp., the Company's operations represent the
only current source of funds available to service the Floating Rate Notes and
Senior Preferred Stock.
F-17
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share information)
14. 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 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, $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.
F-18
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share information)
15. 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 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.
16. 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 AKI. 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 $ (8,227)
Foreign ......................... 179 (492) (64) 682
------ ------ ------ --------
$4,279 $7,117 $3,234 $ (7,545)
====== ====== ====== ========
</TABLE>
F-19
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share information)
16. INCOME TAXES (CONTINUED)
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) (1,916)
Foreign .................. 13 (165) (25) 162
State .................... (65) (42) (59) (281)
------ ------ ------ --------
(483) (297) (460) (2,035)
------ ------ ------ --------
$2,101 $3,135 $1,441 $ (2,052)
====== ====== ====== ========
</TABLE>
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 ................ -- -- -- 2,966
Preferred stock option ......... -- -- -- 922
---- -------- ---- ------
424 -- 827 3,888
Deferred income tax liability:
Property, plant and
equipment .................... -- 2,949 -- 4,143
---- -------- ---- ------
$424 $ (2,949) $827 $ (255)
==== ======== ==== ======
</TABLE>
F-20
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share information)
16. INCOME TAXES (CONTINUED)
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 $ (2,565)
State income tax provision, net
of Federal effect .............. 194 335 145 (265)
Nondeductible expenses,
primarily the amortization of
goodwill ....................... 427 455 193 723
Other, net ....................... 25 (75) 3 55
------ ------ ------ --------
$2,101 $3,135 $1,441 $ (2,052)
====== ====== ====== ========
</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 $2,966 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.
17. 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.
F-21
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share information)
17. STOCK OPTIONS (CONTINUED)
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 valued 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 DLJMB II 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 DLJMB II 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 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 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
F-22
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share information)
17. STOCK OPTIONS (CONTINUED)
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 $(5,494). 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.
18. 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 Company had approximately $2,401 of cash on deposit with
a financial institution affiliated with DLJMBII.
F-23
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share information)
19. 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 ....................... 188,532 158 188,690
</TABLE>
F-24
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share information)
20. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheet at June 30, 1998 and condensed
statement of operations, changes in stockholder equity and cash flows for the
period from December 16, 1997 through June 30, 1998 for Holding should be read
in conjunction on with the consolidated financial statements and notes thereto:
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------
<S> <C>
ASSETS
Cash ............................................................... $ 2,201
Investment in subsidiaries ......................................... 95,408
Deferred charges ................................................... 1,263
Deferred income taxes .............................................. 19
--------
TOTAL ASSETS ..................................................... $ 98,891
========
LIABILITIES
Senior Discount Debentures ......................................... $ 26,020
STOCKHOLDER EQUITY
Common Stock, $0.01 par value, 1,000 shares authorized; 1,000 shares
issued and outstanding ............................................ --
Additional paid-in capital ......................................... 78,364
Accumulated deficit ................................................ (5,493)
--------
TOTAL STOCKHOLDER EQUITY ......................................... 72,871
--------
TOTAL LIABILITIES AND STOCKHOLDER EQUITY ......................... $ 98,891
========
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 16, 1997
THROUGH
JUNE 30, 1998
------------------
<S> <C>
Equity in losses of subsidiaries ......... $ (5,454)
Interest expense ......................... (58)
--------
Loss before income taxes ............... (5,512)
Income tax benefit ....................... (19)
--------
Net loss ............................... $ (5,493)
========
</TABLE>
F-25
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share information)
20. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------- -------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balances, December 16, 1997:
Initial capitalization ........... 1,000 $ -- $78,364 $ -- $ 78,364
Net loss ......................... -- -- -- (5,493) (5,493)
----- ---- ------- -------- --------
Balance at June 30, 1998 ......... 1,000 $ -- $78,364 $ (5,493) $ 72,871
===== ==== ======= ======== ========
</TABLE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 16, 1997
THROUGH
JUNE 30, 1998
------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $ (5,493)
Adjustments to reconcile net loss to net cash
provided by operating activities
Net change in investment in subsidiaries .................... 5,454
Non-cash interest expense ................................... 58
Deferred income taxes ....................................... (19)
---------
Net cash provided (used) by operating activities ............ --
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contributed to subsidiary ............................ (22,499)
---------
FINANCING ACTIVITIES:
Proceeds from issuance of stock .............................. 1
Proceeds from issuance of Senior Discount Debentures ......... 24,699
---------
Net cash provided by financing activities ................... 24,700
---------
Net increase (decrease) in cash and cash equivalents .......... 2,201
Cash and cash equivalents, beginning of period ................ --
---------
Cash and cash equivalents, end of period ...................... $ 2,201
=========
</TABLE>
F-26
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share information)
21. 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
FISCAL 1997 -------------------- ------------------- ---------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
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
----------------------------------------------
QUARTER ENDED OCTOBER 1, 1997 THROUGH
SEPTEMBER 30, 1997 DECEMBER 15, 1997
FISCAL 1998 -------------------- -------------------------
<S> <C> <C>
Net sales .............. $21,928 $13,258
Gross profit ........... 8,306 4,071
Income from
operations ............ 4,680 1,426
Interest expense ....... 1,451 1,195
Net income (loss) ...... 1,796 (3)
<CAPTION>
HOLDING
------------------------------------------------------------
DECEMBER 16, 1997 THROUGH QUARTER ENDED QUARTER ENDED FULL
DECEMBER 31, 1997 MARCH 31, 1998 JUNE 30, 1998 YEAR
FISCAL 1998 --------------------------- ---------------- --------------- ----------
<S> <C> <C> <C> <C>
Net sales .............. $2,791 $19,191 $ 14,084 $ 71,252
Gross profit ........... 813 7,256 3,479 23,925
Income from
operations ............ 153 3,603 104 9,966
Interest expense ....... 759 4,404 6,164 13,973
Net income (loss) ...... (443) (887) (4,163) (3,700)
</TABLE>
F-27
<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 HOLDING OR THE INITIAL PURCHASER. 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 HOLDING 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 ................................. 19
The Exchange Offer .............................. 20
Capitalization .................................. 27
Selected Historical Consolidated Financial
Data ......................................... 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................... 29
Business ........................................ 38
The Transactions ................................ 48
Management ...................................... 49
Security Ownership of Certain Beneficial
Owners and Management ........................ 53
Certain Relationships and Related
Transactions ................................. 54
Description of Certain Indebtedness ............. 56
Description of New Debentures ................... 59
U.S. Federal Income Tax Considerations .......... 84
Plan of Distribution ............................ 89
Notice to Holders ............................... 90
Legal Matters ................................... 90
Experts ......................................... 91
Index to Unaudited Pro Forma
Condensed Consolidated Statement of
Operations ................................... P-1
Index to Consolidated Financial
Statements ................................... F-1
</TABLE>
OFFER TO EXCHANGE
NEW 13 1/2% SENIOR DISCOUNT
DEBENTURES DUE 2009
FOR UP TO $50,000,000
IN PRINCIPAL
AMOUNT OUTSTANDING
13 1/2% SENIOR DISCOUNT
DEBENTURES DUE 2009
AKI HOLDING CORP.
--------------------------------------------
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 A-1 AND EXCHANGE COMMISSION. THE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO ANY REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
[ALTERNATE COVER FOR MARKET-MAKING PROSPECTUS]
PROSPECTUS
AKI HOLDING CORP.
NEW 13 1/2% SENIOR DISCOUNT DEBENTURES DUE 2009
----------------
The 13 1/2% New Senior Discount Debentures due 2009 (the "New Debentures")
were issued in exchange for the 13 1/2% Senior Discount Debentures due 2009
(the "Old Debentures") by AKI Holding Corp., a Delaware corporation
("Holding"). The New Debentures are obligations of Holding. Prior to the
Exchange Offer there was no public trading market for the Old Debentures or the
New Debentures.
The New Debentures will mature on July 1, 2009. The New Debentures have
been issued at a substantial discount from their principal amount. The New
Debentures will accrete at a rate of 13 1/2%, compounded semi-annually to an
aggregate principal amount of $50.0 million at July 1, 2003. Thereafter, the
New Debentures will accrete interest at a rate of 13 1/2% per annum, payable
semi-annually on January 1 and July 1 of each year, commencing on January 1,
2004. The New Debentures are redeemable at the option of Holding, 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, Holding may on any one or more occasions redeem up
to 35% of the aggregate principal amount of New Debentures originally issued at
a redemption price equal to 113.5% of the Accreted Value (as defined herein)
thereof on the date of redemption plus Liquidated Damages, if any, 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 Debentures originally issued remains outstanding
immediately after the occurrence of any such redemption. See "Description of
New Debentures--Optional Redemption." In addition, upon the occurrence of a
Change of Control (as defined herein), 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 accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of repurchase. See "Description
of New Debentures--Repurchase at the Option of Holders--Change of Control."
There can be no assurance that, in the event of a Change of Control, Holding
would have sufficient funds to purchase all Debentures tendered. See "Risk
Factors--Limitations on Ability to Make Change of Control Payment."
The New Debentures are general unsecured obligations of Holding, and rank
pari passu in right of payment to all existing and future senior unsecured
indebtedness of Holding and rank senior in right of payment to all existing and
future subordinated indebtedness of Holding. The New Debentures, however, are
effectively subordinated to all secured obligations of Holding, to the extent
of the assets securing such obligations. The Debentures, however, will be (i)
effectively subordinated to all secured obligations of Holding, to the extent
of the assets securing such obligations, and (ii) structurally subordinated to
all obligations of Holding's subsidiaries. As of September 30, 1998, Holding
had no outstanding indebtedness other than the Debentures. Holding's
subsidiaries had $116.9 million of outstanding indebtedness and $16.7 million
of other outstanding liabilities (including trade payables, accrued liabilities
and taxes), all of which effectively ranks senior to the Debentures.
(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 DEBENTURES.
----------------
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.
<PAGE>
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. Holding does not intend to list the New Debentures on a national
securities exchange or to apply for quotation of the New Debentures through the
National Association of Securities Dealers Automated Quotation System. DLJ has
advised Holding that it intends to make a market in the New Debentures. However
DLJ is not obligated to do so and any market-making activities with respect to
the New Debentures may be discontinued at any time without notice. Holding will
receive no portion of the proceeds of the sale of the New Debentures 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 HOLDING OR DLJ. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE NEW
DEBENTURES 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 HOLDING SINCE THE DATE HEREOF.
A-2
<PAGE>
[ALTERNATE SECTION FOR MARKET-MAKING PROSPECTUS]
----------------
AVAILABLE INFORMATION
Holding 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 Debentures 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,
Holding 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 Holding 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 Debentures were issued, Holding 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 Debentures remain outstanding, it will furnish to the
Trustee and Holders of the Debentures (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 Holding 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 Holding's certified independent public accountants and (ii)
all reports that would be required to be filed with the Commission on Form 8-K
if Holding was required to file such reports. Holding 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 Debentures
remain outstanding, Holding has agreed to make available to any prospective
purchaser of the Debentures or Holder of the Debentures 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 DEBENTURES
There is no existing trading market for the New Debentures, and there can
be no assurance regarding the future development of a market for the New
Debentures or the ability of the Holders of the New Debentures to sell their
New Debentures or the price at which such Holders may be able to sell their New
Debentures. If such market were to develop, the New Debentures could trade at
prices that may be higher or lower than their initial offering price depending
on many factors, including prevailing interest rates, Holding'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 Debentures. 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 Debentures.
DLJ is an affiliate of Holding and, as such, is required to deliver a
prospectus in connection with its market-making activities in the New
Debentures. Pursuant to the Registration Rights Agreement, Holding 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
Debentures. Holding has agreed to bear substantially all the costs and expenses
related to such registration statement.
A-4
<PAGE>
[ALTERNATE SECTION FOR MARKET-MAKING PROSPECTUS]
USE OF PROCEEDS
This Prospectus is delivered in connection with the sale of the New
Debentures by DLJ in market-making transactions. Holding 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 Debentures 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 Holding that it does not intend to
confirm sales of the New Debentures 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 Holding 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 Debentures and
received an underwriting discount of $1.04 million in connection therewith. See
"Certain Relationships and Related Party Transactions."
Holding 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 Debentures 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 Debentures."
The Initial Purchaser and Holding have entered into the Registration
Rights Agreement with respect to the use by the Initial Purchaser of this
Prospectus. Pursuant to such agreement, Holding agreed to bear all registration
expenses incurred under such agreement, and Holding 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 INCOME TAX CONSIDERATIONS
Subject to the qualifications set forth below, the opinion of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., tax counsel to Holding, with respect to the
anticipated material U.S. federal income tax consequences applicable to the
exchange of Old Debentures for New Debentures and the ownership and disposition
of New Debentures by Holders who acquire the New Debentures pursuant to the
Exchange Offer is as follows. The discussion does not address the federal
income tax consequences of ownership of Debentures 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 Debentures 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, except to the limited extent discussed under
"Non-U.S. Holders," 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 DEBENTURES IS URGED TO
CONSULT ITS OWN TAX ADVISOR AS TO PARTICULAR TAX CONSEQUENCES TO IT OF
PURCHASING, HOLDING AND DISPOSING OF DEBENTURES OF HOLDING INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY
PROPOSED CHANGES IN APPLICABLE LAWS.
U.S. HOLDERS
The following discussion is limited to the federal income tax consequences
relevant to a Holder that is (i) a citizen or resident (as defined in Section
7701(b)(1) of the Code) of the United States, (ii) a corporation organized
under the laws of the United States or any political subdivision thereof or
therein, (iii) an estate the income of which is subject to federal income tax
regardless of its source, or (iv) a trust with respect to which a court within
the United States is able to exercise primary supervision over its
administration and one or more U.S. persons have the authority to control all
of its substantial decisions (a "U.S. Holder"). Certain federal income tax
consequences relevant to a Holder other than a U.S. Holder are discussed
separately below.
In addition, this discussion is generally limited to the tax consequences
to initial Holders that purchased the Debentures at the "issue price." For this
purpose, the "issue price" of a Debenture is the first price at which a
substantial part of the Debentures are sold to the public for money (excluding
sales to bond houses, brokers, or similar persons or organizations acting in
the capacity of underwriters, placement agents or wholesalers).
ORIGINAL ISSUE DISCOUNT
The Debentures have been issued with original issue discount ("OID") for
U.S. federal income tax purposes. Accordingly, each U.S. Holder of a Debenture
will be required to include OID in gross income as it accrues on a
yield-to-maturity basis over the term of the Debentures in advance of the
receipt of any cash payment attributable to such income (regardless of whether
the U.S. Holder is a cash or accrual basis taxpayer). The amount of OID with
respect to a Debenture will be the excess of the stated redemption price at
maturity of such Debenture over its issue price. The stated redemption price at
maturity of a
A-7
<PAGE>
Debenture will include all payments required to be made on the Debenture,
whether denominated a principal or interest. The issue price of a Debenture
will be the first price at which a substantial amount of the Debentures is sold
for money (other than sales to bond houses, brokers, similar persons or
organizations acting in the capacity of underwriters, placement agents, or
wholesalers).
A U.S. Holder of a debt instrument that bears OID is required to include
in gross income an amount equal to the sum of the daily portions of OID for
each day during the taxable year in which the debt instrument is held. The
daily portions of OID are determined by allocating to each day in an accrual
period the pro rata portion of the OID that is allocable to the accrual period.
The amount of OID that is allocable to an accrual period is equal to the
product of the adjusted issue price of the Debentures at the beginning of the
accrual period (the issue price of the Debentures determined as described
above, generally increased by all prior accruals of OID and decreased by the
amount of any payments made on the Debentures) and the Debentures' yield to
maturity (the discount rate, which, when applied to all payments under the
Debentures, results in a present value equal to the issue price of the
Debentures). In the case of the final accrual period, the allocable OID is the
difference between the amount payable at maturity and the adjusted issue price
at the beginning of the accrual period.
Holding will furnish annually to the Internal Revenue Service (the
"Service") and to U.S. Holders (other than with respect to certain exempt
holders, including, in particular, corporations) information with respect to
the OID accruing while the Debentures were held by the U.S. Holders. U.S.,
Holders may be required to include different amounts of OID in gross income
based on their individual circumstances, such as the acquisition of a Debenture
for an amount in excess of its adjusted issue price.
Holding does not intend to treat the possibility of an optional redemption
or repurchase of the Debentures as giving rise to any additional accrual of OID
or recognition of ordinary income upon redemption, sale or exchange of a
Debenture. U.S. Holders may wish to consider that United States Treasury
Regulations regarding the treatment of certain contingencies were recently
issued and may wish to consult their tax advisors in this regard.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS
The Debentures are "applicable high yield discount obligations"
("AHYDOs"), as defined in the Code, because the yield to maturity of such
Debentures exceeds by more than five percentage points the "applicable federal
rate" ("AFR") in effect at the time such Debentures were issued. Under the
rules applicable to AHYDOs, the interest expense deduction to Holding otherwise
attributable to a portion of the OID that accrues on the Debentures will be
permanently disallowed (the "non-deductible portion"). Such non-deductible
portion of the OID will be an amount that bears the same ratio to such OID as
(i) the excess of the yield to maturity of the Debentures over the AFR plus six
percentage points bears to (ii) the yield to maturity of the Debentures. To the
extent the non-deductible portion of OID would have been treated as a dividend
if it had been distributed with respect to Holding's stock, it will be treated
as a dividend to Holders of the Debentures for purposes of the rules relating
to the dividends-received deduction for corporate Holders. Any remaining OID on
the Debentures (the "deductible portion") will not be deductible by Holding
until such OID is actually paid.
TAX BASIS
A U.S. Holder's adjusted tax basis in a Debenture at a given date will be
equal to the purchase price paid by such U.S. Holder for such Debenture,
increased by the amount of OID previously included in income with respect to
the Debentures and decreased by all prior payments received on the Debentures.
SALE OR REDEMPTION OF DEBENTURES
Unless a nonrecognition provision applies, the sale, exchange, redemption
(including pursuant to an offer by Holding) or other disposition of a Debenture
will be a taxable event for federal income tax purposes ("Taxable
Disposition"). In such event, a U.S. Holder generally will recognize gain or
loss equal to the difference between (i) the amount of cash plus the fair
market value of any other property received upon the Taxable Disposition and
(ii) the U.S. Holder's adjusted tax basis therein. Such gain or loss
A-8
<PAGE>
generally will be capital gain or loss and generally will be long-term capital
gain or loss if the Debenture was held by the U.S. Holder for more than one
year at the time of such sale, exchange, redemption or other disposition. The
deductibility of capital losses is subject to certain limitations.
BACKUP WITHHOLDING
A U.S. Holder of Debentures may be subject to "backup withholding" at a
rate of 31% with respect to certain "reportable payments" including interest
payments and, under certain circumstances, principal payments on the
Debentures. These backup withholding rules apply if the U.S. Holder, among
other things, (i) fails to furnish a social security number or other taxpayer
identification number ("TIN") certified under penalties of perjury within a
reasonable time after the request therefor, (ii) furnishes an incorrect TIN,
(iii) fails to report properly interest, or (iv) under certain circumstances,
fails to provide a certified statement, signed under penalties of perjury, that
the TIN furnished is the correct number and that such Holder is not subject to
backup withholding. A U.S. Holder who does not provide Holding with its correct
TIN also may be subject to penalties imposed by the Service. Any amount
withheld from a payment to a U.S. Holder under the backup withholding rules is
creditable against the U.S. Holder's federal income tax liability, provided the
required information is furnished to the Service. Backup withholding will not
apply, however, with respect to payments made to certain Holders, including
corporations and tax-exempt organizations, provided their exemption from backup
withholding is properly established.
Holding will report to the U.S. Holders of Debentures and to the Service
the amount of any "reportable payments" for each calendar year and the amount
of tax withheld, if any, with respect to such payments. U.S. Holders are
advised to consult their tax advisors regarding the applicability of the
aforementioned backup withholding rules to the U.S. Holder's particular
situation.
NON-U.S. HOLDERS
The following discussion is limited to the federal income tax consequences
relevant to a Holder of a Debenture that is not a U.S. Holder, as defined above
(a "Non-U.S. Holder").
For purposes of withholding tax on interest discussed below, a
non-resident alien or other non-resident fiduciary of an estate or trust will
be considered a Non-U.S. Holder. For purposes of the following discussion,
interest (including OID) from the Debentures, as well as gain on the sale,
exchange or other disposition of Debentures, 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 Non-U.S.
Holder that is a resident of a nation with which the United States has entered
into an income tax treaty, attributable to a permanent establishment (or, in
the case of an individual, a fixed base) in the United States.
INTEREST
Any interest (including OID) paid to a Non-U.S. Holder that is not U.S.
trade or business income will not be subject to federal income tax if the
interest qualifies as "portfolio interest". Interest on the Debentures will
generally qualify as portfolio interest if (i) the Non-U.S. Holder does not
actually or constructively own 10% or more of the total voting power of all
voting stock of Holding and is not a "controlled foreign corporation" with
respect to which Holding is a "related person" within the meaning of the Code,
and (ii) the beneficial owner (a) under penalties of perjury, certifies that
the beneficial owner is not a U.S. person and such certificate provides the
beneficial owner'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 to a Non-U.S. Holder that neither
qualify for the portfolio interest exception nor are U.S. trade or business
income will be subject to federal income tax at the rate of 30%, unless a
United States income tax treaty applies to reduce or eliminate withholding.
U.S. trade or business income will be taxed at regular federal income tax 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
A-9
<PAGE>
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 the benefit of a tax treaty or
to claim exemption from withholding because the income is U.S. trade or
business income, the Non-U.S. Holder must provide a properly executed Form 1001
or 4224 (or such successor forms as the Service designates), as applicable,
prior to the payment of interest. These forms must be periodically updated.
Under final Treasury Regulations that will be effective for payments after
December 31, 1999, subject to certain transition rules (the "Final
Regulations"), the Forms 1001 and 4224 may be replaced by Form W-8. Also, under
the Final Regulations, a Non-U.S. Holder who is claiming the benefit of a
treaty in certain circumstances may be required to obtain a federal TIN and to
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.
SALE, EXCHANGE OR REDEMPTION OF DEBENTURES
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange,
redemption or other disposition of a Debenture will not be subject to federal
income tax, provided that (i) such gain is not U.S. trade or business income;
(ii) the Non-U.S. Holder is not an individual who holds the Debenture as a
capital asset, is present in the United States for 183 days or more in the
taxable year of the disposition and who meets certain other requirements; and
(iii) the Non-U.S. Holder is not subject to tax pursuant to the provisions of
federal tax law applicable to certain U.S. expatriates (including certain
former citizens or residents of the United States).
A-10
<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 HOLDING. 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 HOLDING 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 ................................. 19
The Exchange Offer .............................. 20
Capitalization .................................. 27
Selected Historical Consolidated Financial
Data ......................................... 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................... 29
Business ........................................ 38
The Transactions ................................ 48
Management ...................................... 49
Security Ownership of Certain Beneficial
Owners and Management ........................ 53
Certain Relationships and Related
Transactions ................................. 54
Description of Certain Indebtedness ............. 56
Description of New Debentures ................... 59
U.S. Federal Income Tax Considerations .......... 84
Plan of Distribution ............................ 89
Notice to Investors ............................. 90
Legal Matters ................................... 90
Experts ......................................... 91
Index to Unaudited Pro Forma
Condensed Consolidated Statement of
Operations ................................... P-1
Index to Consolidated Financial
Statements ................................... F-1
</TABLE>
NEW 13 1/2% SENIOR
DISCOUNT DEBENTURES
DUE 2009
AKI HOLDING CORP.
--------------------------------------------
PROSPECTUS
--------------------------------------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A-11
<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 Tenth of Holding's Certificate of Incorporation, (the
"Certificate of Incorporation") (incorporated by reference as Exhibit 3.1 to
this Registration Statement), eliminates the liability of Holding's directors
to Holding 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 Tenth of the Certificate of Incorporation provides that Holding
shall indemnify any director or officer to the fullest extent permitted by the
DGCL. Holding also maintains officers' and directors' liability insurance which
insures against liabilities that officers and directors of Holding 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 Holding and certain control
persons of Holding against certain liabilities, including liabilities caused by
any untrue statement of material fact or omission contained in any registration
statement, preliminary 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 Holding.+
3.1. Certificate of Incorporation of Holding.+
3.2. Bylaws of Holding.+
4.1. Indenture dated as of June 25, 1998 between Holding and State Street Bank and Trust
Company, as Trustee.+
4.2. Form of 13 1/2% Senior Discount Debentures due July 1, 2009 (included as an exhibit to
Exhibit 4.1).+
4.3. Registration Rights Agreement, dated as of June 25, 1998 between Holding and DLJ.+
5.1. Legal opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. concerning the legality of the
Debentures.*
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 IBJ Schroder Bank &
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 October 9, 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 State Street Bank and 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.
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 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.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
items 4.10(b), 11 or 13 of this Form, within one business day receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the Registration Statement through the date
of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<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 12th day of November 1998.
AKI HOLDING CORP.
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 12, 1998
- ------------------------- (principal executive officer)
Roger L. Barnett and Director
* Chairman of the Board and Director November 12, 1998
- -------------------------
Thompson Dean
* Chief Operating Officer November 12, 1998
- -------------------------
Barry W. Miller
* Chief Financial Officer (principal November 12, 1998
- ------------------------- financial officer and principal
Kenneth A. Budde accounting officer)
* Director November 12, 1998
- -------------------------
Hugh R. Kirkpatrick
Director November 12, 1998
- -------------------------
Mark Michaels
* Director November 12, 1998
- -------------------------
David M. Wittels
</TABLE>
* /s/ Roger L. Barnett
--------------------
Roger L. Barnett
Attorney-in-Fact
II-4
<PAGE>
SCHEDULE II
AKI HOLDING CORP. 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>
[Letterhead of Akin, Gump, Strauss, Hauer & Feld, L.L.P.]
November 9, 1998
AKI Holding Corp.
1815 East Main Street
Chattanooga, Tennessee 37404
RE: AKI HOLDING CORP.
13 1/2% SENIOR DISCOUNT DEBENTURES DUE 2009
Ladies and Gentlemen:
We have acted as counsel to AKI Holding Corp., a Delaware
corporation (the "Company"), in connection with the Company's offer to exchange
(the "Exchange Offer") $1,000 principal amount of 13 1/2% Senior Discount
Debentures due 2009 (the "New Debentures") of the Company for each $1,000
principal amount of its issued and outstanding 13 1/2% Senior Discount
Debentures due 2009 (the "Old Debentures") 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 Debentures have been and the New Debentures will be
issued pursuant to the provisions of an Indenture, dated as of June 25, 1998
(the "Indenture"), by and between the Company and State Street Bank and 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.
<PAGE>
November 9, 1998
Page 2
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 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 Debentures and, when issued, executed and authenticated in accordance with
the terms of the Indenture and delivered in exchange for the Old Debentures in
accordance with the terms of the Exchange Offer, the New Debentures 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>
[Letterhead of Akin, Gump, Strauss, Hauer & Feld, L.L.P.]
November 9, 1998
AKI Holding Corp.
1815 East Main Street
Chattanooga, Tennessee 37404
RE: AKI HOLDING CORP.
13 1/2% SENIOR DISCOUNT DEBENTURES DUE 2009
Dear Gentlemen:
We have acted as counsel to AKI Holding Corp., a Delaware corporation
(the "Company"), in connection with the registration of an aggregate principal
amount of $50,000,000 of 13 1/2% Senior Discount Debentures due 2009 (the "New
Debentures"), pursuant to the Company's Registration Statement on Form S-4,
File No. 333-60991, (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 Debentures to the holders of the
Company's outstanding 13 1/2% Senior Discount Debentures due 2009, previously
sold pursuant to Rule 144A (the "Old Debentures"). 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
<PAGE>
AKI Holding Corp.
November 9, 1998
Page 2
to our satisfaction, of such documents, corporate records and other instruments
as we have deemed 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 Debentures for New
Debentures in the Exchange Offer; and the ownership and disposition of New
Debentures by holders who acquire the New Debentures 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;
<PAGE>
(3) the sum of the then outstanding principal
balances of the Senior Term Loan, Additional Senior Term Loan,
Subordinated Indebtedness held by SBA and, subject to the provisions
of subsection 3.1(G), Refinanced Subordinated Indebtedness, less any
outstanding Lender Guarantees; and
(4) sixty-six and two thirds percent (66-2/3%) of
the sum of (i) the then outstanding principal balances of the Senior
Term Loan, Additional Senior Term Loan, Subordinated Indebtedness held
by SBA and, subject to the provisions of subsection 3.1(G), Refinanced
Subordinated Indebtedness, plus (ii) $12,890,000, representing an
amount equal to the original cash equity investment, directly or
indirectly, by VILARC Capital, SBA and Liberty in Borrower, plus (iii)
additional cash equity invested by Vilarc Capital, SBA, Liberty or any
other Person in Borrower, directly or indirectly, after the date
hereof, less (iv) any outstanding Lender Guarantees.
If at any time the Revolving Loans exceed the Maximum
Revolving Loan Balance, Revolving Loans must be repaid immediately in an amount
sufficient to eliminate any excess. Heller may make Revolving Loans bearing
interest with reference to the Base Rate in any amount with one (1) Business
Day prior notice required for amounts greater than $5,000,000. For amounts less
than $5,000,000, telephonic notice must be provided by noon CST on the date of
the borrowing. All LIBOR Rate Loans require two (2) Business Days' notice. All
Loans requested telephonically must be confirmed in writing within one Business
Day.
(B) Lender Guarantees and Letters of Credit. At Borrower's
request, Heller will provide Lender Guarantees up to an aggregate amount of
$1,000,000 outstanding at any time. "LENDER GUARANTEE" means a letter of credit
issued by Heller or a guarantee by Heller to induce a bank, reasonably
acceptable to Heller, to issue a letter of credit, or any payment made by
Heller pursuant to any letter of credit subject to a Lender Guarantee which has
not been reimbursed by Borrower or charged as a Revolving Loan. In determining
the amount of outstanding Lender Guarantees, the maximum amount of any Heller
guarantee to a bank issuing letters of credit on behalf of Borrower will be
considered outstanding unless such bank reports daily activity to Heller
showing actual outstanding letters of credit subject to Heller's guarantee.
Lender Guarantees will only be provided for letters of credit which expire
within one (1) year after date of issuance and at least thirty (30) days prior
to the date set forth in clause (c) of the definition of the term "EXPIRY
DATE." Borrower shall give Heller five (5) Business Days prior written notice
for
2
<PAGE>
a letter of credit. Five (5) Business Days prior written notice is required
for the issuance of a letter of credit by a bank, provided that such five (5)
Business Day period may not commence until Heller and the bank that will be
issuing such letter of credit have entered into a Service and Letter of Credit
Guaranty Agreement or any similar agreement, in form and substance satisfactory
to Heller, which agreement will govern Heller's guaranty of all letters of
credit to be issued by such bank for the benefit of Borrower. Borrower is
irrevocably and immediately responsible to Heller for reimbursement of any
amount paid by Heller under any Lender Guarantee except to the extent such
1payments were made as a result of Heller's gross negligence or willful
misconduct. Subject to the provisions of the last paragraph of subsection 1.4,
this reimbursement shall occur by the making of a Revolving Loan without prior
notice to Borrower. The Borrower shall (i) maintain an operating account at the
issuing bank or (ii) be directly charged by the issuing bank for settlement of
letters of credit and any related fees.
1.2 Interest and Related Fees.
(A) Interest. From the date the Loans are made and the other
Obligations become due and payable in accordance with the terms of this
Agreement and the other Loan Documents, the Obligations shall bear interest at
the sum of the Base Rate plus one percent (1.0%) per annum and/or, with respect
to any LIBOR Rate Loan, the sum of the LIBOR Rate plus two and three quarters
percent (2.75%) per annum. "BASE RATE" means a variable rate of interest per
annum equal to the rate of interest from time to time published by the Board of
Governors of the Federal Reserve System in Federal Reserve statistical release
H.15 (519) entitled "SELECTED INTEREST RATES" as the Bank prime loan rate. Base
Rate also includes rates published in any successor publications of the Federal
Reserve System reporting the Bank prime loan rate or its equivalent. The
statistical release generally sets forth a Bank prime loan rate for each
business day. The applicable Bank prime loan rate for any date not set forth
shall be the rate set forth for the last preceding date. In the event the Board
of Governors of the Federal Reserve System ceases to publish a Bank Prime loan
rate or equivalent, the term "BASE RATE" shall mean a variable rate of interest
per annum equal to the highest of the "PRIME RATE," "REFERENCE RATE," "BASE
RATE" or other similar rate as determined by Heller announced from time to time
by any of Bankers Trust Company, The Chase Manhattan Bank, National Association
and Chemical Bank (with the understanding that any such rate may merely be a
reference rate and may not necessarily represent the lowest or best rate
actually charged to any customer by such bank). "BASE RATE LOANS" means Loans
bearing interest at rates determined by reference to the Base Rate.
3
<PAGE>
"LIBOR RATE" means, for each Interest Period, a rate equal to: (a) the rate of
interest reasonably determined by Heller at which deposits in U.S. dollars for
the relevant Interest Period are offered based on information presented on the
Reuters Screen LIBO Page as of 11:00 a.m. (London time) on the day which is two
(2) Business Days prior to the first day of such Interest Period, provided that
if at least two such offered rates appear on the Reuters Screen LIBO Page in
respect of such Interest Period, the arithmetic mean of all such rates will be
the rate used, provided, further, that if fewer than two offered rates appear
or if Reuters ceases to provide LIBOR quotations, such rate shall be the rate
of interest at which deposits in U.S. dollars are offered for the relevant
Interest Period by any of Bankers Trust Company, The Chase Manhattan Bank,
National Association or Chemical Bank to prime banks in the London interbank
market, divided by (b) a number equal to 1.0 minus the aggregate (but without
duplication) of the rates (expressed as a decimal fraction) of reserve
requirements in effect on the day which is two (2) Business Days prior to the
beginning of such Interest Period (including, without limitation, basic,
supplemental, marginal and emergency reserves under any regulations of the
Board of Governors of the Federal Reserve System or other governmental
authority having jurisdiction with respect thereto, as now and from time to
time in effect) for Eurocurrency funding (currently referred to as
"Eurocurrency Liabilities" in Regulation D of such Board) which are required to
be maintained by a member bank of the Federal Reserve System; such rate to be
rounded upward to the next whole multiple of one-sixteenth of one percent
(.0625%). "LIBOR RATE LOANS" means Loans bearing interest at rates determined
by reference to the LIBOR Rate.
LIBOR Rate Loans may be obtained for a one, two, three, or six month
period (each being an "Interest Period") provided that: (a) the interest is
calculated from the date the Loan is made, (b) if the Interest Period expires
on a day that is not a Business Day, then it will expire on the next Business
Day, (c) no Interest Period shall extend beyond the date set forth in clause
(c) of the definition of the term "EXPIRY DATE."
If the introduction of or the interpretation of any law, rule, or
regulation would increase the reserve requirement and as a result there would
be an increase in the cost of making or maintaining a LIBOR Rate Loan, then
Heller shall submit a certificate demonstrating the impact of the increased
cost and require payment thereof within ten (10) days from the Borrower. There
are no limitations on the number of times such certificate may be submitted.
4
<PAGE>
(B) Commitment Fee. From the Closing Date, Borrower shall pay
a fee in an amount equal to
(1) the Revolving Loan Commitment less the average
daily balance of the Revolving Loan less the average daily amount of
outstanding Lender Guarantees during the preceding month, multiplied
by
(2) one half of one percent (0.5%) per annum.
Such fee is payable monthly in arrears on the first day of the
subsequent month.
(C) Lender Guarantee Fee. From the Closing Date, Borrower
shall pay a fee for each Lender Guarantee from the date of issuance of the
Lender Guarantee to the date of termination thereof. The fee is equal to the
average daily outstanding amount of the Lender Guarantee multiplied by two and
three quarters percent (2.75%) per annum, such fees payable monthly in arrears
on the first day of each subsequent month. Borrower shall also reimburse Heller
for any and all fees and expenses paid to the issuer of any letter of credit
that are in any way related to a Lender Guarantee.
(D) Computation of Interest and Related Fees. Interest on all
Loans and any other Obligations and the related fees set forth in this
subsection 1.2 shall be calculated daily on the basis of a three hundred sixty
(360) day year for the actual number of days elapsed in the period during which
it accrues. The date of funding a Base Rate Loan, the first day of an Interest
Period with respect to a LIBOR Rate Loan and the date of conversion of a LIBOR
Rate Loan to a Base Rate Loan shall be included in the calculation. The date of
payment of a Base Rate Loan, the last day of an Interest Period with respect to
a LIBOR Rate Loan and the date of conversion of a Base Rate Loan to a LIBOR
Rate Loan shall be excluded in the calculation. Interest on all Base Rate Loans
is payable in arrears on the first day of each month and on the Expiry Date,
whether by acceleration or otherwise. Interest on LIBOR Rate Loans shall be
payable on the last day of the applicable Interest Period, unless the period is
greater than ninety (90) days, in which case interest will be payable on the
ninetieth (90th) day of the Interest Period and the last day of the Interest
Period. In addition, interest on LIBOR Rate Loans is due on the Expiry Date,
whether by acceleration or otherwise.
(E) Default Rate of Interest. At the election of Heller,
after the occurrence of an Event of Default and for so long as it continues,
the Loans and other Obligations which are
5
<PAGE>
then due and payable shall bear interest at a rate that is one percent (1%) in
excess of the rates otherwise payable under this Agreement. Furthermore, during
any period in which any Event of Default exists, and is continuing, as the then
current Interest Periods for LIBOR Rate Loans expire such Loans shall be
converted into Base Rate Loans and the LIBOR Rate election will not be
available to the Borrower until all Events of Default are cured or waived.
(F) Excess Interest. Under no circumstances will the rate of
interest chargeable be in excess of the maximum amount permitted by law. If
excess interest is charged and paid in error, then the excess amount will be
promptly refunded.
(G) LIBOR Rate Election. All Loans made on the Closing Date
shall be Base Rate Loans and remain so for ten (10) Business Days. Thereafter,
Borrower may request that Revolving Loans to be made be LIBOR Rate Loans and
that portions of outstanding Loans be converted to LIBOR Rate Loans. Any such
request, which will be made by submitting a LIBOR Rate Loan request, in the
form of Exhibit 1.2(G), to Heller, shall pertain to Loans in an aggregate
minimum amount of $500,000 and integral multiples of $10,000 in excess thereof.
Once given, a LIBOR Rate Loan request shall be irrevocable and Borrower shall
be bound thereby. Upon the expiration of an Interest Period, in the absence of
a new LIBOR Rate Loan request submitted to Heller not less than two (2)
Business Days prior to the end of such Interest Period, the LIBOR Rate Loan
then maturing shall be automatically converted to a Base Rate Loan. There may
be no more than eight (8) LIBOR Rate Loans outstanding at any one time.
1.3 Other Fees and Expenses.
(A) LIBOR Breakage Fee. Upon any payment or prepayment of a
LIBOR Rate Loan on any day that is not the last day of the Interest Period
applicable to that Loan (regardless of the source of such prepayment and
whether voluntary or otherwise), or, if for any reason (other than a default by
Heller) a borrowing of a LIBOR Rate Loan does not occur on a date specified in
a request for an advance of a LIBOR Rate Loan or in a LIBOR Rate Loan Request,
Borrower shall pay Heller, upon Heller's written request therefor (which
request shall set forth in reasonable detail the computation of the amount
requested) an amount equal to the reasonable losses (including, without
limitation, any such loss sustained by Heller in connection with the
reemployment of funds) that Heller sustains as a result of such payment,
prepayment or failure to borrow ("LIBOR RATE BREAKAGE FEE").
(B) Expenses and Attorneys Fees. Borrower agrees to
6
<PAGE>
promptly pay all reasonable fees, costs and expenses (including those of
attorneys) incurred by Heller in connection with the examination, review, due
diligence investigation, documentation, negotiation and closing of the
transactions contemplated herein and in connection with any amendments,
modifications, and waivers with respect to the Loan Documents. Borrower agrees
to pay all reasonable fees, costs and expenses incurred by Heller in connection
with any action to enforce any Loan Document or to collect any payments due
from Borrower. The reasonable fees, costs and expenses of attorneys may include
allocated costs of internal counsel unless objected to by Borrower, in which
event any such work proposed to be performed by internal counsel may be
performed by external counsel at Borrower's expense. All fees, costs and
expenses for which Borrower is responsible under this subsection 1.3(B) shall
be deemed part of the Obligations when incurred, payable within thirty (30)
days after demand therefor if no Event of Default exists or, if an Event of
Default exists, immediately upon demand, and shall be secured by the
Collateral.
(C) Facility Fee. Borrower shall pay to Heller a
nonrefundable facilities fee of $37,500 per annum, in advance, with the first
payment due on the Closing Date.
1.4 Payments. All payments by Borrower of the Obligations shall be
made in same day funds and delivered to Heller by wire transfer to the
following account or such other place as Heller may from time to time
designate.
ABA No. 0710-0001-3
Account Number 55-00540
The First National Bank of Chicago
One First National Plaza
Chicago, IL 60670
Reference: Heller Corporate Finance Group
for the benefit of ARCADE
Borrower shall receive credit for such funds if received by 1:00 p.m. CST on
such day. In the absence of timely notice and receipt, such funds shall be
deemed to have been paid on the next Business Day. Whenever any payment to be
made hereunder shall be stated to be due on a day that is not a Business Day,
the payment may be made on the next succeeding Business Day and such extension
of time shall be included in the computation of the amount of interest and fees
due hereunder.
Borrower hereby authorizes Heller to make a Revolving Loan for the
payment of interest, facility fees pursuant to subsection
7
<PAGE>
1.3(C), commitment fees and Lender Guarantee fees payable pursuant to
subsections 1.2(B) and 1.2(C), LIBOR Rate Breakage Fees and Lender Guarantee
payments. Heller agrees to use its best efforts to provide to Borrower notice
prior to so making a Revolving Loan; provided, however, the failure to provide
such notice shall not affect or impair the authorization granted pursuant to
the preceding sentence. Prior to an Event of Default, other fees, costs and
expenses (including those of attorneys) reimbursable to Heller pursuant to
subsection 1.3(B) or elsewhere in any Loan Document may be debited to the
Revolving Loan account after thirty (30) days notice to Borrower. During the
continuance of an Event of Default, no notice is required.
1.5 Term of the Agreement. The Agreement shall be effective until the
earlier of (a) the date on which the Loans are paid in full and all other
Obligations (other than contingent Obligations not then due and payable) have
been satisfied and Heller has no further obligation to lend hereunder and (b)
the Expiry Date. Upon the termination of the effectiveness of this Agreement,
any unpaid Obligations shall be immediately due and payable without notice or
demand by Heller. Notwithstanding any type of termination, until all
Obligations (other than contingent Obligations not then due and payable) have
been fully paid and satisfied, Heller shall be entitled to retain the security
interests in all Collateral granted under the Security Documents.
1.6 Borrower's Loan Account. Heller will maintain loan account records
for (a) all Loans, interest charges and payments thereof, (b) all Lender
Guarantees, (c) the charging and payment of all fees, costs and expenses and
(d) all other debits and credits pursuant to this Agreement. The balance in the
loan accounts shall be presumptive evidence of the amounts due and owing to
Heller absent manifest error, provided that any failure to so record shall not
limit or affect the Borrower's obligation to pay. Within five (5) days of the
first of each month, Heller shall provide a statement for each loan account
setting forth the principal of each account and interest due thereon. Borrower
must deliver a written objection within thirty (30) days after the end of each
of its fiscal years or the statements delivered with respect to each month
during each such fiscal year will be presumed as binding evidence of the
obligation absent manifest error. After the occurrence and during the
continuance of an Event of Default, Borrower irrevocably waives the right to
direct the application of any and all payments and Borrower hereby irrevocably
agrees that Heller shall have the continuing exclusive right to apply and
reapply payments in any manner it deems appropriate.
8
<PAGE>
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
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(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)
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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
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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
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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
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(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
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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.
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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
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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.
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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.
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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
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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
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<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
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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.
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<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>
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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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
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<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.
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<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.
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<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
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<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
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<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:
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<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
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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>
EXHIBIT 12.1
AKI HOLDING CORP. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(dollars in thousands)
<TABLE>
<CAPTION>
PREDECESSOR
----------------------------------------------------------------------
PRO FORMA
---------------
FISCAL YEAR ENDED THREE MONTHS THREE MONTHS JULY 1,
JUNE 30, ENDED ENDED 1997 TO
----------------------- SEPTEMBER 30, SEPTEMBER 30, DECEMBER 15,
1996 1997 1997 1997 1997
----------- ----------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Income (loss)
before income
taxes ................ $ 4,279 $ 7,117 $ 3,083 $ (53) $ 3,234
Add:
Interest on all
indebtedness
which includes
amortization of
deferred financing
costs ................ 6,762 6,203 1,451 4,169 2,646
-------- -------- -------- ------ --------
Earnings available
for fixed charges..... 11,041 13,320 4,534 4,169 5,880
Fixed charges ......... 6,762 6,203 1,451 4,169 2,646
-------- -------- -------- ------ --------
Ratio of earnings
to fixed
charges ............. 1.6x 2.1x 3.1x -- 2.2x
<CAPTION>
HOLDING
-------------------------------------------
PRO FORMA
-------------------------------------------
DECEMBER 16, FISCAL YEAR THREE MONTHS
1997 TO ENDED ENDED
JUNE 30, JUNE 30, SEPTEMBER 30,
1998 1998 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Income (loss)
before income
taxes ................ $ (7,545) $ (7,775) $ 315
Add:
Interest on all
indebtedness
which includes
amortization of
deferred financing
costs ................ 11,327 16,730 4,096
--------- --------- --------
Earnings available
for fixed charges..... 3,782 8,955 4,411
Fixed charges ......... 11,327 16,730 4,096
--------- --------- --------
Ratio of earnings
to fixed
charges ............. -- -- 1.1x
</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 $53, $7,545
and $7,775 for the pro forma three months ended September 30, 1997, the period
from December 16, 1997 to June 30, 1998 and the pro forma fiscal year ended
June 30, 1998, respectively.
<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 Holding Corp. 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 12, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF AKI HOLDINGS CORP. (OR ITS PREDECESSOR) FOR THE YEAR ENDED
JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENS.
</LEGEND>
<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 HOLDING CORP. (OR ITS PREDECESSOR) FOR THE
YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<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> 3,339
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 INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF AKI HOLDING CORP. (OR ITS PREDECESSOR) FOR THE YEAR ENDED
JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> JUN-30-1998
<CASH> 3,842
<SECURITIES> 0
<RECEIVABLES> 13,782
<ALLOWANCES> 277
<INVENTORY> 2,078
<CURRENT-ASSETS> 25,857
<PP&E> 20,789
<DEPRECIATION> 1,853
<TOTAL-ASSETS> 214,547
<CURRENT-LIABILITIES> 10,811
<BONDS> 142,509
0
0
<COMMON> 0
<OTHER-SE> 57,084
<TOTAL-LIABILITY-AND-EQUITY> 214,547
<SALES> 71,252
<TOTAL-REVENUES> 71,252
<CGS> 47,327
<TOTAL-COSTS> 47,327
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,973
<INCOME-PRETAX> (4,311)
<INCOME-TAX> (611)
<INCOME-CONTINUING> (3,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,700)
<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 HOLDING CORP. (OR ITS PREDECESSOR) FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<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 HOLDING CORP. FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<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> 276
<INVENTORY> 3,984
<CURRENT-ASSETS> 28,059
<PP&E> 21,473
<DEPRECIATION> 2,894
<TOTAL-ASSETS> 215,626
<CURRENT-LIABILITIES> 13,615
<BONDS> 143,226
0
0
<COMMON> 0
<OTHER-SE> 55,093
<TOTAL-LIABILITY-AND-EQUITY> 215,626
<SALES> 24,024
<TOTAL-REVENUES> 24,024
<CGS> 15,421
<TOTAL-COSTS> 15,421
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,096
<INCOME-PRETAX> 315
<INCOME-TAX> 555
<INCOME-CONTINUING> (240)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (240)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
