<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 13, 1998.
REGISTRATION NO. 333-60991
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
AKI HOLDING CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 2799 74-2883163
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
1815 EAST MAIN STREET
CHATTANOOGA, TENNESSEE 37404
(423) 624-3301
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
KENNETH A. BUDDE
CHIEF FINANCIAL OFFICER
AKI 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: [ ]
---------------
CALCULATION OF REGISTRATION FEE(1)
<TABLE>
<CAPTION>
=======================================================================================================================
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT (2) PRICE (2) FEE
<S> <C> <C> <C> <C>
13 1/2% Senior Discount Debentures Due 2009 $50,000,000 100% $26,384,505 $ 7,783(3)
=======================================================================================================================
</TABLE>
(1) This Registration Statement covers both the Prospectus filed hereby in
connection with the Exchange Offer for the New Debentures and the
Prospectus filed hereby in connection with certain market making
activities by an affiliate of the registrant.
(2) Based on Accreted Value as of August 7, 1998.
(3) Fee previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
===============================================================================
<PAGE>
EXPLANATORY NOTE
This Registration Statement covers the registration of an aggregate
principal amount of $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 , 1998
PROSPECTUS
OFFER TO EXCHANGE
13 1/2% NEW 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.
----------------
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
June 30, 1998, Holding had no outstanding indebtedness other than the
Debentures. Holding's subsidiaries had $122.6 million of outstanding
liabilities (including trade payables), to which the Debentures are
structurally subordinated.
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 advised
by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") as the initial
purchaser (the
i
<PAGE>
"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."
----------------
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.
----------------
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
<PAGE>
----------------
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
<PAGE>
------------
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The information herein contains forward-looking statements that involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of 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
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified in
its entirety by the more detailed information and Consolidated Financial
Statements of the Company, together with the notes thereto, contained elsewhere
herein. Unless the context otherwise requires, all references herein to (i)
"Acquisition Corp." shall mean AHC I Acquisition Corp., (ii) "Holding" shall
mean AKI Holding Corp., a wholly-owned subsidiary of Acquisition Corp., (iii)
the "Company" shall mean AKI, Inc., a wholly-owned subsidiary of Holding, and
its predecessors and subsidiaries and (iv) the "Offering" or the "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" and "Fiscal 1998" when used with respect to the Company refer to the
Company's fiscal years ended June 30, 1996, 1997 and 1998, 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
1
<PAGE>
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 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 June 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 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. 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................ 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 June 30, 1998,
Holding had no outstanding indebtedness other
than the Debentures and Holding's subsidiaries
had $122.6 million of outstanding liabilities
(including trade payables) to which the
Debentures are structurally subordinated. 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
(DOLLARS IN THOUSANDS)
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. 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 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 Statement 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
JULY 1, 1997 1997 YEAR
FISCAL YEAR ENDED JUNE 30, THROUGH THROUGH ENDED
--------------------------- DECEMBER 15, JUNE 30, JUNE 30,
1996 1997 1997 1998 1998
------------ ------------ -------------- -------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales ................................. $ 73,486 $ 77,723 $ 35,186 $36,066 $81,831
Cost of goods sold ........................ 49,862 49,467 22,809 24,518 52,127
-------- -------- -------- ------- -------
Gross profit .............................. 23,624 28,256 12,377 11,548 29,704
Selling, general and administrative
expenses ................................. 10,655 13,353 5,712 5,601 12,350
Amortization of goodwill .................. 1,214 1,214 559 2,087 4,030
-------- -------- -------- ------- -------
Income from operations .................... 11,755 13,689 6,106 3,860 13,324
Interest Expense .......................... 6,762 6,203 2,646 11,327 16,730
OTHER DATA(1):
Capital
expenditures ............................. 2,051 2,462 807 514 1,321
Ratio of earnings to fixed charges(2) ..... 1.6x 2.1x 2.2x -- --
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
1998
------------
<S> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents ........... $ 3,842
Working capital ..................... 15,046
Total assets ........................ 214,547
Total debt .......................... 144,448
Total stockholder's equity .......... 57,084
</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, 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 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 operating activities for the Predecessor was $5,337
and $8,942 for the fiscal years ended June 30, 1996 and 1997, respectively,
and $4,928 for July 1, 1997 through December 15, 1997. Net cash
used in operating activities for Holding was $8,821 for December 16, 1997
through June 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, 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 and $1,321 on a pro forma basis for the fiscal year ended June 30,
1998.
Net cash used in financing activities for the Predecessor was $8,895 and
$6,841 for the fiscal years ended June 30, 1996 and 1997, respectively, 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. 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, 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 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. Earnings were not sufficient to
cover fixed charges by $7,545 and $3,620 for the period from December 16,
1997 through June 30, 1998 and the pro forma fiscal year ended June 30,
1998.
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. As of
June 30, 1998, Holding had total consolidated indebtedness of approximately
$144.4 million and Holding's deficiency of earnings available to cover fixed
charges for Fiscal 1998, on a pro forma basis for the Acquisition, the
Refinancing and the 3M Acquisition, was $3.6 million. In addition, as of such
date 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 June 30, 1998,
Holding's subsidiaries had $122.6 million of outstanding liabilities (including
trade payables) which are structurally senior to the Debentures. At
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June 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 delivered to consumers
through the U.S. Postal Service accounted for approximately 35% of the
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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 sampler market are Webcraft, a subsidiary of Big Flower
Holdings, Inc., Orlandi Inc., Retail Communications Corp., Quebecor Printing
(USA) Corp., Nord'est, Marietta Corp. and Color Prelude in the United States
and Rotocon, Drescher Ascent and Appliquessence in Europe. The Company also
competes with numerous "scratch 'n sniff" printers. 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 Fiscal 1998 compared to Fiscal
1997 and Fiscal 1997 compared to Fiscal 1996 in "Management's Discussion of
Financial Condition and Results of Operations--Results of Operations." There
can be no assurance that further reductions in advertising spending will not
occur, which could have a material adverse effect on the Company's results of
operations and financial condition.
In addition, the Company's sales and operating results have historically
reflected seasonal variations. Such seasonal variations are based on the timing
of the Company's customers' advertising campaigns,
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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.
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
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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 June 30, 1998, approximately 60% of the Company's employees worked
under a collective bargaining agreement that expires on April 1, 1999. While
the Company believes that its relations with its employees are good, there can
be no assurance that the Company's collective bargaining agreement will be
renewed in the future. A prolonged labor dispute (which could include a work
stoppage) could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Employees."
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 has commenced a study of its computer systems in order to
assess its exposure to year 2000 issues. The Company expects to make the
necessary modifications or changes to its computer information systems to
enable proper processing of transactions relating to the year 2000 and beyond.
The Company will evaluate appropriate courses of action, including replacement
of certain systems whose associated costs would be recorded as assets and
subsequently amortized. There can be no assurance that costs and expenses or
other matters relating to year 2000 issues will not have a material adverse
effect on the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Issues."
NO PUBLIC MARKET FOR THE NEW 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
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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 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.
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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 and Overnight Delivery in Boston:
State Street Bank and Trust Company
Two International Place
Boston, Massachusetts 02110
Attention: Corporate Trust Department
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
By mail:
State Street Bank and Trust Company
P.O. Box 778
Boston, Massachusetts 02102
Attention: Corporate Trust Department
Telephone: (617) 664-5587
25
<PAGE>
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 June 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 June 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 Statement of Operations and notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
-----------------
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents .................. $ 3,842
=========
Debt:
Debentures ................................ 26,020
Notes ..................................... 115,000
Other (1) ................................. 3,428
---------
Total debt .............................. 144,448
---------
Stockholder's equity:
Common stock .............................. --
Additional paid-in capital ................ 78,364
Accumulated deficit ....................... (5,493)
Cumulative translation adjustment ......... (57)
Carryover basis adjustment ................ (15,730)
---------
Total stockholder's equity .............. 57,084
---------
Total capitalization ....................... $ 201,532
=========
</TABLE>
- ----------
(1) Includes the Scent Seal Note in the amount of $1,330, which was issued in
connection with the Company's acquisition of Scent Seal, Inc. in 1995.
See "Description of Certain Indebtedness--Scent Seal Note." Also includes
capital lease obligations of $2,098.
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, 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 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 for the period from
December 16, 1997 through June 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 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 HOLDING
------------- --------------------------------------------------------------- -------------
JULY 1, NOVEMBER 4, JULY 1, 1997 DECEMBER 16,
1993 THROUGH 1993 THROUGH FISCAL YEAR ENDED JUNE 30, THROUGH 1997 THROUGH
NOVEMBER 3, JUNE 30, ---------------------------------- DECEMBER 15, JUNE 30,
1993 1994 1995 1996 1997 1997 1998
------------- ------------- ---------- ---------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .......................... $19,941 $ 18,213 $61,794 $ 73,486 $ 77,723 $ 35,186 $ 36,066
Cost of goods sold ................. 11,172 12,042 38,333 49,862 49,467 22,809 24,518
------- -------- ------- -------- --------- -------- --------
Gross profit ....................... 8,769 6,171 23,461 23,624 28,256 12,377 11,548
Selling, general and
administrative expenses ........... 2,950 4,809 8,483 10,655 13,353 5,712 5,601
Amortization of goodwill ........... 78 723 1,113 1,214 1,214 559 2,087
------- -------- ------- -------- --------- -------- --------
Income from operations ............. 5,741 639 13,865 11,755 13,689 6,106 3,860
Interest expense, net .............. -- 3,718 6,170 6,762 6,203 2,646 11,327
Fees to stockholders ............... 102 197 470 470 470 215 125
Other, net ......................... 2,462 2,754 (22) 244 (101) 11 (47)
Income tax expense
(benefit) ......................... 1,310 (1,946) 3,114 2,101 3,135 1,441 (2,052)
------- -------- ------- -------- --------- -------- --------
Net income (loss) .................. $ 1,867 $ (4,084) $ 4,133 $ 2,178 $ 3,982 $ 1,793 $ (5,493)
======= ======== ======= ======== ========= ======== ========
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents .......... $ 68 $ 3,728 $ 4,196 $ 626 $ 303 $ 4,481 $ 3,842
Working capital (deficit) .......... 2,288 3,593 39 (4,685) (36,957) (4,959) 15,046
Total assets ....................... 28,320 72,754 85,695 82,395 77,142 77,399 214,547
Total debt and redeemable
preferred stock ................... 850 61,025 64,655 60,736 54,964 55,408 144,448
Total stockholder's equity ......... 16,940 2,927 6,572 7,932 11,225 12,716 57,084
OTHER DATA:
Capital expenditures ............... 1,109 1,184 1,325 2,051 2,462 807 514
Ratio of earnings to fixed
charges (1) ....................... n/m(2) -- 2.2x 1.6x 2.1x 2.2x --
</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 1999 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
For purposes of the following discussion, the results of operations for
Fiscal 1998 reflect the combination of the results of operations of the
Predecessor for the period July 1, 1997 through December 15, 1997, the date of
the Acquisition, with the results of operations of the Company for the period
December 16, 1997 through June 30, 1998. Because of the effects of purchase
accounting applied in the Acquisition and the additional interest expense
associated with the debt incurred to finance the Acquisition, the results of
operations of the Company are not comparable in all respects to the results of
operations of the Predecessor.
Fiscal 1998 Compared to Fiscal 1997
Net Sales. Net sales for Fiscal 1998 decreased $6.4 million, or 8.2%, to
$71.3 million as compared to $77.7 million for Fiscal 1997. The majority of
this decrease was attributable to three core customers' advertising decreases
on new product launches and existing products as a result of a management
restructuring at two of these customers and the sale of one of them. In
addition there was a decrease in
30
<PAGE>
domestic sales of products for fragrance sampling. These decreases were
partially offset by increased domestic and European sales of sampling products
to other categories of the cosmetics industry as well as increased sales to the
consumer products market.
Gross Profit. Gross profit for Fiscal 1998 decreased $4.4 million, or
15.5%, to $23.9 million as compared to $28.3 million for Fiscal 1997. Gross
profit as a percentage of net sales decreased to 33.5% in Fiscal 1998 from
36.4% in Fiscal 1997. The gross profit decline was primarily attributable to
the absorption of fixed overhead, depreciation costs and equipment
reconfiguration costs created by shorter production runs due to lower volume
and the increase in cost of goods sold in the period subsequent to the
Acquisition from the write-up of inventory in purchase accounting.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for Fiscal 1998 decreased $2.1 million, or 15.7%, to
$11.3 million as compared to $13.4 million for Fiscal 1997. The decrease in
selling, general and administrative expenses was primarily attributable to a
decrease in sales commissions resulting from the decreased level of sales and a
decrease in legal costs related to the Company's pursuit of a patent
infringement claim in Fiscal 1997. In addition, the Company also had decreased
expenses in Fiscal 1998 versus Fiscal 1997 related to the consolidation of
certain acquired technologies and certain expenses relating to reorganizing the
management structure at the Company's European subsidiary. As a result of these
factors, selling, general and administrative expenses as a percentage of net
sales decreased to 15.8% in Fiscal 1998 from 17.2% in Fiscal 1997.
Income from Operations. Income from operations for Fiscal 1998 decreased
$3.7 million, or 27.0%, to $10.0 million as compared to $13.7 million for
Fiscal 1997. Income from operations as a percentage of net sales decreased to
14.0% in Fiscal 1998 from 17.6% in Fiscal 1997 principally as a result of the
factors described above and the increase in amortization of goodwill resulting
from the Acquisition.
Interest Expense. Interest expense for Fiscal 1998 increased $7.8 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 was 36.8% in 1998 and 37.6% in 1997.
EBITDA. EBITDA for Fiscal 1998 decreased $2.4 million, or 12.8%, to $16.4
million as compared to $18.8 million for Fiscal 1997, principally as a result
of the factors described above. EBITDA is income from operations plus
depreciation and amortization of goodwill and other intangibles.
Fiscal 1997 Compared to Fiscal 1996
Net Sales. Net sales for Fiscal 1997 increased $4.2 million, or 5.7%, to
$77.7 million as compared to $73.5 million in Fiscal 1996. The increase is
primarily attributable to volume increases related to core customers'
advertising expenditure increases on new product launches and existing
products.
Gross Profit. Gross profit for Fiscal 1997 increased $4.7 million, or
19.9%, to $28.3 million, as compared to $23.6 million in Fiscal 1996. Gross
profit as a percentage of net sales improved to 36.4% in Fiscal 1997 from 32.1%
in Fiscal 1996. Gross profit improvements reflected decreased materials costs
as a result of paper price decreases and increased operating efficiency gained
from moving the production of an acquired business from outside sources to
internal facilities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for Fiscal 1997 increased $2.7 million, or 25.2%, to
$13.4 million as compared to $10.7 million in Fiscal 1996.
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The increase in selling, general and administrative expenses was primarily
attributable to an increase in legal costs as the Company pursued a patent
infringement claim against a competitor. Additional increases were related to
reorganizing the management structure of the Company's European subsidiary,
increases in customer service and sales staffing and increased commissions
related to sales volume increases. As a result of these factors, selling,
general and administrative expenses as a percentage of net sales increased to
17.2% in Fiscal 1997 from 14.6% in Fiscal 1996.
Income from Operations. Income from operations for Fiscal 1997 increased
$1.9 million, or 16.1%, to $13.7 million as compared to $11.8 million in Fiscal
1996. Income from operations as a percentage of net sales increased to 17.6% in
Fiscal 1997 from 16.1% in Fiscal 1996 principally as a result of the factors
described above.
Interest Expense. Interest expense for Fiscal 1997 decreased $0.6 million,
or 8.8% to $6.2 million as compared to $6.8 million for Fiscal 1996. Interest
expense as a percentage of net sales decreased to 8.0% in Fiscal 1997 from 9.3%
in Fiscal 1996. The decrease in interest expense is primarily attributable to
the decrease in the outstanding principal balance of the Scent Seal notes,
capitalized lease obligations and Senior Loan Agreement including a decrease in
the related interest rate due to a decrease in the prime rate, partially offset
by increased borrowings against the revolving credit line.
Other Income/Expense and Management Fees. Other income/expense and
management fees for Fiscal 1997 decreased $0.3 million, or 42.9% to $0.4
million as compared to $0.7 million for Fiscal 1996. Other income/expense and
management fees as a percentage of net sales decreased to 0.5% in Fiscal 1997
from 1.0% in Fiscal 1996. The decrease in other income/expense and management
fees was due to a loss on the disposal of equipment in 1996 and a gain in 1997
related to the purchase and resale of preproduction material.
Income Tax Expense. Income tax expense for Fiscal 1997 increased $1.0
million, or 47.6% to $3.1 million as compared to $2.1 million for Fiscal 1996.
The Company's effective tax rate was 37.6% in 1997 and 38.2% in 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 was 38.2% in 1996 and 37.2% in 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 June 30, 1998, Holding had consolidated indebtedness in an
aggregate amount of $144.4 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 is currently negotiating to amend certain of the financial
condition tests under the Credit Agreement. 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."
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
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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, $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.
Net cash generated by operating activities in Fiscal 1997 resulted mainly
from net income before depreciation and amortization. Key elements of changes
in net cash from operating activities were decreases in trade accounts
receivable that were principally offset by decreases in income taxes, accounts
payable and accrued expenses.
In Fiscal 1997 and 1998, the Company had capital expenditures of
approximately $2.5 million and $1.3 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 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 June 30, 1998, the total indebtedness of Holding on a consolidated
basis was approximately $157.5 million, of which approximately $131.4 million
(including trade payables, accrued liabilities and deferred taxes) is a direct
obligation of Holdings' subsidiaries. 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 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 June 30, 1998, the Company expects 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, $1.3 million in scheduled principal
repayments under the Scent Seal
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Note, $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" which is effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 requires that certain transactions
historically recorded through the statement of stockholders equity be presented
in the financial statements as other comprehensive income. The Company believes
there will be no material impact upon adoption of this Statement. The Company
will adopt the provisions of this Statement on July 1, 1998.
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 the three years ended June 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 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 the processing of date-sensitive information by its computerized
information systems. The Year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define the applicable
year. Certain programs may recognize a date using "00" as the year 1900 rather
than the year 2000, which could result in miscalculations or system failures.
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The Company has in place a Year 2000 program which is being executed by a
project team 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.
In the fourth quarter of calendar 1998 the Company will upgrade 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. The Company expects to be fully
Year 2000 compliant with respect to all significant business systems during the
first quarter of calendar 1999.
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.
Based on the Company's current assessment, the costs of addressing
potential problems are not currently expected to have a material adverse impact
on the Company's financial position, results of operations or cash flows in
future periods. However, if the Company, its customers or vendors identify Year
2000 issues in the future and are unable to resolve such issues in a timely
manner, it could result in a material financial risk. Accordingly, the Company
plans to devote the necessary resources to resolve all significant year 2000
issues in a timely manner.
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 the
fastest growing category in the cosmetics industry. Such growth is based
primarily on changing consumer demographics, as aging baby boomers look for
ways to maintain a youthful appearance, and the fast pace of product
innovation. Cosmetics companies launched more than 700 new skin care products
in 1996, approximately ten times the number of fragrances introduced that year.
The makeup category accounted for approximately $3.8 billion in annual sales in
the United States in 1997. The skin care category generally includes skin
lotions, treatments, toners and astringents, and the makeup category generally
includes liquid and powder makeup.
Historically, most cosmetic sampling programs have consisted of relatively
limited in-store or direct-mail efforts because traditional sampling
alternatives including miniatures, vials, packettes, sachets and blisterpacks,
have been too costly to produce in mass quantities and too inefficient to
incorporate into magazines, catalogs and other print advertising. Management
estimates that skin care and makeup sales account for approximately two-thirds
of all cosmetics industry sales, while sampling for such products account for
less than one-fourth of all cosmetics sampling units.
The Company's new product sampling technologies allow marketers for the
first time to cost-effectively reach consumers in their homes through
subscription magazines. Home sampling for skin care products and makeup is
important because such products are ideally sampled on clean skin in the
morning or evening. In addition, mass marketers have had limited opportunities
to sample their products in-store because there is generally no in-store
service person and most current methods of in-store sampling are viewed by
consumers as unsanitary. By providing cost-effective sampling technologies that
can be delivered on a mass scale to consumers' homes in a sanitary manner,
management believes that the Company's new sampling technologies will rapidly
become the industry standard for skin care and makeup sampling.
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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."
<TABLE>
<CAPTION>
YEAR OF PATENT TARGET
PRODUCT INTRODUCTION ORIGIN PROTECTION MARKET
- -------------------------------- -------------- ---------------------- ---------------- -------------------------------------
<S> <C> <C> <C> <C>
Fragrance Samplers:
ScentStrip .................... 1979 internally developed -- fragrance, consumer products
ScentStrip Plus ............... mid 1980's internally developed -- fragrance
DiscCover ..................... 1994 licensed patented fragrance, consumer products
Scent Seal .................... 1995 acquired patented fragrance
Resealable ScentStrip ......... 1997 internally developed patent pending fragrance, consumer products
New Products:
BeautiSeal .................... 1997 internally developed patent pending liquid makeup, skin care (lotions,
treatments)
PowdaTouch .................... 1997 internally developed patent pending powder cosmetics
LiquaTouch .................... 1997 internally developed patent pending liquid fragrance, skin care (toners,
astringents)
LipSeal ....................... pending internally developed patent pending lipstick
</TABLE>
Fragrance samplers. The Company has five different traditional fragrance
sampling products, which have historically accounted for substantially all of
the Company's sales. While the ScentStrip product technology continues to be
the most widely used technology in the fragrance sampling industry, management
believes that the Company's new fragrance sampling technologies have maintained
the Company's competitive position as an innovator in the industry. As a
result, the Company has played a sampling role in most major fragrance launches
in recent years, including such high-profile campaigns as Calvin Klein
Cosmetics' launch of CK One in 1994, Estee Lauder's launches of Pleasures in
1996 and Pleasures for Men in 1997, and Tommy Hilfiger's launch of Tommy in
1996 and Tommy Girl in 1997. Other examples of the Company's diverse experience
in the fragrance industry include successful sampling programs for (i) private
label retailers, including The Gap and Victoria's Secret, (ii) Donna Karan to
introduce its home fragrance line and (iii) Coty to introduce its aromatherapy
products with an innovative combination of Resealable ScentStrip Plus and Scent
Seal samplers.
o ScentStrip: The Company's original pull-apart microencapsulated
fragrance sampler. ScentStrip delivers to the consumer the most
cost-effective rendition of a fragrance.
o ScentStrip Plus: Adds a powdery texture to the microencapsulated
fragrance of ScentStrip.
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o Resealable ScentStrip: Adds an innovative closure to ScentStrip that
opens and reseals up to 25 times.
o DiscCover: A "peel and reveal," non-encapsulated fragrance label
sampling technology that opens and reseals up to 25 times, which is
versatile and color printable and can be die-cut to nearly any shape and
size.
o Scent Seal: A heat-sealed, pouch-like label technology that peels open
to reveal a moist, wearable gel sample that consumers can actually
experience on skin. Scent Seal samplers are the leading fragrance
sampling technology in the European market.
New products. The Company has recently introduced three innovative new
products, which management expects to account for a significant portion of the
Company's sales in the future. The Company is also in the final stages of
developing LipSeal, a lipstick sampler, which management expects to market at
the end of 1998. All of these new sampling technologies have been approved by
the U.S. Postal Service for inclusion in subscription magazines at periodical
postage rates.
o BeautiSeal: A heat-sealed, pouch-like label technology that peels open
to deliver cream and lotion treatments, liquid makeup and lipstick
directly into the hands of consumers in an inexpensive, spill-proof
format. The BeautiSeal sampler is less expensive and more versatile than
existing skin care sampling alternatives. For example, a two-sided,
printed insert incorporating a BeautiSeal sampler generally costs less
than half the cost to manufacture and distribute in magazines than an
equivalent sample packette. This product is the only skin treatment and
liquid makeup sampling technology approved by the U.S. Postal Service for
inclusion in subscription magazines at periodical postage rates. Because
of these advantages, management believes that the BeautiSeal technology
has been extremely well received in the market to date and is a
particularly attractive sampling vehicle for mass-cosmetic marketers who
have very few cost-effective alternatives to mass sample their products.
The product was introduced in featured advertisements for Estee Lauder's
flagship skin care product, Fruition Extra, in the August 1997 editions
of several magazines. Though the BeautiSeal technology was at the time
untested, management believes that Estee Lauder's BeautiSeal campaign was
the largest skin treatment sampling program in the history of Estee
Lauder.
o PowdaTouch: Offers color marketers a superior rendition of the actual
powder shade, texture, application and finish of their products.
PowdaTouch applies up to four different shades to sample a single item
shade range or a complete color line at a much lower cost than competing
technologies. Management estimates that PowdaTouch samplers can be
produced at a rate that is approximately ten times faster than competing
products and at a reduced production cost.
o LiquaTouch: The only sampling technology containing an
alcohol-formulated fragrance with an applicator that is approved by the
U.S. Postal Service for inclusion in subscription magazines at periodical
postage rates. LiquaTouch is a finalist of the Fragrance Foundation's
prestigious award for "Innovation of the Year" for 1997. Equally
appropriate for liquid skin care treatment products, LiquaTouch samplers
allow consumers to experience product texture, application and benefit in
a format that can be die-cut to nearly any shape or bottle replica.
Management believes that this new form of sampling will compete very
favorably with fragrance sampling in vials and sachets, in-store handouts
and direct-mail pieces in addition to providing a new opportunity for
subscription magazines. Management expects to generate additional
fragrance and skin treatment sales from its LiquaTouch technology. While
BeautiSeal samplers are ideally suited for treatment creams, LiquaTouch
samplers are expected to be very attractive for clear liquid products,
such as cleansers, astringents and toners.
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<PAGE>
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.,
Revlon, 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
44
<PAGE>
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. Upon consummation of the 3M
Acquisition, the Company's principal competitors in the printed fragrance
sampler market will be Webcraft, a subsidiary of Big Flower Holdings, Inc.,
Orlandi Inc., Retail Communications Corp. and
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Quebecor Printing (USA) Corp. The Company's fragrance sampler products also
compete with other forms of fragrance sampling, including miniatures, vials,
packettes, sachets, blisterpacks and scratch and sniff. Such additional forms
of fragrance sampling are marketed and manufactured by many different companies
including cosmetics companies producing such products for its own fragrance
products. The Company's principal competitors in the makeup sampler market are
Color Prelude Inc. and Retail Communications Corp. Management believes that the
Company currently has no direct competition in the subscription advertising,
skin care and liquid makeup sampling market, which has traditionally used
packettes that are more costly and less versatile than the Company's product
sampling technologies. However, there can be no assurance that competitors will
not develop makeup sampling technologies superior to the Company's or introduce
attractive alternatives for cosmetics companies to utilize for makeup sampling
programs. See "Risk Factors--Competition" and "--The Company."
ENVIRONMENTAL AND SAFETY REGULATION
The Company's operations are subject to extensive laws and regulations
relating to the storage, handling, emission, transportation and discharge of
materials into the environment and the maintenance of safe conditions in the
workplace. The Company's policy is to comply with all legal requirements of
applicable environmental, health and safety laws and regulations, and the
Company believes it is in general compliance with such requirements and has
adequate professional staff and systems in place to remain in compliance,
although there can be no assurances that this is the case. The Company
considers costs for environmental compliance to be a normal cost of doing
business, and includes such costs in pricing decisions.
FACILITIES
The Company owns the land and buildings in Chattanooga, Tennessee that are
used for production, administration and warehousing. The Company's executive
offices and primary facility at 1815 East Main Street are located on 2.55 acres
and encloses approximately 67,900 square feet. A second facility housing
product development and additional manufacturing areas at 1600 East Main Street
is located three blocks away on 2.49 acres and encloses approximately 36,700
square feet.
The Company currently has a number of web printing presses with
multi-color capability as well as envelope-converting machines and other
ancillary equipment. The Company operates a fully equipped production lab for
the manufacture of microcapsules and slurry and separate laboratories for the
Company's Encapsulated Products Division and the Company's research and
development facility. The Company also has a fully staffed and equipped label
manufacturing facility, which includes state-of-the-art label manufacturing
machines that have been specially modified to produce the Company's products
and a complete label attaching operation. The Company also maintains sales
offices in New York, San Francisco, Paris, France and London, England.
EMPLOYEES
As of June 30, 1998, the Company employed 331 persons, which includes 204
hourly and 127 salaried and management personnel. Substantially all of the
Company's hourly employees are represented by the Graphics Communications
International Union (GCIU) local 197M. Management considers its relations with
the union to be good. The current union contract was signed in 1996 and will be
in effect through April 1, 1999.
LEGAL PROCEEDINGS
The Company does not believe that there are any pending legal proceedings
that, if adversely determined, would have a material adverse effect on the
financial condition or results of operations of the Company, taken as a whole.
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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 June 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.
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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 ............. 49 Chief Financial Officer
Hugh R. Kirkpatrick .......... 61 Director
Mark Michaels ................ 38 Director
David M. Wittels ............. 33 Director
</TABLE>
THOMPSON DEAN has served as Chairman of the Board and director of the
Company since December 1997. Mr. Dean is the Managing Partner of DLJ Merchant
Banking II, Inc. ("DLJ Merchant Banking"), the general partner of DLJ Merchant
Banking Partners II, L.P. and an affiliate of the Initial Purchaser. Mr. Dean
serves as a director of Commvault Inc., Von Hoffman Press, Inc., Manufacturers'
Services Limited and Phase Metrics, Inc.
ROGER L. BARNETT has served as President of the Company since 1995 and
director of the Company since November 1993. From 1994 to 1995, Mr. Barnett
served as Senior Vice President and Vice President of the Company. From 1991
until his employment by the Company, Mr. Barnett was a member of the banking
group at Lazard Freres & Company, an investment banking firm.
BARRY W. MILLER has served as Chief Operating Officer of the Company since
May 1998. From 1994 to 1997, Mr. Miller served as President of Precision
Printing and Packaging, Inc., a subsidiary of Anheuser-Busch Companies, Inc.
Prior to that, Mr. Miller served as Chief Executive Officer of International
Label from 1987 to 1993.
KENNETH A. BUDDE has served as Chief Financial Officer of the Company
since November 1994. From October 1988 to June 1994, Mr. Budde served as
Controller and Chief Financial Officer of Southwestern Publishing Company.
Prior to that, Mr. Budde spent 12 years with KPMG Peat Marwick.
HUGH R. KIRKPATRICK has served as a director of the Company since June
1998. Mr. Kirkpatrick is a former director of International Flavors &
Fragrances, Inc. where he served as Senior Vice President and President,
Worldwide Fragrance Division, from 1991 through his retirement in 1996.
MARK MICHAELS has served as director of the Company since June 1998. Mr.
Michaels has been a Principal of DLJ Merchant Banking since 1997. Prior
thereto, Mr. Michaels was a consultant with McKinsey & Company, Inc. from 1987
to 1996.
DAVID M. WITTELS has served as a director of the Company since December
1997. Mr. Wittels is a Principal of DLJ Merchant Banking and has served in
various capacities with DLJ Merchant Banking since 1986. Mr. Wittels serves as
a director of McCulloch Corp. and Wilson Greatbatch Limited.
COMPENSATION OF DIRECTORS
Except for Hugh R. Kirkpatrick, directors of the Company will not receive
compensation for services rendered in that capacity, but will be reimbursed for
out-of-pocket expenses incurred by them in connection with their travel to and
attendance at board meetings and committees thereof. Mr. Kirkpatrick will
receive an annual fee of $20,000 per year plus reasonable out-of-pocket
expenses in connection with his travel to and attendance at meetings of the
Board of Directors and committees thereof. In addition, it is expected Mr.
Kirkpatrick will be granted options to purchase shares of common stock, par
value $.01 per share, of Acquisition Corp. ("Acquisition Corp. Common Stock")
under the Option Plan (as defined) on terms to be established by the Board of
Directors.
48
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information for the three most
recently completed fiscal years with respect to the compensation of the
Company's Chief Executive Officer and its other most highly compensated
executive officers (collectively, the "named executive officers") whose total
annual compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------- --------------------
FISCAL SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION(1)
- ----------------------------------- -------- ----------- ---------- -------------------- ----------------
<S> <C> <C> <C> <C> <C>
Roger L. Barnett .................. 1998 $367,083 $ -- 32,500(2) $3,670
President, Chief Executive Officer 1997 210,000 275,000 -- 5,700
and Director 1996 210,000 225,000 -- 6,856
Hugh F. Brown (3) ................. 1998 145,000 100,000 -- 3,384
Executive Vice President 1997 145,000 100,000 -- 5,700
Manufacturing 1996 145,000 100,000 -- 5,636
Kenneth A. Budde .................. 1998 120,000 75,000 -- --
Chief Financial Officer 1997 100,000 50,000 -- --
1996 100,000 20,000 -- --
</TABLE>
- ----------
(1) Represents amounts contributed on behalf of the named executive to the
Company's 401(k) retirement savings plan.
(2) Option to purchase shares of Acquisition Corp. Common Stock. See
"--Equity-Based Compensation."
(3) Mr. Brown resigned from the Company in July 1998. Mr. Brown is expected
to become a consultant to the Company.
The following table contains information concerning the share options
grants made to each of the named executive officers of the Company during the
fiscal year ended June 30, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
SHARE PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(2)
-------------------------------------------------------- -----------------------
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS IN FISCAL BASE PRICE EXPIRATION
GRANTED(1) YEAR ($/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.
49
<PAGE>
EMPLOYMENT AGREEMENTS
Barnett Agreement
The Company entered into an employment agreement with Mr. Barnett dated as
of June 17, 1998 (the "Barnett Agreement"). Pursuant to the Barnett Agreement,
Mr. Barnett will serve as President and Chief Executive Officer of the Company
for a term of three years. Mr. Barnett will receive an annual base salary of
$500,000 plus an annual bonus of up to 100% of his base salary contingent upon
the Company achieving certain financial performance targets set forth in the
Barnett Agreement. Mr. Barnett is also entitled to receive certain perquisites
commensurate with his position with the Company.
In the event of Mr. Barnett's resignation with "good reason" or
termination by the Company for any reason other than "cause" (each as defined
in the Barnett Agreement) or Mr. Barnett's death or disability, Mr. Barnett
will be entitled to 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
50
<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.
51
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
All of the Company's issued and outstanding capital stock is owned by
Holding. All of Holding's issued and outstanding capital stock is owned by
Acquisition Corp. The following table sets forth certain information as of the
date of this Prospectus with respect to the beneficial ownership of Acquisition
Corp. Common Stock by (i) owners of more than five percent of such Acquisition
Corp. Common Stock, (ii) each director and named executive officer of the
Company and (iii) all directors and executive officers of Acquisition Corp.,
Holding and the Company, as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
SHARES ACQUISITION CORP.
BENEFICIAL OWNER BENEFICIALLY OWNED COMMON STOCK
- ------------------------------------------------------------------------ -------------------- ------------------
<S> <C> <C>
DLJ Merchant Banking Partners II, L.P. and related investors (1) (2).... 903,111 81.3%
Thompson Dean (3) ...................................................... -- --
Roger L. Barnett (2) ................................................... 134,325 12.1
Hugh F. Brown .......................................................... 2,625 0.2
Hugh R. Kirpatrick ..................................................... -- --
Mark Michaels (3) ...................................................... -- --
David M. Wittels (3) ................................................... -- --
Barry W. Miller ........................................................ -- --
Kenneth A. Budde ....................................................... -- --
All directors and executive officers as a group (2) (3) ................ 136,950 12.3
</TABLE>
- ----------
(1) Consists of shares held directly by the following affiliated investors:
DLJ Merchant Banking Partners II, L.P.; DLJ Merchant Banking Partners
II-A, L.P. ("DLJMBII-A"); DLJ Offshore Partners II, C.V. ("Offshore
Partners II"); DLJ Diversified Partners, L.P. ("Diversified Partners");
DLJ Diversified Partners-A, L.P. ("Diversified Partners-A"); DLJMB
Funding II, Inc. ("DLJ Funding II"); DLJ Millennium Partners, L.P.
("Millennium Partners"); DLJ Millennium Partners-A, L.P., ("Millennium
Partners-A"); DLJ EAB Partners, L.P. ("EAB Partners"); UK Investment Plan
1997 Partners ("UK Partners"); and DLJ First ESC L.P. ("First ESC"). See
"Certain Relationships and Related Transactions--Transactions with
DLJMBII and their Affiliates" and "Plan of Distribution." The address of
each of DLJMBII, DLJMBII-A, Diversified Partners, Diversified Partners-A,
DLJ Funding II, Millennium Partners, Millennium Partners-A, EAB Partners
and First ESC is 277 Park Avenue, New York, New York 10172. The address
of Offshore Partners II is John B. Gorsiraweg 14, Willemstad, Curacao,
Netherlands Antilles. The address of UK Partners is 2121 Avenue of the
Stars, Fox Plaza, Suite 3000, Los Angeles, California 90067. Does not
include 18,000 shares of Acquisition Corp. Common Stock held directly by
the Bridge Lender, an affiliate of DLJMBII and the Initial Purchaser.
(2) See "Certain Relationships and Related Transactions."
(3) Messrs. Dean, Michaels and Wittels are officers of DLJ Merchant Banking,
an affiliate of DLJMBII and the Initial Purchaser. Share data shown for
such individuals excludes shares shown as held by DLJMBII, as to which
such individuals disclaim beneficial ownership. The address of each of
Messrs. Dean, Michaels and Wittels is 277 Park Avenue, New York, New York
10172.
52
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH DLJMBII AND THEIR AFFILIATES
Messrs. Dean, Michaels and Wittels, who are directors of the Company and
officers and directors of Holding and Acquisition Corp., are officers of DLJ
Merchant Banking. DLJ Merchant Banking, together with DLJMBII, beneficially
own, in the aggregate, approximately 81.3% of the outstanding Acquisition Corp.
Common Stock. See "Risk Factors--Control by DLJMBII; Conflicts of Interests."
The Initial Purchaser is also an affiliate of DLJ Merchant Banking and
DLJMBII and 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.
53
<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."
54
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT AGREEMENT
On April 30, 1996, the Company entered into the Credit Agreement with the
Lender, which was amended on December 12, 1997, in connection with the
Acquisition (the "Credit Agreement"). The Credit Agreement provides for a
revolving loan commitment up to a maximum of $20.0 million (subject to a
borrowing base calculation), which commitment shall expire on December 31, 2002
or earlier under certain circumstances. Borrowings under the Credit Agreement
are an obligation of the Company and are secured by the current and future
assets of the Company. The Debentures will be structurally subordinate to any
borrowings outstanding under the Credit Agreement. On June 30, 1998 the Company
received a waiver for its inability to meet one of its financial convenants and
is currently negotiating an amendment to certain provisions of the Credit
Agreement, including those related to certain financial covenants. There can be
no assurance, however, that the Company will obtain any such amendment on the
terms it intends to seek. The following description of 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.
55
<PAGE>
BRIDGE NOTES
Simultaneously with the Acquisition, the Company entered into a Securities
Purchase Agreement with the Bridge Lender, an affiliate of DLJMBII and the
Initial Purchaser, pursuant to which the Company issued $123.5 million
principal amount of Bridge Notes to the Bridge Lender. In connection with the
issuance of the Bridge Notes for the financing of the Acquisition, the Bridge
Lender received certain reasonable and customary fees and reimbursements.
Messrs. Dean, Michaels and Wittels are officers of DLJ Merchant Banking, an
affiliate of the Initial Purchaser and the Bridge Lender. The entire
outstanding principal amount of, and accrued and unpaid interest on the Bridge
Notes were repaid with the net proceeds of the 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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DESCRIPTION OF NEW DEBENTURES
GENERAL
The Debentures will be issued pursuant to an indenture (the "Indenture")
between Holding and the Trustee, in a private transaction that is not subject
to the registration requirements of the Securities Act. See "Notice to
Investors." 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 proposed form of
Indenture and Registration Rights Agreement are available as set forth below
under "--Additional Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions."
The New 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
June 30, 1998, Holding had no outstanding secured obligations and Holding's
subsidiaries had $122.6 million of outstanding liabilities (including trade
payables). The Indenture will permit the incurrence of additional Indebtedness
in the future.
Holding is a holding Company whose sole subsidiary is the Company. As of
the date of the Indenture, each of the Company and its subsidiaries, Arcade
Europe S.A.R.L and Scent Seal Inc., were 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.
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
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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 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
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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 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.
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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
(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
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(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) 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
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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.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company of Indebtedness and letters of credit
pursuant to the Credit Agreement; provided that the aggregate principal amount
of all such Indebtedness (with letters of credit
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being deemed to have a principal amount equal to the maximum potential
liability of the Company thereunder) then classified as having been incurred in
reliance on this clause (i) that remains outstanding under the Credit Agreement
after giving effect to such incurrence does not exceed the sum of $20.0
million.
(ii) the incurrence by 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 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
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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 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,
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(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 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.
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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 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."
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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 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
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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, 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
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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).
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
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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 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
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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 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."
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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 Notes for Certificated Notes" 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 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
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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 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
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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
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
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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 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.
"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.
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"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 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
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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 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."
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"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 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
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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.
"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.
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"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 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
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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 following qualifications set forth below, in the opinion of
Akin, Gump, Strauss, Hauer & Feld, L.L.P., tax counsel to Holding, the
following accurately sets forth 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. 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 should 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
generally will be required to include OID in
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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 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 generally 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
generally 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
generally 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.
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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 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
Generally, 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.
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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 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 generally 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
86
<PAGE>
(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 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.
In general, 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.
87
<PAGE>
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.
88
<PAGE>
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.
89
<PAGE>
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.
90
<PAGE>
INDEX TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Introduction to Unaudited Pro Forma Condensed Consolidated Statement of Operations .. P-2
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year Ended
June 30, 1998 ...................................................................... P-4
Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations ......... P-5
</TABLE>
P-1
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT 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 statement of
operations of the Company is based upon the combined historical consolidated
statement of operations of the Predecessor for the period from July 1, 1997
through December 15, 1997 and the Company for the period from December 16, 1997
through June 30, 1998 as adjusted to give effect to the Acquisition, the 3M
Acquisition and the issuance by the Company 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 balance
sheet of the Company as of June 30, 1998 includes the effects of the
Acquisition, the 3M Acquisition and the Refinancing as such events occurred
prior to June 30, 1998.
Pro forma adjustments are described in the accompanying notes and are
applied to the combined historical consolidated statements of operations of the
Predecessor for the period from July 1, 1997 through December 15, 1997 and the
Company for the period from December 16, 1997 through June 30, 1998 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.
P-2
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
(dollars in thousands)
As noted above, the Company has acquired the fragrance sampling business
of 3M. 3M's fragrance sampling business was predominantly a sales and
distribution business as it outsourced the production of the majority of the
products it sold. The Company did not assume such outsourcing arrangements and
relocated such operations to its Chattanooga facilities as the Company has
excess manufacturing capacity at such facilities. In addition, except for
several sales and technical employees, the Company did not extend employment to
any employees from 3M; the Company's management has determined that additional
personnel will be required at its Chattanooga facilities in the selling
and technical functions in order to serve the incremental sales volume. As
described in the notes to the unaudited pro forma condensed consolidated
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 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 (used) by
operating activities ............. $ (3,893) $ 3,481 $ (412)
Net cash provided (used) by
investing activities ............. (142,724) 134,153 (8,571)
Net cash provided (used) by
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 (used) by
operating activities ............. $ 749 $ 337 $ 2,810 $ 3,146
Net cash provided (used) by
investing activities ............. -- (8,571) (7,250) (1,321)
Net cash provided (used) by
financing activities ............. (11,357) (657) -- (657)
</TABLE>
See notes to unaudited pro forma consolidated statements of operations.
P-4
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS--(CONTINUED)
(DOLLARS IN THOUSANDS)
ACQUISITION ADJUSTMENTS
(a) Represents the net reduction in depreciation expense of $405 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 $3,848 based upon goodwill of
$153,929 amortized using straight-line method over 40 years.
(c) Reflects incremental interest expense and amortization of deferred
charges of $3,558 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 of $90.
(e) Reflects incremental income tax benefit of $1,156 relating to pro
forma consolidated statement of operations' adjustments in (c) and (d) above.
Goodwill is not tax deductible.
REFINANCING ADJUSTMENTS
(f) Reflects incremental reduction in interest expense and amortization of
deferred charges of $801 associated with the Refinancing as though such
Refinancing had occurred at the beginning of the period.
(g) Reflects the incremental provision for income taxes of $488 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.
<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.
P-5
<PAGE>
AKI HOLDING CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(ii) Reflects the decrease in production costs of $3,915 resulting from
the loss of a significant customer prior to the 3M Acquisition noted
in (i) above and reflects the decrease in production costs of $2,885
from the Company not assuming 3M's outsourcing arrangements and
consolidating production into the Company's Chattanooga facilities.
The decrease in production costs from consolidating production into
the Company's Chattanooga facilities takes into account the
Company's available manufacturing capacity at such facilities as
well as the variable costs (primarily materials and direct labor) of
such incremental sales based upon the Company's historical results.
Due to the Company's existing capacity, fixed costs (primarily
depreciation and overhead) will not be affected by such incremental
sales.
(iii) Reflects the net decrease in selling, general and administrative
expenses due to the consolidation of these activities into the
Company. Subsequent to the consummation of the 3M Acquisition, the
Company added several additional sales and technical employees as
well as certain additional administrative employees. The salaries,
benefits and commissions, if applicable, of these employees have
been accounted for in the adjustment. The Company believes that due
to the similarity of its existing customers and 3M's fragrance
sampling customers, no other additional employees will be required.
The adjustment also reflects the elimination of corporate expense
allocations that have been discontinued as a result of the transfer
of the 3M fragrance sampling business to the Company.
(iv) Represents amortization expense based upon goodwill of $7,289
arising from the 3M Acquisition amortized over 40 years using the
straight-line method.
(v) Reflects incremental income tax expense relating to the 3M
adjustments in (i) through (iv) above.
P-6
<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 .................................... 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 ............................................................. 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 .................................... 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 ............................................................. 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.
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.
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 HOLDING
--------------- --------------
JUNE 30, 1997 JUNE 30, 1998
--------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................... $ 303 $ 3,842
Accounts receivable, net ..................................... 10,200 13,577
Inventory .................................................... 2,786 2,078
Income tax refund receivable ................................. -- 5,155
Prepaid expenses ............................................. 221 378
Deferred income taxes ........................................ 424 827
------- ---------
TOTAL CURRENT ASSETS ...................................... 13,934 25,857
Property, plant and equipment, net ........................... 18,156 18,936
Goodwill, net ................................................ 44,293 159,131
Deferred charges ............................................. 555 6,535
Deferred income taxes ........................................ -- 3,888
Other assets ................................................. 204 200
------- ---------
TOTAL ASSETS .............................................. $77,142 $ 214,547
======= =========
LIABILITIES AND STOCKHOLDER(S) EQUITY
CURRENT LIABILITIES
Current portion of loans payable to stockholder .............. $37,892 $ --
Current portion of capital lease obligation .................. 557 609
Current portion of other notes payable ....................... 100 1,330
Revolving line of credit ..................................... 4,338 --
Accounts payable, trade ...................................... 3,435 4,140
Accrued income taxes ......................................... 26 100
Accrued bonuses .............................................. 1,396 650
Accrued expenses ............................................. 3,147 3,982
------- ---------
TOTAL CURRENT LIABILITIES ................................. 50,891 10,811
Long-term portion of capital lease obligation ................ 2,098 1,489
Senior notes ................................................. 115,000
Senior discount debentures ................................... 26,020
Other notes payable, net ..................................... 1,301 --
Deferred income taxes ........................................ 2,949 4,143
------- ---------
57,239 157,463
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
Stock purchase warrants ...................................... 1,923
Retained earnings (deficit) .................................. 4,565 (5,493)
Cumulative translation adjustment ............................ (153) (57)
Carryover basis adjustment ................................... -- (15,730)
------- ---------
TOTAL STOCKHOLDER(S) EQUITY ............................... 11,225 57,084
------- ---------
TOTAL LIABILITIES AND STOCKHOLDER(S) EQUITY ............... $77,142 $ 214,547
======= =========
</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 HOLDING
---------------------------------------- ------------------
JULY 1, 1997 DECEMBER 16, 1997
YEAR ENDED JUNE 30, THROUGH THROUGH
----------------------- DECEMBER 15, JUNE 30,
1996 1997 1997 1998
---------- ---------- -------------- ------------------
<S> <C> <C> <C> <C>
Net sales .................................... $73,486 $77,723 $35,186 $ 36,066
Cost of goods sold ........................... 49,862 49,467 22,809 24,518
------- ------- ------- --------
Gross profit .............................. 23,624 28,256 12,377 11,548
Selling, general and administrative
expenses .................................... 10,655 13,353 5,712 5,601
Amortization of goodwill ..................... 1,214 1,214 559 2,087
------- ------- ------- --------
Income from operations .................... 11,755 13,689 6,106 3,860
Other expenses (income):
Interest expense to stockholder(s) and
affiliate ................................. 6,164 5,196 2,143 10,785
Interest expense, net ....................... 598 1,007 503 542
Management fees to stockholders and affiliate 470 470 215 125
Other, net .................................. 244 (101) 11 (47)
------- ------- ------- --------
Income (loss) before income taxes ......... 4,279 7,117 3,234 (7,545)
Income tax expense (benefit) ................. 2,101 3,135 1,441 (2,052)
------- ------- ------- --------
Net income (loss) ......................... $ 2,178 $ 3,982 $ 1,793 $ (5,493)
======= ======= ======= ========
</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 STOCK
----------------- PAID-IN PURCHASE
SHARES AMOUNT CAPITAL WARRANTS
-------- -------- ----------- ----------
PREDECESSOR
----------------------------------------
<S> <C> <C> <C> <C>
Balances, June 30, 1995 ............. 48,000 $ 1 $ 4,889 $1,923
Preferred stock dividend ........... -- -- -- --
Cumulative translation
adjustment ....................... -- -- -- --
Net income ......................... -- -- -- --
------ ---- -------- ------
Balances, June 30, 1996 ............. 48,000 1 4,889 1,923
Preferred stock dividend ........... -- -- -- --
Cumulative translation
adjustment ....................... -- -- -- --
Net income ......................... -- -- -- --
------ ---- -------- ------
Balances, June 30, 1997 ............. 48,000 1 4,889 1,923
Preferred stock dividend ........... -- -- -- --
Cumulative translation
adjustment ....................... -- -- -- --
Net income ......................... -- -- -- --
------ ---- -------- ------
Balances, December 15, 1997 ......... 48,000 $ 1 $ 4,889 $1,923
====== ==== ======== ======
- ------------------------------------------------------------------------------
HOLDING
------
Balances, December 16, 1997 ......... -- $ -- $ -- $ --
Initial capitalization ............. 1,000 -- 78,364 --
Carryover basis adjustment ......... -- -- -- --
Cumulative translation
adjustment ....................... -- -- -- --
Net loss ........................... -- -- -- --
------ ---- -------- ------
Balances, June 30, 1998 ............. 1,000 $ -- $ 78,364 $ --
====== ==== ======== ======
<CAPTION>
CUMULATIVE CARRYOVER
RETAINED TRANSLATION BASIS
EARNINGS ADJUSTMENT ADJUSTMENT TOTAL
------------ ------------- ------------- -----------
PREDECESSOR
----------------------------------------------------
<S> <C> <C> <C> <C>
Balances, June 30, 1995 ............. $ (361) $ 120 $ -- $ 6,572
Preferred stock dividend ........... (618) -- -- (618)
Cumulative translation
adjustment ....................... -- (200) -- (200)
Net income ......................... 2,178 -- -- 2,178
-------- ------ --------- ---------
Balances, June 30, 1996 ............. 1,199 (80) -- 7,932
Preferred stock dividend ........... (616) -- -- (616)
Cumulative translation
adjustment ....................... -- (73) -- (73)
Net income ......................... 3,982 -- -- 3,982
-------- ------ --------- ---------
Balances, June 30, 1997 ............. 4,565 (153) -- 11,225
Preferred stock dividend ........... (283) -- -- (283)
Cumulative translation
adjustment ....................... -- (19) -- (19)
Net income ......................... 1,793 -- -- 1,793
-------- ------ --------- ---------
Balances, December 15, 1997 ......... $ 6,075 $ (172) $ -- $ 12,716
======== ====== ========= =========
- -------------------------------------------------------------------------------
Balances, December 16, 1997 ......... $ -- $ -- $ -- $ --
Initial capitalization ............. -- -- -- 78,364
Carryover basis adjustment ......... -- -- (15,730) (15,730)
Cumulative translation
adjustment ....................... -- (57) -- (57)
Net loss ........................... (5,493) -- -- (5,493)
-------- ------ --------- ---------
Balances, June 30, 1998 ............. $ (5,493) $ (57) $ (15,730) $ 57,084
======== ====== ========= =========
</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 HOLDING
-------------------------------------- ------------------
JULY 1, 1997
YEAR ENDED JUNE 30, THROUGH DECEMBER 16, 1997
----------------------- DECEMBER 15, THROUGH
1996 1997 1997 JUNE 30, 1998
----------- ----------- -------------- ------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................... $ 2,178 $ 3,982 $ 1,793 $ (5,493)
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 3,954
Amortization of debt discount ........................... 642 560 233 139
Amortization of loan closing costs ...................... 231 258 101 3,808
Deferred income taxes ................................... (483) (297) (460) (2,035)
Other ................................................... 239 (138) (18) (57)
Changes in operating assets and liabilities:
Accounts receivable .................................... (1,268) 2,546 1,153 (4,589)
Inventory .............................................. (304) (550) 69 543
Prepaid expenses, deferred charges and other
assets ................................................ (168) (101) (62) (452)
Income taxes ........................................... 75 (1,163) 699 767
Accounts payable and accrued expenses .................. (227) (1,239) (1,036) (5,406)
-------- -------- -------- ----------
Net cash provided by (used in) operating
activities ............................................ 5,337 8,942 4,928 (8,821)
-------- -------- -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment .................................... (2,051) (2,462) (807) (514)
Proceeds from sale of equipment ........................... 55 38 -- --
Refundable deposit on equipment ........................... 1,984 -- -- --
Payments for acquisitions, net of cash acquired ........... -- -- -- (141,403)
-------- -------- -------- ----------
Net cash used in investing activities .................. (12) (2,424) (807) (141,917)
-------- -------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under capital leases for equipment ............... (646) (2,359) (249) (308)
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 (6,700)
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 ................. (6,004) (7,004) (1,851) (36,649)
Repayment of other notes payable .......................... (1,627) (1,200) (50) (50)
Dividends paid on preferred stock ......................... (618) (616) (155) (128)
-------- -------- -------- ----------
Net cash provided by (used in) financing activities (8,895) (6,841) 57 154,580
-------- -------- -------- ----------
Net increase (decrease) in cash and cash equivalents ....... (3,570) (323) 4,178 3,842
Cash and cash equivalents, beginning of period ............. 4,196 626 303 --
-------- -------- -------- ----------
Cash and cash equivalents, end of period ................... $ 626 $ 303 $ 4,481 $ 3,842
======== ======== ======== ==========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for:
Interest to stockholder(s) .............................. $ 5,573 $ 4,559 $ 1,146 $ 11,503
Interest, other ......................................... 604 917 459 214
Income taxes ............................................ 2,834 4,594 1,222 (784)
SIGNIFICANT NON-CASH ACTIVITIES:
Assets acquired under capital lease ....................... $ 3,555 $ -- $ -- $ --
</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 ACQUISITION
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
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.
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)
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.
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.
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)
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.
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.
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)
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 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.
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)
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>
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.
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)
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, JUNE 30,
1997 1998
------------ -----------
<S> <C> <C>
Trade accounts receivable .................................... $ 10,362 $ 13,782
Allowance for doubtful accounts .............................. (319) (277)
-------- --------
10,043 13,505
Employee and other related party accounts receivable ......... 121 28
Other accounts receivable .................................... 36 44
-------- --------
$ 10,200 $ 13,577
======== ========
</TABLE>
5. INVENTORY
The following table details the components of inventory:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
---------- ---------
<S> <C> <C>
Raw materials
Paper ....................... $ 915 $ 556
Other raw materials ......... 956 786
------ ------
Net raw materials ........... 1,871 1,342
Work in process .............. 915 736
------ ------
Net inventory ................ $2,786 $2,078
====== ======
</TABLE>
Inventory would have been greater by $45 at June 30, 1997, had it been
stated using the FIFO method. There was an insignificant difference between
inventory stated using the FIFO or LIFO methods at June 30, 1998.
F-13
<PAGE>
AKI 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.
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.
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)
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% 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.
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)
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.
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.
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)
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.
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
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 (CONTINUED)
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.
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.
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)
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 1988
--------- --------- -------------- ------------------
<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>
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
JULY 1, 1997 DECEMBER 16, 1997
JUNE THROUGH THROUGH
30, 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>
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)
The significant components of deferred tax assets and deferred tax
liabilities at June 30, 1997 and 1998, were as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
------------------------ -----------------------
CURRENT NONCURRENT CURRENT NONCURRENT
--------- ------------ --------- -----------
DEFERRED INCOME TAX ASSET:
<S> <C> <C> <C> <C>
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>
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 THROUGH THROUGH
30, DECEMBER 15, JUNE 30,
1996 1997 1997 1998
--------- --------- -------------- ------------------
<S> <C> <C> <C> <C>
Computed tax provision
(benefit) at the statutory rate $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 $2,947 reflecting cumulative net operating loss carryforwards available to
offset future federal taxable income of $6,500 and future state taxable income
of $14,500. These cumulative net operating loss carryforwards expire in varying
amounts through 2013. Realization is dependent on generating sufficient taxable
income prior to expiration of the loss carryforwards. Although realization is
not assured, management believes that it is more likely than not
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)
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.
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
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)
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 exercise of his 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 $2,000 in cash on such date.
Subsequent to the Acquisition, Acquisition Corp. adopted the 1998 Stock
Option Plan ("Option Plan") for certain key employees and directors of
Acquisition Corp. and any parent or subsidiary of Acquisition Corp. The Option
Plan authorizes the issuance of options to acquire up to 80,000 shares of
Acquisition Corp. Common Stock. The terms of each individual options grant are
determined by the Board of Directors. The exercise price for each grant is
required to be set at least equal to the fair market value per share of
Acquisition Corp. provided that the exercise price shall not be less than $1.00
per share. Options may be exercisable for up to ten years.
On June 17, 1998, Acquisition Corp. granted an officer of the Company
options to purchase 32,500 shares of Acquisition Corp. Common Stock. All
options have an exercise price of $1.00 per share and a term of 10 years. Under
the terms of the option agreement, 16,250 of the options granted to the officer
are subject to time vesting. One-third of these options become exercisable on
June 30, 1999 and are thereafter exercisable as to an additional one-third of
such options on June 30, 2000 and June 30, 2001. The remaining 16,250 of
options become exercisable at various percentages on June 30, 1999 and on June
30, 2000 and on June 30, 2001, based on the achievement of certain financial
performance targets for the years then ended.
The Company has elected to account for its stock based compensation with
employees under the intrinsic value method as permitted under FAS 123. Under
the intrinsic value method, because the stock price of the Company's employee
stock options equaled the fair value of the underlying stock on the date of
grant, no compensation expense was recognized. If the Company had elected to
recognize compensation expense based on the fair value of the options at grant
date as prescribed by FAS 123, the net loss for the period from December 16,
1997 through June 30, 1998 would have been $(5,494). 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-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)
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
-----------
REVENUES:
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
---------
REVENUES:
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-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)
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-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 (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-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)
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 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>
<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>
F-26
<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 ........................................ 37
The Transactions ................................ 47
Management ...................................... 48
Security Ownership of Certain Beneficial
Owners and Management ........................ 52
Certain Relationships and Related
Transactions ................................. 53
Description of Certain Indebtedness ............. 55
Description of New Debentures ................... 58
U.S. Federal Income Tax Considerations .......... 83
Plan of Distribution ............................ 88
Notice to Holders ............................... 89
Legal Matters ................................... 89
Experts ......................................... 90
Index to Unaudited Pro Forma
Condensed Consolidated Financial
Data ......................................... P-1
Index to Consolidated Financial
Statements ................................... F-1
</TABLE>
OFFER TO EXCHANGE
13 1/2% NEW 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 ND 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.
13 1/2% NEW 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 June 30, 1998, Holding had no
outstanding indebtedness other than the Debentures. Holding's subsidiaries had
$122.6 million of outstanding liabilities (including trade payables), to which
the Debentures are structurally subordinated.
(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.
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>
[ATLERNATE 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]
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
Subject to the following qualifications set forth below, in the opinion of
Akin, Gump, Strauss, Hauer & Feld, L.L.P., tax counsel to Holding, the
following accurately sets forth 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. 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.
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
generally 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
A-7
<PAGE>
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 generally 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
generally 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
generally 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
A-8
<PAGE>
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
Generally, 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
A-9
<PAGE>
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 generally 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 ........................................ 37
The Transactions ................................ 47
Management ...................................... 48
Security Ownership of Certain Beneficial
Owners and Management ........................ 52
Certain Relationships and Related
Transactions ................................. 53
Description of Certain Indebtedness ............. 55
Description of New Debentures ................... 58
U.S. Federal Income Tax Considerations .......... 83
Plan of Distribution ............................ 88
Notice to Investors ............................. 89
Legal Matters ................................... 89
Experts ......................................... 90
Index to Unaudited Pro Forma
Condensed Consolidated Statement of
Operations ................................... P-1
Index to Consolidated Financial
Statements ................................... F-1
</TABLE>
13 1/2% NEW 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.+
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
10.4. Employment Agreement dated as of June 17, 1998 between the Company and Roger L.
Barnett.+
10.5. Employment Agreement dated as of May 12, 1998 between the Company and Barry W.
Miller.+
10.6. Stockholders Agreement dated as of December 15, 1997 between Acquisition Corp.,
DLJMBII and certain other investors including Roger L. Barnett.+
10.7. Credit Agreement dated as of April 30, 1996, as amended on December 12, 1997, between
the Company and Heller Financial, Inc.+
10.8. Securities Purchase Agreement dated as of December 15, 1997 between the Company and
the Bridge Lender.*
10.9. Asset Purchase Agreement dated as of June 22, 1998 between Arcade Marketing, Inc. and
Minnesota, Mining and Manufacturing Company.+
10.10. 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, 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 Coopers & Lybrand, L.L.P. 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.*
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.
** To be filed by amendment.
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 9th day of October 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 October 9, 1998
- -------------------------
(principal executive officer)
Roger L. Barnett
and Director
* Chairman of the Board and Director October 9, 1998
- -------------------------
Thompson Dean
* Chief Operating Officer October 9, 1998
- -------------------------
Barry W. Miller
* Chief Financial Officer (principal October 9, 1998
- -------------------------
financial officer and principal
Kenneth A. Budde
accounting officer)
* Director October 9, 1998
- -------------------------
Hugh R. Kirkpatrick
Director October 9, 1998
- -------------------------
Mark Michaels
* Director October 9, 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) 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.
<PAGE>
CERTIFICATE OF INCORPORATION
OF
AKI HOLDING CORP.
- -------------------------------------------------------------------------------
I, the undersigned natural person acting as an incorporator of a
corporation (hereinafter called the "Corporation") under the General
Corporation Law of the State of Delaware ("DGCL"), do hereby adopt the
following Certificate of Incorporation for the Corporation:
FIRST: The name of the Corporation is AKI Holding Corp.
SECOND: The registered office of the Corporation in the State of
Delaware is located at Corporation Trust Center, 1209 Orange Street, in the
City of Wilmington, County of New Castle. The name of the registered agent of
the Corporation at such address is The Corporation Trust Company.
THIRD: The purpose for which the Corporation is organized is to
engage in any and all lawful acts and activity for which corporations may be
organized under the DGCL. The Corporation will have perpetual existence.
FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue is 1,000 shares of capital stock, classified as
common stock, par value $0.01 per share ("Common Stock").
FIFTH: The name of the incorporator is Kyle C. Krpata, and the
mailing address of such incorporator is 100 Crescent Court, Suite 1300, Dallas,
Texas 752016950.
SIXTH: The number of directors constituting the initial board of
directors is one, and the name and mailing address of each person who is to
serve as director until the first annual meeting of stockholders or until his
successor is elected and qualified are:
NAME ADDRESS
---- -------
David M. Wittels 277 Park Avenue
New York, New York 10172
SEVENTH: Directors of the Corporation need not be elected by
written ballot unless the bylaws of the Corporation otherwise provide.
EIGHTH: The directors of the Corporation shall have the power to
adopt, amend, and repeal the bylaws of the Corporation.
1
<PAGE>
NINTH: No contract or transaction between the Corporation and one
or more of its directors, officers, or stockholders or between the Corporation
and any person (as used herein "person" means other corporation, partnership,
association, firm, trust, joint venture, political subdivision, or
instrumentality) or other organization in which one or more of its directors,
officers, or stockholders are directors, officers, or stockholders, or have a
financial interest, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of
the board or committee which authorizes the contract or transaction, or solely
because his, her, or their votes are counted for such purpose, if: (i) the
material facts as to his or her relationship or interest and as to the contract
or transaction are disclosed or are known to the board of directors or the
committee, and the board of directors or committee in good faith authorizes the
contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or (ii) the material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or (iii) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved, or ratified by the board of directors, a committee
thereof, or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the board of directors or
of a committee which authorizes the contract or transaction.
TENTH: The Corporation shall indemnify any person who was, is, or
is threatened to be made a party to a proceeding (as hereinafter defined) by
reason of the fact that he or she (i) is or was a director or officer of the
Corporation or (ii) while a director or officer of the Corporation, is or was
serving at the request of the Corporation as a director, officer, partner,
venturer, proprietor, trustee, employee, agent, or similar functionary of
another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan, or other enterprise, to the
fullest extent permitted under the DGCL, as the same exists or may hereafter be
amended. Such right shall be a contract right and as such shall run to the
benefit of any director or officer who is elected and accepts the position of
director or officer of the Corporation or elects to continue to serve as a
director or officer of the Corporation while this Article Tenth is in effect.
Any repeal or amendment of this Article Tenth shall be prospective only and
shall not limit the rights of any such director or officer or the obligations
of the Corporation with respect to any claim arising from or related to the
services of such director or officer in any of the foregoing capacities prior
to any such repeal or amendment to this Article Tenth. Such right shall include
the right to be paid by the Corporation expenses incurred in defending any such
proceeding in advance of its final disposition to the maximum extent permitted
under the DGCL, as the same exists or may hereafter be amended. If a claim for
indemnification or advancement of expenses hereunder is not paid in full by the
Corporation within sixty (60) days after a written claim has been received by
the Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim, and if successful in
whole or in part, the claimant shall also be entitled to be paid the expenses
of prosecuting such claim. It shall be a defense to any such action that such
indemnification or advancement of costs of
2
<PAGE>
defense are not permitted under the DGCL, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its board of directors or any committee thereof, independent legal
counsel or stockholders) to have made its determination prior to the
commencement of such action that indemnification of, or advancement of costs of
defense to, the claimant is permissible in the circumstances nor an actual
determination by the Corporation (including its board of directors or any
committee thereof, independent legal counsel, or stockholders) that such
indemnification or advancement is not permissible shall be a defense to the
action or create a presumption that such indemnification or advancement is not
permissible. In the event of the death of any person having a right of
indemnification under the foregoing provisions, such right shall inure to the
benefit of his or her heirs, executors, administrators and personal
representatives. The rights conferred above shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute, bylaw,
resolution of stockholders or directors, agreement or otherwise.
The Corporation may additionally indemnify any employee or agent of
the Corporation to the fullest extent permitted by law.
As used herein, the term "proceeding" means any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, any appeal in such an action,
suit or proceeding, and any inquiry or investigation that could lead to such an
action, suit or proceeding.
ELEVENTH: A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the director derived an improper personal benefit. Any
repeal or amendment of this Article Eleventh by the stockholders of the
Corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Corporation arising
from an act or omission occurring prior to the time of such repeal or
amendment. In addition to the circumstances in which a director of the
Corporation is not personally liable as set forth in the foregoing provisions
of this Article Eleventh, a director shall not be liable to the Corporation or
its stockholders to such further extent as permitted by any law hereafter
enacted, including without limitation any subsequent amendment to the DGCL.
TWELFTH: The Corporation expressly elects not to be governed by
Section 203 of the DGCL.
3
<PAGE>
I, the undersigned, for the purpose of forming the Corporation
under the laws of the State of Delaware, do make, file and record this
Certificate of Incorporation and do certify that this is my act and deed and
that the facts stated herein are true and, accordingly, I do hereunto set my
hand on this 5th day of June, 1998.
/s/ Kyle C. Krpata
------------------------------
Kyle C. Krpata
Incorporator
4
<PAGE>
[Letterhead of Akin, Gump, Strauss, Hauer & Feld, L.L.P.]
October 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.
In our examination, we have assumed the authenticity of all documents
submitted to us as originals, the signature of all parties (other than the
Company) to documents, the legal right and power of all parties (other than the
Company) to enter into and execute the documents to which they are a party and
to consummate the transactions contemplated therein, and the conformity to
original documents of all documents submitted to us as certified or photostatic
copies.
<PAGE>
AKI Holding Corp.
October 9, 1998
Page 2
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.
This opinion is limited to the matters stated herein, and no opinion
is implied or may be inferred beyond the matters expressly stated. We assume
herein no obligation, and hereby disclaim any obligation, to make any inquiry
after the date hereof or to advise you of any future changes in the foregoing
or of any facts or circumstances that may hereafter come to our attention. This
opinion letter is solely for your benefit and no other persons shall be
entitled to rely upon the opinions herein expressed.
We hereby consent to the filing of this opinion as Exhibit 5 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.]
October 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 registration of an aggregate
principal amount of $50,000,000 of New 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 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
<PAGE>
AKI Holdings, Corp.
October 9, 1998
Page 2
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 hereof. 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>
SECURITIES PURCHASE AGREEMENT
dated as of
December 15, 1997
among
AHC I ACQUISITION CORP.
AHC I MERGER CORP.
and
SCRATCH & SNIFF FUNDING, INC.
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I
DEFINITIONS
SECTION 1.01. DEFINITIONS .............................................. 1
SECTION 1.02. ACCOUNTING TERMS AND DETERMINATIONS ...................... 12
ARTICLE 2
PURCHASE AND SALE OF SECURITIES; TERMS OF SECURITIES
SECTION 2.01. COMMITMENT TO PURCHASE . . ............................... 12
SECTION 2.02. TAKEDOWN PROCEDURE . . ................................... 13
SECTION 2.03. FEES ........................ ............................ 14
SECTION 2.04. TERMINATION AND REDUCTION OF COMMITMENT .................. 14
SECTION 2.05. INTEREST. ....................... ................. . . .. 14
SECTION 2.06. MATURITY OF NOTES; PREPAYMENT OF NOTES.................... 15
SECTION 2.07. FEE DUE IN CERTAIN CIRCUMSTANCES ......................... 16
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
SECTION 3.01. CORPORATE EXISTENCE AND POWER ............................ 16
SECTION 3.02. AUTHORIZATION, EXECUTION AND ENFORCEABILITY .............. 16
SECTION 3.03. GOVERNMENTAL AUTHORIZATION . ............................. 17
SECTION 3.04. CONTRAVENTION ............................. . . . ........ 17
SECTION 3.05. FINANCIAL INFORMATION .................................... 17
SECTION 3.06. LITIGATION ................................ .............. 18
SECTION 3.07. ENVIRONMENTAL MATTERS .................................... 18
SECTION 3.08. TAXES .................................................... 20
SECTION 3.09. SUBSIDIARIES .......................... . ......... ...... 20
SECTION 3.10. NOT AN INVESTMENT COMPANY ................................ 20
SECTION 3.11. FULL DISCLOSURE . . . . ............................. .... 20
SECTION 3.12. CAPITALIZATION .............................. . .......... 20
SECTION 3.13. SOLICITATION; ACCESS TO INFORMATION ...................... 21
SECTION 3.14. NON-FUNGIBILITY .......................................... 21
SECTION 3.15. PERMITS .................................................. 21
SECTION 3.16. REPRESENTATIONS IN OTHER FINANCING DOCUMENTS AND
IN MATERIAL ACQUISITION DOCUMENTS ........................ 21
SECTION 3.17. PRIOR ACTIVITIES . . . . . . ............................. 22
SECTION 3.18. COMPLIANCE WITH ERISA .................................... 22
<PAGE>
Page
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PURCHASER
SECTION 4.01. Purchase for Investment; Authority; Binding Agreement.......22
ARTICLE 5
CONDITIONS PRECEDENT TO
PURCHASE
SECTION 5.01. Conditions to Purchaser's Obligation at First Takedown .... 23
SECTION 5.02. Conditions to Purchaser's Obligations at Each Takedown .... 25
ARTICLE 6
COVENANTS
SECTION 6.01. Information ................................................26
SECTION 6.02. Payment of Obligations......................................28
SECTION 6.03. Insurance ..................................................28
SECTION 6.04. Conduct of Business and Maintenance of Existence ...........28
SECTION 6.05. Compliance with Laws .......................................29
SECTION 6.06. Inspection of Property, Books and Records ..................29
SECTION 6.07. Investment Company Act .....................................29
SECTION 6.08. Financial Covenants ................................. . . ..29
SECTION 6.09. Limitation on Debt .........................................30
SECTION 6.10. Restricted Payments; Voluntary Prepayments . . .........30
SECTION 6.11. Investments ......................................... ......30
SECTION 6.12. Negative Pledge ............................................31
SECTION 6.13. Transactions with Affiliates ...............................31
SECTION 6.14. Consolidations, Mergers and Sales of Assets; Ownership
of Subsidiaries ...........................................32
SECTION 6.15. Limitations on Activities by Holdings ......................32
SECTION 6.16. Use of Proceeds ............................................33
SECTION 6.17. Restrictions on Certain Amendments .........................33
SECTION 6.18. Permanent Financing ........................................33
SECTION 6.19. Appointment of Director ....................................34
ARTICLE 7
EVENTS OF DEFAULT
SECTION 7.01. Events of Default Defined; Acceleration of Maturity;
Waiver of Default...........................................34
ii
<PAGE>
PAGE
ARTICLE 8
LIMITATION ON TRANSFERS
SECTION 8.01. Restrictions on Transfer.................................. 37
SECTION 8.02. Restrictive Legends ...................................... 37
SECTION 8.03. Notice of Proposed Transfers.............................. 38
ARTICLE 9
MISCELLANEOUS
SECTION 9.01. Notices .................................................. 39
SECTION 9.02. No Waivers; Amendments ................................... 39
SECTION 9.03. Indemnification .......................................... 40
SECTION 9.04. Expenses ................................................. 42
SECTION 9.05. Payment .................................................. 43
SECTION 9.06. Successors and Assigns ................................... 43
SECTION 9.07. Brokers .................................................. 43
SECTION 9.08. New York Law; Submission to Jurisdiction;
Waiver of Jury Trial ..................................... 43
SECTION 9.09. Severability ............................................. 44
SECTION 9.10. Counterparts ............................................. 44
iii
<PAGE>
SECURITIES PURCHASE AGREEMENT
AGREEMENT dated as of December 15,1997 among AHC I MERGER CORP., AHC I
ACQUISITION CORP. and SCRATCH & SNIFF FUNDING, INC,
The parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01, Definitions. The following terms, as used herein,
have the following meanings:
"Acquisition" means the acquisition by the Company of all capital stock
of Arcade Holdings.
"Additional Notes" has the meaning set forth in Section 2.05(c).
"Affiliate" means, with respect to any Person, any other Person that,
directly or indirectly, controls, is controlled by or is under common control
with such Person. For purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling", "controlled by" and "under
common control with"), as used with respect to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of that Person, whether through the
ownership of voting securities, by contract or otherwise.
"Agreement" means this Agreement, as amended from time to time in
accordance with its terms.
"APPROVED ACCOUNTANTS" MEANS (i) Coopers & Lybrand LLP, (ii) any other
of the so-called "Big Six" accounting firms, or (iii) any other independent
certified public accountant of nationally recognized standing reasonably
approved by the Purchaser.
"Arcade" means Arcade Inc., a Tennessee corporation.
<PAGE>
"Arcade Corporate Documents" means the articles of incorporation and
bylaws of Arcade and the certificate of incorporation and bylaws of Arcade
Holdings.
"Arcade Holdings" means Arcade Holding Corporation, a Delaware
corporation.
"Asset Sale" means any sale, lease or other disposition (including any
such transaction effected by way of merger or consolidation and any consignment
arrangement or other similar arrangements) by the Company or any of its
Subsidiaries of any asset, including without limitation any sale-leaseback
transaction, but excluding (i) dispositions of inventory and used, obsolete,
surplus or worn out equipment in the ordinary course of business, (ii)
dispositions to the Company or a wholly-owned Subsidiary of the Company
(including without limitation any such disposition effected by the Mergers),
(iii) cash payments otherwise permitted under this Agreement; (iv) the sale or
discount of overdue accounts receivable arising in the ordinary course of
business, but only in connection with the compromise or collection thereof,
provided that any disposition not excluded pursuant to clauses (i) through (iv)
shall constitute an Asset Sale only if, and solely to the extent that, the Net
Cash Proceeds therefrom, together with the Net Cash Proceeds from all other
such dispositions effected by the Company and its Subsidiaries after the date
hereof, exceed $1,000,000.
"Assumption" means an instrument of assumption in substantially the form
of Exhibit D pursuant to which Arcade Holdings assumes the obligations of the
Company under the other Financing Documents.
"Benefit Arrangement" means at any time an employee benefit plan within
the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer
Plan and which is maintained or otherwise contributed to by any member of the
ERISA Group.
"Business Acquisition" means (i) an Investment by the Company or any of
its Subsidiaries in any other Person pursuant to which such Person shall become
a Subsidiary or shall be merged into or consolidated with the Company or any of
its Subsidiaries or (ii) an acquisition by the Company or any of its
Subsidiaries of the property and assets of any Person (other than the Company
or any of its Subsidiaries) that constitute a substantial part of the assets of
such Person or of any division or other business unit of such Person.
"Business Day" means any day except a Saturday, Sunday or other
day on which commercial banks in the City of New York are authorized or
required by law to close,
2
<PAGE>
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits and
certificates of deposit of any domestic commercial bank (including a domestic
branch of a foreign bank) which has, or whose obligations are guaranteed by an
affiliated commercial bank which has capital and surplus in excess $500,000,000
having maturities of one year or less from the date of acquisition, (iii)
repurchase obligations with a term of not more than 7 days for underlying
securities of the types described in clause (i) entered into with any bank
meeting the qualifications specified in clause (ii) above, (iv) commercial
paper rated at least A-I or the equivalent thereof by Standard & Poor's
Ratings Services or at least P-I or the equivalent thereof by Moody's
Investors Service, Inc., maturing within one year after the date of
acquisition, (v) investments in money market funds substantially all of whose
assets are comprised of securities of the types described in clauses (i)
through (iv) above, and (vi) obligations denominated in a currency other than
dollars which are of a credit quality and maturity comparable to those referred
to in clauses (i) through (iv) above that are customarily used for short-term
investment of excess cash in the markets in which the Company and its
Subsidiaries operate.
"Change of Control" means such time as (a) DLJMB and any of its
Affiliates that are Initial Investors has sold, transferred or otherwise
disposed of, to any Person other than the Initial Investors, any of their
Affiliates or any member of the management of the Company an aggregate of more
than 25% of the outstanding Common Stock; or (b) a "person" or "group" (within
the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act of 1934, as
amended), other than any person or group the majority of whose shares of common
stock or other equity interests are beneficially owned by the DLJMB or any of
its Affiliates, has become the beneficial owner, by way of merger,
consolidation or otherwise, of 25% or more of the voting power of all classes
of voting securities of Holdings; or (c) a sale or transfer of all or
substantially all of the assets of the Company to any Person or group has been
consummated; or (d) Arcade ceases to be a wholly-owned Subsidiary of the
Company (other than pursuant to the Mergers); or (e) the company ceases to be a
wholly-owned Subsidiary of Holdings (other then pursuant to the Mergers).
Notwithstanding the foregoing, in the event that Hoak Communications Partners,
L.P. or any of its affiliates shall make an equity investment in Holdings, no
transfer or other disposition of shares of Common Stock from DLJMB to Hoak
Communications Partners, L.P. or any of its affiliates shall constitute a
"Change of Control".
"Closing" means the Closing as defined in the Purchase Agreement.
3
<PAGE>
"Commission" means the Securities and Exchange Commission.
"Commitment" means the obligation of Purchaser to purchase Notes
hereunder in an aggregate principal amount not to exceed $125,000,000.
"Common Stock" means the authorized common stock, par value $.01 per
share, of Holdings.
"Company" means AHC I Merger Corp., a Delaware corporation, and its
successors (including, without limitation, Arcade Holdings).
"Company Corporate Documents" means the certificate of incorporation and
bylaws of the Company,
"Consolidated EBITDA" means, for any period of four consecutive fiscal
quarters, consolidated net income of the Company and its Consolidated
Subsidiaries for such period plus to the extent deducted in determining such
consolidated net income, the aggregate amount of (i) consolidated interest
expense, (ii) income tax expense, (iii) depreciation, amortization and other
similar non-cash charges, (iv) any severance costs incurred in connection with
the Scent Seal acquisition and other severance costs payable to former
employees of Arcade and its subsidiaries, (v) stockholder expenses and (vi)
extraordinary legal costs, in each case for such period; provided that for any
period of four consecutive fiscal quarters ended prior to December 31, 1998,
Consolidated EBITDA shall be Consolidated EBITDA for the portion of such period
from and including the date of the Closing to and including the last day of
such period, annualized on a simple arithmetic basis.
"Consolidated Debt" means, at any date, the Debt of the Company and its
Consolidated Subsidiaries, determined on a consolidated basis as of such date.
"Consolidated Net Worth" means, at any date, the consolidated
stockholders' equity of the Company and its Consolidated Subsidiaries
determined as of such date.
"Consolidated Subsidiary" means, at any date with respect to any Person,
any Subsidiary or other entity, the accounts of which would be consolidated
with those of such Person in its consolidated financial statements if such
statements were prepared as of such date.
"Corporate Documents" means each of the Arcade Corporate Documents, the
Company Corporate Documents and the Holdings Corporate Documents.
4
<PAGE>
"Debt" of any Person means, at any date, (a) all indebtedness of such
Person for borrowed money or for the deferred purchase price of property or
services (other than current trade liabilities and accrued operating expenses,
in each case incurred in the ordinary course of business) or which is evidenced
by a note, bond, debenture or similar instrument, (b) all obligations of such
Person under Financing Leases, (c) all obligations (contingent or otherwise) of
such Person to reimburse any bank or other Person in respect of amounts paid
under a letter of credit or similar instrument, (d) all Derivatives
Obligations of such Person, (e) all Guarantee Obligations of such Person in
respect of Debt of any other Person and (f) all liabilities of the types
described in clauses (a) through (e) above secured by any Lien on any property
owned by such Person even though such Person has not assumed or otherwise
become liable for the payment thereof provided, however, that the amount of
such Debt of any Person described in this clause (f) shall, for purposes of
this Agreement, on any date, be deemed to be equal to the lesser of (i) the
aggregate unpaid amount of such Debt on such date and (ii) the fair market
value of the property or asset subject to the relevant Lien on such date, as
determined by such Person in good faith.
"Debt Incurrence" means, after the Closing, any incurrence by Holdings
or any of its Subsidiaries of any Debt (including without limitation pursuant
to the Permanent Financing), other than Debt permitted under Section 6.09(a)
through (c), inclusive, or Section 6.15.
"Default" means any Event of Default or any event or condition which,
with the giving of notice or lapse of time or both, would, unless cured or
waived, become an Event of Default.
"Derivatives Obligations" of any Person means all obligations of such
Person in respect of any rate swap transaction, basis swap, forward rate
transaction, commodity swap, commodity option, equity or equity index swap,
equity or equity index option, bond option, interest rate option, foreign
exchange transaction, cap transaction, floor transaction, collar transaction,
currency swap transaction, cross-currency rate swap transaction, currency
option or any other similar transaction (including any option with respect to
any of the foregoing transactions) or any combination of the foregoing
transactions.
"DLJMB" means DLJ Merchant Banking II, Inc., and its successors.
"DLJSC" means Donaldson, Lufkin & Jenrette Securities Corporation, a
Delaware corporation, and its successors.
"dollars" or "$" mean lawful currency of the United States of America.
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"Engagement Letter"- means an engagement letter between Holdings and DUSC
pursuant to which Holdings shall engage DUSC as exclusive investment banker for
Holdings and its Subsidiaries for a period of five years from the Closing.
"Environmental Laws" means any and all applicable statutes, laws,
judicial decisions, regulations, ordinances, rules, judgments, orders, decrees,
codes, plans, injunctions, permits, concessions, grants, franchises, licenses
and governmental restrictions, relating to human health, the environment or to
emissions, discharges or releases of pollutants, contaminants, Hazardous
Materials or wastes into the environment, including ambient air, surface water,
ground water or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, Hazardous Materials or wastes or the clean-up or
other remediation thereof.
"Equity Issuance" means, after the Closing, the issuance of any equity
securities by Holdings or any of its Subsidiaries (including without limitation
any equity securities issued pursuant to the exercise of stock options or
warrants or the Permanent Financing), but excluding equity securities issued to
Holdings or any Subsidiary.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA Group" means the Company, Holdings, any Subsidiary and all
members of a controlled group of corporations and all trades or businesses
(whether or not incorporated) under common control which, together with the
Company, Holdings or any Subsidiary, are treated as a single employer under
Section 414 of the Internal Revenue Code.
"Escrow Agreement" means that certain Escrow Agreement dated as of
December 15 among Holding, the Sellers, Victor J. Barnett and Michael Kluger,
as representatives of the Sellers, and The Chase Manhattan Bank, as escrow
agent.
"Event of Default" has the meaning set forth in Section 7.01.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Expiration Date" has the meaning set forth in Section 2,01(b).
"Financing Documents" means this Agreement, the Notes, the Assumption,
the Subscription Agreement, the Holdings Notes and the Revolver.
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"Financing Lease" means any lease of property, real or personal,
the obligations of the lessee in respect of which are required in accordance
with international accounting standards to be capitalized on a balance sheet of
the lessee.
"Guarantee Obligation" means as to any Person (the "guaranteeing
person"), any obligation of (a) the guaranteeing person or (b) another Person
(including, without limitation, any bank under any letter of credit) to induce
the creation of which the guaranteeing person has issued a reimbursement,
counterindemnity or similar obligation, in either case guaranteeing or in
effect guaranteeing any Debt, leases, dividends or other obligations (the
"primary obligations") of any third Person (the "primary obligor") in any
manner, whether directly or indirectly, including, without limitation, any
obligation of the guaranteeing person, whether or not contingent, (i) to
purchase any such primary obligation or any property constituting direct or
indirect security therefor, (ii) to advance or supply funds (1) for the
purchase or payment of any such primary obligation or (2) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency of the primary obligor, (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment
of such primary obligation against loss in respect thereof; provided, however,
that the term Guarantee Obligation shall not include endorsements of
instruments for deposit or collection in the ordinary course of business. The
amount of any Guarantee Obligation of any guaranteeing person shall be deemed
to be the lower of (a) an amount equal to the stated or determinable amount of
the primary obligation in respect of which such Guarantee Obligation is made
and (b) the maximum amount for which such guaranteeing person may be liable
pursuant to the terms of the instrument embodying such Guarantee Obligation,
unless such primary obligation and the maximum amount for which such
guaranteeing person may be liable are not stated or determinable, in which case
the amount of such Guarantee Obligation shall be such guaranteeing person's
maximum reasonably anticipated liability in respect thereof as determined by
such Person in good faith.
"Hazardous Materials" means (i) asbestos; (ii) polychlorinated
biphenyls; (iii) petroleum, its derivatives, by-products and other
hydrocarbons; and (iv) any other toxic, radioactive, caustic or otherwise
hazardous substance regulated under Environmental Laws.
"Hazardous Materials Contamination" means existing contamination of
the improvements, buildings, facilities, soil, groundwater, air or other
elements on or of the real property owned, operated or leased by the Company or
any of its Subsidiaries by Hazardous Materials at concentrations that exceed
those allowed
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by Environmental Laws, or on or of any other property as a result of Hazardous
Materials present in concentrations that exceed those allowed by Environmental
Laws, generated on, emanating from or disposed of in connection with the
relevant property.
"Holder" means any Holder of any Note,
"Holdings" means AHC I Acquisition Corp., a Delaware corporation, and
its successors.
"Holdings Corporate Documents" means the certificate of incorporation
and bylaws of Holdings.
"Holdings Notes" means unsecured senior notes of Holdings which (i)
require no payment of principal and no cash payment of interest prior to June
12, 2000 and (ii) the holders of which will not be entitled to enforce or
otherwise exercise remedies with respect thereto prior to June 12, 2000.
"Holdings Preferred Stock" means the 15% Senior Preferred Stock Due
2012 of Holdings, par value $0.01 per share, the terms of which do not require
redemption for cash or dividend payments in cash prior to June 12, 2000.
"Initial Investors" means the Persons indicated on Schedule I
hereto as holders of Common Stock.
"Interest Payment Date" each March 15, June 15, September 15 and
December 15 (or, if any such date is not a Business Day, the next succeeding
Business Day), beginning with March 15, 1998.
"Interest Rate" has the meaning set forth in Section 2.05(b).
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended, or any successor statute.
"Investment" means any investment in any Person, whether by means
of share purchase, capital contribution, loan, time deposit, Guarantee
Obligation or otherwise (it being understood that demand deposits do not
constitute an investment in a Person).
"Lien" means, any mortgage, pledge, hypothecation, assignment,
deposit arrangement, encumbrance, lien (statutory or other), charge or other
security interest or any preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever (including, without
limitation, any
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conditional sale or other title retention agreement) and any other arrangement
having substantially the same economic effect as any of the foregoing.
"Majority Holders" means (i) at any time prior to the issuance of
the Notes, Purchaser and (ii) at any time thereafter, the holders of voting
rights with respect to waivers, amendments and other actions permitted or
required to be taken by Holders under the terms of the Notes constituting a
majority of such voting rights attributable to the aggregate outstanding amount
of Notes at such time.
"Material Acquisition Documents" means the Purchase Agreement, the
Escrow Agreement and the Common Stock Purchase Agreements and the Minority
Investors' Stockholders' Agreement (each as defined in the Purchase Agreement)
and the Merger Agreements.
"Material Adverse Effect" means a material adverse affect on the
business, consolidated financial position or consolidated results of operations
of the Company and its Consolidated Subsidiaries, taken as a whole.
"Maturity Date" means December 15, 1998.
"Mergers" means the merger of the Company with and into Arcade
Holdings and the merger of Arcade with and into the Company pursuant to the
Merger Agreements.
"Merger Agreements" means the Certificates of Ownership and Merger
filed with the Secretary of State of Delaware and the Articles of Merger and
the Plan of Merger filed with the Secretary of State of Tennessee.
"Multiemployer Plan" means at any time an employee pension benefit
plan within the meaning of Section 4001(a)(3) of ERISA (i) to which any member
of the ERISA Group is then making or accruing an obligation to make
contributions or has within the preceding five plan years made contributions,
including for these purposes any Person which ceased to be a member of the
erisa Group during such five year period and (ii) which is covered by Title IV
of ERISA.
"Net Cash Proceeds" means, with respect to any transaction, an
amount equal to the cash proceeds received by Holdings or any of its
Subsidiaries from or in respect of such transaction (including any cash
proceeds received as income or other proceeds of any non-cash proceeds of such
transaction), less (i) any expenses (including commissions) reasonably incurred
by Holdings or such Subsidiary in respect of such transaction, (ii) the amount
of any Debt secured by a
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Lien on a related asset and discharged from the proceeds of such transaction
and (iii) any taxes paid or payable by Holdings or such Subsidiary with respect
to such transaction (as reasonably estimated by the Company's chief financial
officer in good faith) and (iv) solely if such transaction is an Asset Sale,
any portion of such cash proceeds which Holdings or any of its Subsidiaries
determines in good faith should be reserved for post-closing adjustments with
respect to such Asset Sale (to the extent Holdings or such Subsidiary delivers
to the Holders a certificate as to such determination), it being understood and
agreed that on the first date on which all such post-closing adjustments shall
have been determined, the amount (if any) by which the reserved amount of cash
proceeds with respect to all Asset Sales exceeds actual post-closing
adjustments payable by Holdings or any of its Subsidiaries shall constitute
"Net Cash Proceeds" on such date.
"Notes" means the Company's Senior Increasing Rate Notes
substantially in the form set forth as Exhibit A hereto, including any
Additional Notes.
"Obligor" means any of the Company and Arcade.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Pemanent Financing" means any Debt Incurrence or Equity
Issuance following the date hereof for the purpose of refinancing the Notes.
"Permits" means all domestic and foreign licenses, permits and
approvals required for the full operation of the Company and its Subsidiaries,
including provincial, state, federal, city and county permits and approvals.
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock company,
government (or any agency or political subdivision thereof) or other entity of
any kind.
"PIK Amount" has the meaning set forth in Section 2.05(c).
"Plan" means at any time an employee pension benefit plan (other
than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to
the minimum funding standards under Section 412 of the Internal Revenue Code
and either (i) is maintained, or contributed to, by any member of the ERISA
Group for employees of any member of the ERISA Group or (ii) has at any time
within the preceding five years been maintained, or contributed to, by any
Person which was at such time a member of the ERISA Group for employees of any
Person which was at such time a member of the ERISA Group.
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"Prime Rate" means, for any day, a rate per annum equal to the
rate of interest publicly announced by The Bank of New York (or its successor)
from time to time in The City of New York as its prime, reference or base rate,
it being understood that such rate is one of such bank's base rates and serves
as a basis upon which effective rates of interest are calculated for those
loans making reference thereto and may not be the lowest of such bank's base
rates.
"Purchase Agreement" means the Stock Purchase Agreement dated as
of November 14, 1997 among Holdings, Arcade Holdings and the Sellers party
thereto.
"Purchaser" means Scratch & Sniff Funding, Inc., a Delaware
corporation, and its successors.
"Restricted Payment" means (i) any dividend or other distribution
on any shares of the capital stock of the Company or Holdings (except dividends
payable solely in shares of capital stock of the same class of the same issuer)
or (ii) any payment on account of the purchase, redemption, retirement or
acquisition of (a) any shares of the capital stock of the Company or Holdings
or (b) any option, warrant or other right to acquire shares of the capital
stock of the Company or Holdings.
"Revolver" means a revolving credit agreement (i) to be entered
into by the Company with a bank reasonably satisfactory to Purchaser or (ii) a
revolving credit agreement with Heller Financial, Inc. (or its Affiliate) to be
continued by the Company on terms and conditions reasonably satisfactory to the
Purchaser.
"Scent Seal" means Scent Seal, Inc., a California corporation, and
its successors.
"Scent Seal Note" means that certain Conditional Promissory Note
and Security Agreement by and between Arcade, Scent Seal and Elaine
Trebek-Kares, as in effect on the date hereof.
"Securities Act" means the Securities Act of 1933, as amended.
"Sellers" shall mean those parties identified on the signature page
of the Purchase Agreement as "Sellers".
"Subscription Agreement" means the Subscription Agreement dated as
of the date hereof between the Purchaser and Holdings, as amended from time to
time.
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"Subsidiary" means, with respect to any Person, any corporation or
other entity of which a majority of the capital stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are at the time
directly or indirectly owned by such Person.
"Takedown" has the meaning set forth in Section 2.02(a).
"Transfer" means any disposition of Notes that would constitute a
sale thereof under the Securities Act.
"Unfunded Liabilities" means, with respect to any Plan at any time,
the amount (if any) by which (i) the value of all benefit liabilities (within
the meaning of Section 4001(a)(16) of ERISA) under such Plan, determined on a
plan termination basis using the assumptions prescribed by the PBGC for
purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all
Plan assets allocable to such liabilities under Title IV of ERISA (excluding
any accrued but unpaid contributions), all determined as of the then most
recent valuation date for such Plan, but only to the extent that such excess
represents a potential liability of a member of the ERISA Group to the PBGC or
any other Person under Title IV of ERISA.
"U.S. GAAP" means generally accepted accounting principles as in
effect from time to time in the United States of America.
SECTION 1.02. Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with U,S.
GAAP applied on a consistent basis (except for changes concurred in by the
Company's independent public accountants).
ARTICLE 2
PURCHASE AND SALE OF SECURITIES; TERMS OF SECURITIES
SECTION 2.01. Commitment to Purchase. (a) Subject to the terms and
conditions set forth herein and in reliance on the representations and
warranties of the Obligors contained herein and in the other Financing
Documents, the
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Company may at its option issue and sell, and Purchaser agrees to purchase,
Notes in an aggregate principal amount not to exceed $125,000,000. The purchase
price for the Notes shall be 100% of the principal amount thereof.
(b) The Commitment will terminate on the earliest of (i) the
termination of the Purchase Agreement in accordance with the terms thereof
prior to the consummation of the Acquisition, (ii) the delivery by the Company
of a notice of termination of Purchaser's Commitment obligation, (iii) the
consummation of the Acquisition (if such date occurs prior to the date of the
first Takedown), (iv) the date on which Holdings or any of its Subsidiaries
commences the marketing of any securities with respect to which DLJSC or any of
its Affiliates is not the sole manager or agent or lead underwriter, as the
case may be and (v) March 31, 1998 (such earliest date, the "Expiration Date");
provided that if at any time on or after the date hereof an Event of Default
shall have occurred and be continuing, Purchaser may at its option terminate
the Commitment by notice to the Company, such termination to be effective upon
the giving of such notice; and provided further that the Commitment shall
automatically terminate, without notice to the Company or any other action on
the part of Purchaser, upon the occurrence of any of the events specified in
Sections 7.01(e) and 7.01(f) with respect to the Company.
SECTION 2.02. Takedown Procedure. (a) The Company shall give
Purchaser notice not later than 11:00 A.M. (New York City time) two Business
Days prior to each proposed purchase and sale of Notes hereunder (each such
purchase and sale, a "Takedown"), which notice shall specify the principal
amount of Notes to be purchased and sold at such Takedown (which amount shall
be a minimum amount of $ 1,000,000 or any larger multiple of $250,000) and the
date of such Takedown (which shall be a Business Day). There shall not be more
than three Takedowns hereunder.
(b) On the date of each Takedown, Purchaser shall deliver by wire
transfer, to the account number of the Company specified by the Company in
writing no later than 2:00 P.M. (New York City time) two Business Days prior to
the date of such Takedown, immediately available funds in an amount equal to
the aggregate purchase price of the Notes to be purchased by Purchaser
hereunder on such date, less the aggregate amount of fees payable by the
Company to Purchaser on such date pursuant to Section 2.03 and expenses payable
to Purchaser on such date pursuant to SECTION 9.04.
(c) At each Takedown, against payment as set forth in subsection
(b) of this Section 2.02, the Company shall deliver to Purchaser a single Note
representing the aggregate principal amount of Notes to be purchased at such
Takedown registered in the name of Purchaser, or, if requested by Purchaser,
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separate Notes in such other denominations and registered in such name or names
as shall be designated by Purchaser by notice to the Company at least two
Business Days prior to the date of such Takedown.
SECTION 2.03. Fees. (a) The Company shall pay Purchaser a
commitment fee in the amount of $1,250,000, which fee shall be fully earned
upon the execution and delivery of this Agreement by the parties hereto and
shall be payable in full in cash on the date of the consummation of the
Acquisition (regardless of whether the Takedown has occurred on or prior to
such date).
(b) On the date of each Takedown hereunder, the Issuer shall pay
to Purchaser a takedown fee in an amount equal to 2.00% of the aggregate
principal amount of the Notes being purchased at such Takedown,
SECTION 2.04. Termination and Reduction of Commitment. (a) The
Commitment shall terminate on the Expiration Date.
(b) On the date of each Takedown, the Commitment shall be reduced
by an amount equal to the aggregate principal amount of the Notes being
purchased at such Takedown.
SECTION 2,05. Interest. (a) Interest on each Note shall be payable
quarterly in arrears, on each Interest Payment Date of each year in which such
Note remains outstanding, commencing with the first Interest Payment Date after
the date of issuance thereof, on the principal sum of such Note outstanding.
Interest on each Note shall be calculated at the rates per annurn set forth
below, and shall accrue from and including the most recent Interest Payment
Date to which interest has been paid on such Note (or if no interest has been
paid on such Note, from the date of issuance thereof) to but excluding the date
on which payment in full of the principal sum of such Note has been made.
(b) The interest rate applicable to each Note (the "Interest
Rate") shall be a floating rate per annum equal to the greater of (A) 10.00%
per annum and (b) the sum of (i) the Prime Rate in effect from time to time
plus (ii) 2.25% plus (iii) an additional percentage amount, equal to 1.00% from
and including the Interest Payment Date falling on June 12, 1998 and increasing
by 0.50% effective on each Interest Payment Date thereafter until the principal
amount of such Note is paid in full; provided that in no event shall such
interest rate exceed the lesser of (x) 17.00% per annum and (y) the maximum
rate permitted by applicable law. Interest on each Note will be calculated on
the basis of a 365-day year and paid for the actual number of days elapsed.
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(c) If and to the extent that the amount of interest payable on
any Interest Payment Date is greater than the amount of interest on the Notes
which would have been payable on such Interest Payment Date if the Interest
Rate in effect at all times during the three-month period then ended had been
15.00% per annum (the amount of such excess being hereinafter referred to as
the "PIK Amount" for such period), then the Company may, at its option, in
lieu of payment of the PIK Amount of interest in cash, pay interest on such
Interest Payment Date through the issuance of additional Notes ("Additional
Notes"). Such Additional Notes issued on any Interest Payment Date shall,
subject to the remaining provisions of this subsection (c), be in an aggregate
principal amount equal to the PIK Amount for such Interest Payment Date, shall
otherwise be identical to the outstanding Notes and shall be issued to the
Holders of the Notes at the time outstanding in proportions such that each
Holder shall receive the same ratio of cash interest to Additional Notes on
such Interest Payment Date. Such Additional Notes shall be issued only in
denominations of $1,000 and multiples thereof. Any interest otherwise payable
in Additional Notes which cannot be so paid because an Additional Note would
have a denomination less than $ 1,000 (or not be a multiple hereof) shall be
paid in cash.
SECTION 2.06. Maturity of Notes; Prepayment of Notes. (a) The Notes
shall mature on the Maturity Date.
(b) The Company at its option may, upon three (3) Business Days'
written notice to the Holders, at any time, prepay all or any part of the
principal amount of the Notes at a redemption price equal to 100.00% of the
principal amount of the Notes so prepaid together with accrued and unpaid
interest to the date of prepayment; provided that if after giving effect to any
such prepayment any Notes remain outstanding, the aggregate outstanding
principal amount thereof shall be not less than $1,000,000.
(c) The Company shall, within five days of receipt by Holdings or
any of its Subsidiaries of the Net Cash Proceeds of any Asset Sale, Debt
Incurrence or Equity Issuance, prepay a principal amount of the Notes equal to
the amount of such Net Cash Proceeds (less any amounts not required to be paid
as a result of the requirement in subsection (d) of this Section 2.06 that all
such prepayments be made in multiples of $1,000), at a redemption price equal
to 100.00% of the principal amount of the notes so prepaid together with
accrued and unpaid interest to the date of prepayment.
(d) Any prepayment of the Notes pursuant to Section 2.06(b) shall
be in a minimum amount of at least $1,000,000, unless less than $ 1,000,000 of
the Notes remain outstanding, in which case all of the Notes must be prepaid.
Any prepayment of the Notes pursuant to Section 2.06(c) shall be in a minimum
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amount which is a multiple of $1,000 times the number of Holders at the time
of such prepayment.
(e) Any partial prepayment shall be made so that the Notes then
held by each Holder shall be prepaid in a principal amount which shall bear the
same ratio, as nearly as may be, to the total principal amount being prepaid as
the principal amount of such Notes held by such Holder shall bear to the
aggregate principal amount of all Notes then outstanding. In the event of a
partial prepayment, upon presentation of any Note the Company shall execute and
deliver to or on the order of the Holder, at the expense of the Company, a new
Note in principal amount equal to the remaining outstanding portion of such
Note.
SECTION 2.07. Fee Due in Certain Circumstances. If the Company at
any time or from time to time repays, prepays or otherwise redeems any Notes in
whole or in part, whether at its option or as required by the terms of the
Financing Documents and whether before, on or after the Maturity Date, with or
in anticipation of funds raised directly or indirectly by any means other than
a transaction in which DLJSC has acted as the sole agent or the lead
underwriter, the Company shall pay to the Purchaser a fee equal to 3.00% of par
plus accrued interest of the Notes so repaid, prepaid or redeemed.
ARTICLE 3
REPRESENTATIONS AND
WARRANTIES
Each of the Company and Holdings represents and warrants to
Purchaser (both before and after giving effect to the Acquisition and the
Mergers) as set forth below:
SECTION 3.01. Corporate Existence and Power. Each Obligor is a
corporation duly incorporated, validly existing and in good standing under the
laws of its jurisdiction of organization, and has all corporate powers and all
material governmental licenses, authorizations, consents and approvals required
to carry on its business as now conducted and as proposed to be conducted after
the Acquisition.
SECTION 3.02. Authorization, Execution and Enforceability, The
execution, delivery and performance by each Obligor of the Financing Documents
and Material Acquisition Documents to which it is a party and the issuance of
the Notes by the Company have been duly and validly authorized and are within
its corporate powers. Each of the Financing Documents (other than the Notes)
and Material Acquisition Documents has been duly executed and delivered by each
Obligor party thereto and constitutes its valid and binding agreement,
enforceable
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in accordance with its terms, subject to applicable bankruptcy, insolvency and
other similar laws affecting creditors' rights generally and equitable
principles of general applicability. When executed and delivered by the Company
in accordance with the terms hereof. the Notes will constitute valid and
binding obligations of the Company, enforceable in accordance with their terms,
subject to applicable bankruptcy, insolvency and other similar laws affecting
creditors' rights generally and equitable principles of general applicability.
SECTION 3.03. Governmental Authorization. The execution and
delivery by the Obligors of each of the Financing Documents and Material
Acquisition Documents to which it is a party did not and will not, the issuance
and sale of the Notes by the Company will not, and the consummation of the
transactions contemplated hereby and thereby will not, require any action by or
in respect of, or filing with, any governmental body, agency or governmental
official except (i) as specified in Sections 3.9 and 4.3 of the Purchase
Agreement and the filing of the Merger Agreements and (ii) other actions and
filings which, if not taken or made, would not reasonably be expected to affect
in any manner the validity or enforceability of the Financing Documents or the
Material Acquisition Documents.
SECTION 3.04. Contravention. The execution and delivery by the
Obligors of the Financing Documents and the Material Acquisition Documents did
not and will not, the issuance and sale of the Notes by the Company will not,
and the consummation of the transactions contemplated hereby and thereby will
not, contravene or constitute a default under or violation of any provision of
(i) applicable law or regulation, (ii) the Corporate Documents, (iii) any
agreement under which Debt may be incurred, (iv) any material agreement (other
than any agreement described in clause (iii), or (v) any judgment, injunction,
order, decree or other instrument binding upon it or any of its assets, or
result in the creation or imposition of any Lien on any asset of Holdings or
any of its Subsidiaries.
SECTION 3.05. Financial Information.
(A) The consolidated balance sheets of the Company and its
Consolidated Subsidiaries as of June 30, 1995, June 30, 1996 and June 30, 1997
and the related consolidated statements of operations, stockholders' equity and
cash flows for each fiscal year then ended, reported on by Coopers & Lybrand
LLP, fairly present, in conformity with U.S., GAAP, the consolidated financial
position of the Company and its Consolidated Subsidiaries as of each such date
and their consolidated results of operations, changes in stockholders' equity
and cash flows for each such period.
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(b) The unaudited consolidated balance sheet of the Company and its
Consolidated Subsidiaries as of September 30, 1997 and the related unaudited
consolidated statements of operations and cash flows for the three months then
ended, fairly present, in conformity with U.S., GAAP (except as set forth on
Schedule 3,05(b)), applied on a basis consistent with the financial statements
referred to in Section 3.05(a), the consolidated financial position of the
Company and its Consolidated Subsidiaries as of such date and their
consolidated results of operations and cash flows for the three months then
ended (subject to normal year-end adjustments).
(c) There has occurred no material adverse change, or development
that could reasonably be expected to result in a material adverse change, in
the business, condition (financial or otherwise), operations, performance,
properties or prospects of the Company and its Subsidiaries since September 30,
1997.
SECTION 3.06. Litigation. Except as set forth on Schedule 3.06,
there is no action, suit or proceeding pending or, to the knowledge of the
Company and Holdings threatened against any Obligor or any of their respective
Subsidiaries before any court or arbitrator or any governmental body, agency or
official in which there is a reasonable possibility of an adverse decision
which could have a Material Adverse Effect or which challenges the validity of
any Financing Document or of the Acquisition.
SECTION 3.07. Environmental Matters. Except as provided on Schedule
3.07:
(a) Except to the extent the following would not result in a
Material Adverse Effect, (i) other than generation in compliance with all
applicable Environmental Laws, no Hazar dous Materials are located on any
properties now or previously owned, leased or operated by the Company or any of
its Subsidiaries or have been released into the environment, or deposited,
discharged, placed or disposed of at, on, under or near any of such properties,
(ii) no portion of any such property is being used, or has been used at any
previous time, for the disposal, storage, treatment, processing or other
handling of Hazardous Materials (other than processing or handling incidental
to the generation of Hazardous Materials in compliance with all applicable
Environmental Laws), nor (iii) is any such property now or previously owned,
leased or operated by the Company or any of its Subsidiaries affected by any
Hazardous Materials Contamination.
(b) Except to the extent the following would not result in a
Material Adverse Effect, no asbestos or asbestos-containing materials are
present on any of the properties now or previously owned, leased or operated by
the Company or any of its Subsidiaries.
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(c) Except to the extent the following would not result in a
Material Adverse Effect, no polychlorinated biphenyls are located on or in any
properties now or previously owned, leased or operated by the Company or any of
its Subsidiaries, in the form of electrical transformers, fluorescent light
fixtures with ballasts, cooling oils or any other device or form.
(d) Except to the extent the following would not result in a
Material Adverse Effect, no underground storage tanks are located on any
properties now or previously owned, leased or operated by the Company or any of
its Subsidiaries, or were located on any such property and subsequently removed
or filled.
(e) Except as to the extent the following (or the matters referred
to in any of the following) would not result in a Material Adverse Effect, no
notice, notification, demand, request for information, complaint, citation,
summons, investigation, administrative order, consent order and agreement,
litigation or settlement with respect to Hazardous Materials or Hazardous
Materials Contamination is in existence or, to the Company's knowledge,
proposed, threatened or anticipated with respect to or in connection with the
operation of any properties now or previously owned, leased or operated by the
Company or any of its Subsidiaries. Except as to the extent the following would
not result in a Material Adverse Effect, all such properties and their existing
and prior uses comply and at all times have complied with any applicable
Environmental Laws and there is no condition on any of such properties which is
in violation of any applicable Environmental Laws, and neither the Company nor
any of its Subsidiaries has received any communication from or on behalf of any
governmental authority that any such condition exists which has not been
resolved.
(f) There has been no environmental investigation, study, audit,
test, review or other analysis conducted of which the Company has knowledge in
relation to the current or prior business of the Company or any property or
facility now or previously owned, leased or operated by the Company or any of
its subsidiaries which has not been delivered to the Lenders at least five days
prior to the date hereof.
(g) For purposes of this Section 3.07, the terms "Company" and
"Subsidiary" shall include any business or business entity (including a
corporation) which is, in whole or in part, a predecessor of the Company or any
Subsidiary,
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SECTION 3.08. Taxes. All income tax returns and all other material
tax returns which are required to be filed by or on behalf of the Company and
its Subsidiaries have been filed and all taxes shown as due on such returns
have been paid or adequate reserves have been established on the books of the
Company. The charges, accruals and reserves on the books of the Company and in
respect of taxes or other governmental charges have been established in
accordance with U.S. GAAP.
SECTION 3.09. Subsidiaries. Other than those listed on Schedule
3.09, the Company has no Subsidiaries.
SECTION 3.10. Not an Investment Company. The Company is not an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
SECTION 3.11. Full Disclosure. The information heretofore
furnished by the Company or Holdings to Purchaser for purposes of or in
connection with the Financing Documents or any transaction contemplated hereby
does not, and all such information hereafter furnished by the Company or
Holdings to Purchaser will not (in each case taken together and on the date as
of which such information is furnished), contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements contained therein, in the light of the circumstances under which
they are made, not misleading. The Company and Holdings have disclosed to
Purchaser any and all facts which materially and adversely affect or may affect
(to the extent the Company and Holdings can now reasonably foresee), the
business, operations or financial condition of the Company or the ability of
the Company to perform its obligations under the Financing Documents or to
complete the Permanent Financing,
SECTION 3.12. Capitalization. (a) At the date of the first
Takedown and after giving effect to the Acquisition and the Mergers, the
capitalization of Holdings will be as set forth on Schedule 3.12(a). All of the
issued and outstanding shares of Common Stock are validly issued, fully paid
and nonassessable and free and clear of any Lien or other right or claim and
the holders thereof are not entitled to any preemptive or other similar rights,
(b) At the date of the first Takedown and after giving effect to
the Acquisition and the Mergers, the capitalization of the Company will be as
set forth on Schedule 3.12(b). All of the issued and outstanding shares of
capital stock of the Company are validly issued, fully paid and nonassessable
and free and clear of any Lien or other right or claim and the holder thereof
is not entitled to any preemptive or other similar rights, There are no
subscriptions, options, warrants, rights, convertible securities, exchangeable
securities or other
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agreements or commitments of any character pursuant to which the Company is
required to issue any shares of its capital stock,
SECTION 3,13. Solicitation; Access to Information. No form of
general solicitation or general advertising was used by the Company or, to the
best of its knowledge, any other Person acting on behalf of the Company, in
connection with the offer and sale of the Notes. Neither the Company nor any
Person acting on behalf of the Company has, either directly or indirectly, sold
or offered for sale to any Person any of the Notes or any other similar
security of the Company except as contemplated by this Agreement, and the
Company represents that neither the Company nor any person acting on its behalf
other than Purchaser and its Affiliates will sell or offer for sale to any
Person any such security to, or solicit any offers to buy any such security
from, or otherwise approach or negotiate in respect thereof with, any Person or
Persons so as thereby to bring the issuance or sale of any of the Notes within
the provisions of Section 5 of the Securities Act.
SECTION 3.14. Non-fungibility. When the Notes are issued and
delivered pursuant to this Agreement, the Notes will not be of the same class
(within the meaning of Rule 144A under the Securities Act) as securities which
are (i) listed on a national securities exchange registered under Section 6 of
the Exchange Act or (ii) quoted in a U,S.
automated inter-dealer quotation system.
SECTION 3.15. Permits. Except to the extent any of the following
would not reasonably be expected to result in a Material Adverse Effect: (a)
the Company and its Subsidiaries have all Permits as are reasonably necessary
for the conduct of their respective businesses as it has been carried on; (b)
all such Permits are in full force and effect, and each of the Company and its
Subsidiaries has fulfilled and performed all material obligations with respect
to such Permits; (c) no event has occurred which allows, or after notice or
lapse of time would allow, revocation or termination by the issuer thereof or
which results in any other impairment of the rights of the holder of any such
Permit; and (d) each of the Company and its Subsidiaries has no reason to
believe that any governmental body or agency is considering limiting,
suspending or revoking any such Permit.
SECTION 3.16. Representations in Other Financing Documents and in
Material Acquisition Documents. (a) Each of the representations and warranties
of any Obligor set forth in any of the other Financing Documents is true and
correct in all material respects as of each date on which such representations
and warranties are made or deemed made.
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(b) Each of the representations and warranties set forth in any of
the Material Acquisition Documents is true and correct in all material respects
as of each date on which such representations and warranties are made or deemed
made.
SECTION 3.17. Prior Activities. Holdings has not engaged in any
activities or incurred any liabilities other than in connection with its
incorporation and the Material Acquisition Documents, and the transactions
contemplated thereby,
SECTION 3.18. Compliance with ERISA. Each member of the ERISA
Group has fulfilled its obligations under the minimum funding standards of
ERISA and the Internal Revenue Code with respect to each Plan and is in
compliance in all material respects with the presently applicable provisions of
ERISA and the Internal Revenue Code with respect to each Plan. No member of the
ERISA Group has (i) sought a waiver of the minimum funding standard under
Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to
make any contribution or payment to any Plan or Multiemployer Plan or in
respect of any Benefit Arrangement, or made any amendment to any Plan or
Benefit Arrangement, which has resulted or could result in the imposition of a
Lien or the posting of a bond or other security under ERISA or the Internal
Revenue Code or (iii) incurred any liability under Title IV of ERISA other than
a liability to the PBGC for premiums under Section 4007 of ERISA.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PURCHASER
SECTION 4.01. Purchase for Investment; Authority; Binding
Agreement. Purchaser represents and warrants to the Company that:
(a) Purchaser is an Accredited Investor within the meaning of Rule
501 (a) under the securities Act and the Notes to be acquired by it pursuant to
this Agreement are being acquired for its own account and Purchaser will not
offer, sell, transfer, pledge, hypothecate or otherwise dispose of the Notes
unless pursuant to a transaction either registered under, or exempt from
registration under, the Securities Act;
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(b) the execution, delivery and performance of this Agreement and
the purchase of the Notes pursuant hereto are within Purchaser's corporate
powers and have been duly and validly authorized by all requisite corporate
action;
(c) this Agreement has been duly executed and delivered by
Purchaser;
(d) this Agreement constitutes a valid and binding agreement of
Purchaser enforceable in accordance with its terms; and
(e) Purchaser has such knowledge and experience in financial and
business matters so as to be capable of evaluating the merits and risks of its
investment in the Notes and Purchaser is capable of bearing the economic risks
of such investment.
ARTICLE 5
CONDITIONS PRECEDENT TO PURCHASE
SECTION 5.01. Conditions to Purchaser's Obligation at First
Takedown. The obligation of Purchaser to purchase the Notes to be issued and
sold by the Company at the first Takedown hereunder is subject to the
satisfaction of the following conditions contemporaneously with such Takedown:
(a) (i) Each of the conditions to the parties' obligations under
the Material Acquisition Documents shall have been satisfied or, with the prior
written consent of Purchaser, waived, (ii) the Acquisition and the Mergers
shall have been completed on the terms set forth in the Material Acquisition
Documents and (iii) the aggregate amount of funds required by the Company with
respect to the Acquisition (including without limitation for the payment of
fees, commissions and expenses) shall not exceed $204,000,000.
(b) Each of the Material Acquisition Documents, the Financing
Documents and the corporate documents shall be in full force and effect and no
term or condition thereof shall have been amended, waived or otherwise modified
without the prior written consent of Purchaser.
(c) Holdings shall have received (i) aggregate cash proceeds of
not less than $30,000,000 from the issuance and sale to DLJMB of the Holdings
Notes, (ii) aggregate cash proceeds of not less than $45,000,000 from the
issuance and
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sale to the Initial Investors of the Holdings Preferred Stock and (iii)
aggregate cash proceeds of not less than $1,000,000 from the issuance and sale
to the Initial Investors and management of the Company and existing
stockholders of the Company of Common Stock,
(d) Purchaser shall have received the financial statements
referred to in Section 3.05 hereof.
(e) Purchaser shall have received evidence reasonably
satisfactory to it that all governmental, shareholder and third party consents
and approvals reasonably necessary in connection with the Acquisition and the
other transactions contemplated by the Financing Documents and by the Material
Acquisition Documents (including without limitation any Hart-Scott-Rodino
filings) have been received and all applicable waiting periods shall have
expired without any action being taken by any competent authority that could
restrain, prevent or impose any materially adverse conditions on the
Acquisition or such other transactions or that could seek or threaten any of
the foregoing, and no law or regulation shall be applicable which in the
judgment of Purchaser could have any such effect,
(f) There shall exist no action, suit, investigation, litigation
or proceeding pending or overtly threatened in any court or before any
arbitrator or any governmental instrumentality that purports to affect any
Financing Document, any Material Acquisition Document or the Acquisition or any
of the other transactions contemplated thereby or hereby, which, if adversely
determined, could reasonably be expected to have a material adverse effect on
any Financing Document, and Material Acquisition Document or the Acquisition or
any of the other transactions contemplated thereby or hereby.
(g) Purchaser shall have received evidence reasonably
satisfactory to it that on the date of the Takedown, and after giving effect to
the Acquisition and the Mergers, there shall be no outstanding Debt of Holdings
or any of its Subsidiaries except the Notes, the Holdings Notes, and the Scent
Seal Note, and no agreement providing for the incurrence of Debt in the future
other than the Permanent Financing and the Revolver.
(h) Purchaser shall have received evidence satisfactory to it
that on the date of the Takedown, and after giving effect to the Acquisition
and the Merger, there shall be no outstanding preferred stock of Holdings or
its Subsidiaries except the Holdings Preferred Stock.
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(i) Purchaser shall have received opinions, dated on or prior to
the date of the Takedown, of (i) Weil, Gotshal & Manges LLP, special counsel
for the Company and Holdings, substantially in the form of Exhibit B hereto,
and (ii) Davis Polk & Wardwell, special counsel for the Purchaser,
substantially in the form of Exhibit C.
(j) Holdings and DLJSC shall have executed the Engagement Letter.
(k) All fees and expenses due and payable to Purchaser or DLJSC
hereunder, under the Engagement Letter or otherwise in connection with the
transactions contemplated hereby, shall have been paid in full.
(1) There shall have occurred no material adverse change in the
business, condition (financial or otherwise), operations, performance,
properties or prospects of the Company and its Subsidiaries, taken as a whole,
since September 30, 1997.
(m) There shall not have occurred any disruption or adverse change
in the financial or capital markets generally which could reasonably be
expected to materially adversely affect the purchase of the Notes or the
refinancing thereof,
SECTION 5.02. Conditions to Purchaser's Obligations at Each
Takedown. The obligation of Purchaser to purchase the Notes to be issued and
sold by the Company at each Takedown hereunder is subject to the satisfaction
of the following conditions contemporaneously with such Takedown:
(a) Purchaser shall have received the Notes to be issued at such
Takedown, duly executed by the Company in the denominations and registered in
the names specified in or pursuant to Section 2.02(c).
(b) The representations and warranties of the Obligors contained
in the Financing Documents and the representations and warranties set forth in
the Material Acquisition Documents shall each be true and correct in all
material respects on and as of the date of such Takedown as if made on and as
of such time, except to the extent such representation and warranties
specifically relate to an earlier date, in which case they shall be true and
correct in all material respects as of such earlier date, and each of the
Company and Holdings shall have performed and complied with all covenants and
agreements required by the Financing Documents to be performed by it or
complied with by it at or prior to such Takedown.
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(c) There shall not exist any Default.
(d) Solely if such Takedown is the first Takedown and the Scent
Seal Note shall remain outstanding immediately after such Takedown and the
application of the proceeds of the Notes purchased pursuant thereto, the
aggregate principal amount of the Notes being purchased at such Takedown shall
not exceed $125,000,000 minus the outstanding principal amount of the Scent
Seal Note immediately prior to such Takedown and accrued and unpaid interest
thereon,
ARTICLE 6
COVENANTS
The Company (and, in the case of Sections 6.10, 6.13, 6.15, 6.17,
6.18 and 6.19, Holdings) agree that, from and after the date of the Takedown
and so long as any Notes remain outstanding and unpaid or any other amount is
owing to Purchaser or the Holders hereunder, and for the benefit of Purchaser
and the Holders:
SECTION 6,01. Information. The Company will deliver to Purchaser:
(a) as soon as available and in any event within 90 days after the
end of each fiscal year of the Company, a consolidated balance sheet of the
Company and its Consolidated Subsidiaries as of the end of such fiscal year and
the related consolidated statements of income and cash flows and stockholders'
equity for such fiscal year, setting forth in each case in comparative form the
figures for the previous fiscal year, all reported on in a manner acceptable to
the Approved Accountants;
(b) as soon as available and in any event within 45 days after the
end of each of the first three quarters of each fiscal year of the Company, a
consolidated balance sheet of the Company and its Consolidated Subsidiaries as
of the end of such quarter and the related consolidated statements of income
and cash flows and stockholders' equity for such quarter and for the portion of
the Company's fiscal year ended at the end of such quarter, setting forth in
each case in comparative form the figures for the corresponding quarter and the
corresponding portion of the Company's previous fiscal year, all certified
(subject to footnote presentation and normal year-end adjustments) as to
fairness of presentation, U.S. GAAP and consistency by a responsible financial
officer of the Company;
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(c) as soon as available and in any event within 30 days after
the end of each month of each fiscal year of the Company, a consolidated
balance sheet of the Company and its Consolidated Subsidiaries and the related
consolidated statements of income for such month and for the portion of the
fiscal year ended at the end of such month and of cash flows for the portion of
the fiscal year ended at the end of such month;
(d) simultaneously with the delivery of each set of financial
statements referred to in clauses (a), (b) and (c) above, a certificate of a
responsible financial officer or the chief accounting officer of the Company
(i) setting forth in reasonable detail the calculations (if any) required to
establish whether the Company was in compliance with the requirements of
Sections 6.08 through 6.12, inclusive, on the date of such financial statements
and (ii) stating whether any Default exists on the date of such certificate
and, if any Default then exists, setting forth the details thereof and the
action which the Company is taking or proposes to take with respect thereto;
(e) simultaneously with the delivery of each set of financial
statements referred to in clause (a) above, a statement of the firm of
independent public accountants which reported on such statements confirming the
calculations set forth in the officer's certificate delivered simultaneously
therewith pursuant to clause (d) above;
(f) within five days after any officer of the Company obtains
knowledge of a Default, a certificate of a responsible officer of the Company
setting forth the details thereof and the action which the Company is taking or
proposes to take with respect thereto;
(g) promptly upon the filing thereof, copies of all applications,
registration statements or reports which Holdings or any of its Subsidiaries
shall have filed with the Commission or any national stock exchange;
(h) promptly following the commencement thereof, notice and a
description in reasonable detail of any litigation or proceeding to which
Holdings or any of its Subsidiaries is a party in which the amount involved is
$1,000,000 or more;
(i) promptly following the occurrence thereof, notice and a
description in reasonable detail of any material adverse change in the
business, operations,
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property, condition (financial or otherwise) or prospects of the Company and
its Subsidiaries taken as a whole;
(j) from time to time such additional information regarding the
financial position or business of Holdings and its Subsidiaries as Purchaser
may reasonably request; and
(k) within 30 days after the initial Takedown, a consolidating
pro forma balance sheet of Holdings as of September 30, 1997, giving effect to
the Acquisition and the Merger and the other transactions contemplated by the
Financing Documents and the Material Acquisition Documents and reflecting
estimated accounting adjustments in connection therewith, prepared by the
Approved Accountants.
SECTION 6.02. Payment of Obligations. The Company will pay and
discharge, and will cause each Subsidiary to pay and discharge, at or before
maturity, all their respective material obligations and liabilities, including,
without limitation, tax liabilities, except where the same may be contested in
good faith by appropriate proceedings, and will maintain, and will cause each
Subsidiary to maintain, in accordance with generally accepted accounting
principles, appropriate reserves for the accrual of any of the same.
SECTION 6.03. Insurance. The Company shall, and shall cause each
of its Subsidiaries to, keep its insurable properties adequately insured at all
times by financially sound and reputable insurers; maintain such other
insurance, to such extent and against such risks, including fire and other
risks insured against by extended coverage, as is customary with companies in
the same or similar businesses operating in the same or similar locations,
including (i) public liability insurance against claims for personal injury or
death or property damage occurring upon, in, about in connection with the use
of any properties owned, occupied or controlled by it and (ii) business
interruption insurance; and maintain such other insurance as may be required by
law,
SECTION 6.04. Conduct of Business and Maintenance of Existence.
The Company will continue, and will cause each Subsidiary to continue, to
engage in business of the same general type as now conducted by the Company and
its Subsidiaries, and will preserve, renew and keep in full force and effect,
and will cause each Subsidiary to preserve, renew and keep in full force and
effect their respective corporate existence and their respective rights,
privileges and franchises necessary or desirable in the normal conduct of
business, except that (i) the Company may discontinue any immaterial line of
business of the Company
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and its Subsidiaries if the Board of Directors of the Company determines that
such discontinuation is in the best interests of the Company and not
disadvantageous to the holder of any Note and (ii) nothing in this Section 6.04
shall prohibit the merger or consolidation of any wholly-owned Subsidiary of
the Company with or into any other wholly-owned Subsidiary of the Company
(including, without limitation, the Mergers).
SECTION 6.05. Compliance with Laws. (a) The Company will comply,
and cause each Subsidiary to comply, in all material respects with all
applicable laws, ordinances, rules, regulations, and requirements of
governmental authorities (including, without limitation, Environmental Laws and
the rules and regulations thereunder).
(b) The Company will take all actions to ensure that the
obligations of the Company under the Financing Documents are at all times
valid, binding and enforceable against the Company in accordance with their
terms under all applicable laws.
SECTION 6.06. Inspection of Property, Books and Records. The
Company will keep, and will cause each Subsidiary to keep, proper books of
record and account in which full, true and correct entries shall be made of all
dealings and transactions in relation to its business and activities; and will
permit, and will cause each Subsidiary to permit, representatives of Purchaser
at the expense of the Company, upon reasonable prior notice, to visit and
inspect any of their respective properties, to examine and make abstracts from
any of their respective books and records and to discuss their respective
affairs, finances and accounts with their respective executive officers and
independent public accountants at such reasonable times and as often as may
reasonably be desired; provided, however, the Purchaser shall notify the
Company prior to any contact with such independent public accountants and give
the Company the opportunity to participate in such discussions.
SECTION 6.07. Investment Company Act. The Company will not be or
become an open-end investment trust, unit investment trust or face-amount
certificate company that is or is required to be registered under Section 8 of
the Investment Company Act of 1940, as amended.
SECTION 6.08. Financial Covenants. (a) At any date on or after
March 31, 1998 (i) Consolidated Net Worth at such date plus (ii) the aggregate
amount (if any) by which Consolidated Net Worth has been reduced as a result of
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purchase price adjustments related to the Acquisition on or prior to such date
will not be less than $70,000,000,
(b) At any date on or after March 31, 1998, the ratio of (i)
Consolidated Debt at such date to (ii) Consolidated EBITDA for the period of
four consecutive fiscal quarters most recently ended on or prior to such date
shall not exceed 6.50:1.00.
SECTION 6.09. Limitation on Debt. Neither the Company nor any
Subsidiary will create, incur, assume or suffer to exist any Debt, except:
(a) Debt of the Company evidenced by the Notes;
(b) Debt under the Revolver; provided that the aggregate
outstanding principal amount of such Debt shall at no time exceed $20,000,000;
(c) Debt owing to the Company or a Subsidiary;
(d) Debt of Scent Seal evidenced by the Scent Seal Note; and
(e) other Debt the terms and conditions of which shall have been
approved by the Majority Holders and the Net Cash Proceeds of which are applied
in accordance with Section 2.06.
SECTION 6. 10. Restricted Payments; Voluntary Prepayments. (a)
Neither Holdings nor any Subsidiary of Holdings will declare or make any
Restricted Payment other than payments to repurchase Common Stock owned by any
employee of the Company or any of its Subsidiaries in connection with such
employee's termination of employment or as permitted or contemplated under any
shareholders agreement; provided that the aggregate amount of such payments
shall not exceed $1,000,000 multiplied by the number of the next succeeding
anniversary of the date of the Takedown.
(b) Holdings will not, and will not permit any of its Subsidiaries
to, directly or indirectly, optionally redeem, retire, purchase, acquire,
defease or otherwise make any cash payment in respect of the Holdings Notes.
SECTION 6.11. Investments. The Company will not, and will not
permit any of its Subsidiaries to, make or acquire any Investment in any Person
other than (i) Investments in existence on the date hereof and consisting of
the capital stock of direct or indirect wholly-owned Subsidiaries, (ii)
Investments in Cash
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Equivalents, (iii) Investments in the form of loans and advances to Persons
which are wholly-owned Subsidiaries on the date hereof, (iv) loans and advances
to employees of the Company and its Subsidiaries in the ordinary course of
business (including, without limitation, for travel, entertainment and
relocation expenses) not to exceed $1,000,000 at any one time outstanding, (v)
Investments received in connection with the bankruptcy or reorganization of
suppliers and customers and in settlement of delinquent obligations of, and
other disputes with, customers and suppliers arising in the ordinary course of
business and (vi) Investments made after the date hereof in Persons which are
direct or indirect wholly-owned Subsidiaries immediately after such Investment
is made; provided that the consideration paid by the Company for any such
Investments consists solely of Common Stock. Without limiting the generality of
the foregoing, Holdings will not make, or permit any of its Subsidiaries to
make, any Business Acquisition other than (i) the Acquisition and (ii) any
Business Acquisition by the Company with respect to which the consideration
paid consists solely of Common Stock.
SECTION 6.12. Negative Pledge. (a) The Company will not create,
assume or suffer to exist any Lien on any asset now owned or hereafter acquired
by it, except:
(a) existing Liens (other than Liens described in clause (b)
below) to be terminated not later than the date of the first Takedown;
(b) (i) Liens in existence on the date hereof on assets subject to
such Liens on the date hereof securing the Scent Seal Note or (ii) Liens
securing Debt and other obligations incurred under the Revolver;
(c) other Liens approved by the Majority Holders securing Debt
permitted by Section 6.09(e); and
(d) Liens arising in the ordinary course of its business which (i)
do not secure Debt, (ii) do not secure any obligation in an amount exceeding
$1,000,000 and (iii) do not in the aggregate materially detract from the value
of the assets of the Company and its Subsidiaries, taken as a whole, or
materially impair the use thereof in the operation of its business; and
(e) Liens in cash collateral not exceeding $600,000 securing
certain operating lease obligations in existence on the date hereof.
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SECTION 6.13, Transactions with Affiliates. The Company will not,
and will not permit any Subsidiary to, directly or indirectly, pay any funds to
or for the account of, make any investment (whether by acquisition of stock or
indebtedness, by loan, advance, transfer of property, guarantee or other
agreement to pay, purchase or service, directly or indirectly, any Debt, or
otherwise) in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect any transaction in
connection with any joint enterprise or other joint arrangement with, any
Affiliate, except on terms to the Company or such Subsidiary no less favorable
than terms that could be obtained by the Company or such Subsidiary from a
Person that is not an Affiliate, as determined, in the case of any transaction
with a value of $500,000 or more, in good faith by the Board of Directors of
the Company; provided that no determination of the Board of Directors shall be
required with respect to any such transactions entered into in the ordinary
course of business or in connection with the execution or performance of the
Company's obligations under the Engagement Letter; and provided further that
this Section shall not apply to any transaction with Purchaser or any of its
Affiliates.
SECTION 6.14. Consolidations, Mergers and Sales of Assets;
Ownership of Subsidiaries. (a) Neither the Company nor any of its Subsidiaries
will consolidate or merge with or into any other Person; provided that any
wholly-owned Subsidiary of the Company may merge or consolidate with or into any
other wholly-owned Subsidiary (including without limitation pursuant to the
Mergers). The Company will not, and will not permit its Subsidiaries to, sell,
lease or otherwise transfer, directly or indirectly, any substantial part of
the assets of the Company and its Subsidiaries, taken as a whole, to any other
Person.
(b) The Company will at all times continue to own, directly or
indirectly, 100% of the capital stock of each Person which is a wholly-owned
Subsidiary of the Company on the date hereof.
SECTION 6.15. Limitations on Activities by Holdings. Holdings will
not, directly or indirectly, engage in any business or conduct any activity
other than the making and holding of its Investment in the Company and
activities necessary to perform its obligations under the Financing Documents
and the Material Acquisition Documents to which it is a party or reasonably
incidental thereto. Without limiting the generality of the foregoing, Holdings
will not (i) incur or suffer to exist any Debt, other than Debt under the
Holdings Notes and other Debt of Holdings incurred to repurchase Common Stock
held by any employees of the Company or any of its Subsidiaries, in an
aggregate principal amount not to exceed at any date $1,000,000 multiplied by
the number of the next succeeding
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anniversary of the date of the Takedown, (ii) incur or suffer to exist any Lien
on any of its assets or (iii) consolidate or merge with or into any other
Person. Holdings shall preserve, renew and keep in full force and effect its
corporate existence and any rights, privileges and franchises necessary or
desirable in the conduct of its business, and shall comply in all material
respects with all material applicable laws, ordinances, rules, regulations, and
requirements of governmental authorities, provided that Holdings may terminate
any such right, privilege or franchise (other than its corporate existence) if
its board of directors in good faith determines that such termination is in the
best interests of Holdings and not materially disadvantageous to the Holders.
SECTION 6.16. Use of Proceeds. The proceeds from the issuance and
sale of the Notes by the Company pursuant to this Agreement at the first
Takedown shall be used to pay the purchase price of the Acquisition and related
fees and expenses and may also be used to refinance in full the Scent Seal
Note. The proceeds from the issuance and sale of the Notes by the Company
pursuant to this Agreement at any Takedown other than the first Takedown shall
be used solely to refinance in full the Scent Seal Note and to pay purchase
price adjustments to be paid to the Sellers under the Acquisition Documents,
SECTION 6.17. Restrictions on Certain Amendments. (a) Neither the
Company nor Holdings will amend or waive, or suffer to be amended or waived,
any Corporate Document, any Financing Document (other than the Revolver) or any
Material Acquisition Document from the respective forms thereof delivered to
Purchaser pursuant to Section 5.01 without the prior written consent of
Purchaser.
(b) The Company will not agree to any amendment or other
modification of the Revolver the effect of which would be to impose any
additional restriction on the Permanent Financing.
SECTION 6.18. Permanent Financing. (a) Holdings will, and will
cause its Subsidiaries to, take all actions which, in the reasonable judgment
of DLJSC, are necessary or desirable to obtain Permanent Financing as soon as
practicable through (x) bank financing on terms usual and customary for similar
financings and/or (y) through issuance of securities at such interest rates and
other terms as are, in the reasonable opinion of DLJSC, prevailing for new
issues of securities of comparable size and credit rating in the capital
markets at the time such Permanent Financing is consummated and obtained in
comparable transactions made on an arm's-length basis between unaffiliated
parties; provided that, if in the reasonable judgment of DLJSC, equity
securities of Holdings need to be provided for the consummation of Permanent
Financing on the terms set forth above, the
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terms of the Permanent Financing shall provide for the issuance of such equity
securities (which may include warrants to purchase such equity securities). The
respective amounts to be financed through bank financing or through the
issuance of securities shall be as determined by the Company, but shall be in
an amount at least sufficient to repay or redeem the Notes in full in
accordance with their terms. The Company hereby covenants and agrees that the
proceeds from the Permanent Financing shall be used to the extent required to
redeem in full the Notes in accordance with their terms.
(b) Holdings covenants that it will, and will cause its
Subsidiaries to, enter into such agreements as in the reasonable judgment of
DLJSC are customary in connection with the Permanent Financing, make such
filings under the Securities Act, the Exchange Act, the Trust Indenture Act of
1939, as amended, and state securities laws as in the reasonable judgment of
DLJSC shall be required to permit consummation of the Permanent Financing and
take such steps as in the reasonable judgment of DLJSC are necessary or
desirable to cause such filings to become effective or in the reasonable
judgment of DLJSC are otherwise required to consummate the Permanent Financing.
SECTION 6.19. Appointment of Director. If an Event of Default
shall have occurred and be continuing the Company and Holdings shall provide
Purchaser with the right to appoint in its sole discretion one additional
director to the Board of Directors of each of the Company and Holdings, which
additional director shall serve as such only for so long as an Event of Default
shall continue; provided that such right shall terminate at such time as
Purchaser is no longer the holder of at least 50% of the aggregate outstanding
principal amount of the Notes.
ARTICLE 7
EVENTS OF DEFAULT
SECTION 7.0 1. Events of Default Defined; Acceleration of
Maturity; Waiver of Default. In case one or more of the following (each, an
"Event of Default"), whatever the reason for such Event of Default and whether
it shall be voluntary or involuntary or be effected by operation of law or
pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body, shall have occurred and
be continuing:
(a) default in the payment of all or any part of the principal or
premium, if any, on any of the Notes as and when the same shall become due and
payable either at maturity, upon any redemption, by declaration or otherwise;
or
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(b) default in the payment of any installment of interest upon any
of the Notes or any fees payable under this Agreement or any amount payable
under Section 2.07 as and when the same shall become due and payable, and
continuance of such default for a period of five days; or
(c) failure on the part of the Company or Holdings duly to observe
or perform any of the covenants contained in Sections 6.07 through 6.20 of the
Agreement; or
(d) failure on the part of the Company or Holdings duly to observe
or perform any other of the covenants or agreements contained in the Financing
Documents, if such failure shall continue for a period of 30 days after the
date on which written notice thereof shall have been given to the Company at
the option of any holder of a Note; or
(e) Holdings or any of its Subsidiaries shall commence a voluntary
case or other proceeding seeking liquidation, reorganization or other relief
with respect to itself or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect in any jurisdiction or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, or shall consent to any
such relief or to the appointment of or taking possession by any such official
in an involuntary case or other proceeding commenced against it, or shall make
a general assignment for the benefit of creditors, or shall fail generally to
pay its debts as they become due, or shall take any corporate action to
authorize any of the foregoing; or
(f) an involuntary case or other proceeding shall be commenced
against Holdings or any of its Subsidiaries seeking liquidation, reorganization
or other relief with respect to it or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, and such involuntary
case or other proceeding shall remain undismissed and unstayed for a period of
60 days; or an order for relief shall be entered against Holdings or any of its
Subsidiaries under the bankruptcy laws as now OR hereafter in effect in any
jurisdiction; or
(g) there shall be a default in respect of any Debt of Holdings or
any of its Subsidiaries whether such Debt now exists or shall hereafter be
created (excluding the Notes but including Debt owing to the Company or a
Subsidiary) if such default results in acceleration of the maturity of such
Debt or enables the holder of such Debt to accelerate the maturity thereof
(without giving effect to
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any waiver or amendment of the terms of such Debt which might otherwise
eliminate such default); or Holdings or any of its Subsidiaries shall fail to
pay at maturity any such Debt whether such Debt now exists or shall hereafter
be created; or
(h) final judgments for the payment of money which in the
aggregate at any one time exceed $1,000,000 (not paid or covered by insurance
or indemnification agreements with respect to which the relevant insurer or
indemnify party, as the case may be, has acknowledged coverage) shall be
rendered against Holdings or any of its Subsidiaries by a court of competent
jurisdiction and shall remain undischarged for a period (during which execution
shall not be effectively stayed) of 60 days after such judgment becomes final;
or
(i) any representation, warranty, certification or statement made
or deemed made by Holdings or any of its Subsidiaries in any Financing Document
or which is contained in any certificate, document or financial or other
statement furnished at any time under or in connection with any Financing
Document shall prove to have been untrue in any material respect when made or
deemed made; or
(j) a Change of Control has occurred; or
(k) or any of the Financing Documents shall for any reason fail to
constitute the valid and binding agreement of any Obligor party thereto (other
than pursuant to the cessation of the existence of such Obligor pursuant to a
transaction permitted under Section 6.14 of this Agreement), or any Obligor
shall so assert in writing; or
(1) any member of the ERISA Group shall fail to pay when due an
amount or amounts aggregating in excess of $250,000 which it shall have become
liable to pay under Title IV of ERISA; or notice of intent to terminate a
Material Plan shall be filed under Title IV of ERISA by any member of the ERISA
Group, any plan administrator or any combination of the foregoing; or the PBGC
shall institute proceedings under Title IV of ERISA to terminate, to impose
liability (other than for premiums under Section 4007 of ERISA) in respect of,
or to cause a trustee to be appointed to administer any Material Plan; or a
condition shall exist by reason of which the PBGC would be entitled to obtain a
decree adjudicating that any Material Plan must be terminated; or there shall
occur a complete or partial withdrawal from, or a default, within the meaning
of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer
Plans which could cause one or more members of the ERISA Group to incur a
current payment obligation in excess of $1,000,000;
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then, and in each and every such case (other than under clauses (e) and (f)
with respect to the Company), unless the principal of all the Notes shall have
already become due and payable, the Majority Holders (or, if at such time
Purchaser no longer holds least 50% of the aggregate outstanding principal
amount of the Notes, Holders of at least 33 1/3% of the aggregate outstanding
principal amount of the Notes), by notice in writing to the Company, may
declare the entire principal amount of the Notes together with accrued and
unpaid interest thereon to be, and upon the Company's receipt of such notice
the entire principal amount of the Notes together with accrued and unpaid
interest thereon shall become, immediately due and payable. If an Event of
Default specified in clauses (e) or (f) with respect to the Company occurs, the
principal of and accrued and unpaid interest on the Notes will be immediately
due and payable without any declaration or other act on the part of the
Holders.
ARTICLE 8
LIMITATION ON TRANSFERS
SECTION 8.01. Restrictions on Transfer. From and after the date of
the Takedown and their respective dates of issuance, in the case of Additional
Notes, none of the Notes shall be transferable except upon the conditions
specified in Sections 8.02 and 8.03, which conditions are intended to ensure
compliance with the provisions of the Securities Act in respect of the Transfer
of any of such Notes or any interest therein. Purchaser will cause any proposed
transferee of any Notes (or any interest therein) held by it to agree to take
and hold such Notes (or any interest therein) subject to the provisions and
upon the conditions specified in this Section 8.01 and in Sections 8.02 and
8.03
SECTION 8.02. Restrictive Legends. (a) Each Note issued to
Purchaser or to a subsequent transferee shall (unless otherwise permitted by
the provisions of Section 8.02(b) or Section 8.03) include a legend in
substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD, UNLESS IT
HAS BEEN REGISTERED UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR
UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE AND THEN ONLY IN COMPLIANCE
WITH THE RESTRICTIONS ON
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TRANSFER SET FORTH IN THE SECURITIES PURCHASE AGREEMENT DATED AS OF DECEMBER
15,1997, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER OF THIS SECURITY AT
ITS PRINCIPAL EXECUTIVE OFFICE.
(b) Any Holders of Notes registered pursuant to the Securities Act
and qualified under applicable state securities laws may exchange such Notes on
transfer for new securities that shall not bear the legend set forth in
paragraph (a) of this Section 8.02.
SECTION 8.03. Notice of Proposed Transfers. (a) Five Business Days
prior to any proposed Transfer (other than Transfers of Notes (i) registered
under the Securities Act, (ii) to an Affiliate of DLJSC or a general
partnership in which DLJSC or an Affiliate of DLJSC is one of the general
partners or (iii) to be made in reliance on Rule 144A under the Securities Act)
of any Notes, the holder thereof shall give written notice to the Company of
such holder's intention to effect such Transfer, setting forth the manner and
circumstances of the proposed Transfer, and shall be accompanied by (i) an
opinion of counsel reasonably satisfactory to the Company addressed to the
Issuer to the effect that the proposed Transfer of such Notes may be effected
without registration under the Securities Act, (ii) such representation letters
in form and substance reasonably satisfactory to the Company to ensure
compliance with the provisions of the Securities Act and (iii) such letters in
form and substance reasonably satisfactory to the Company from each such
transferee stating such transferee's agreement to be bound by the terms of this
Agreement. Such proposed Transfer may be effected only if the Company shall
have received such notice of transfer, opinion of counsel, representation
letters and other letters referred to in the immediately preceding sentence,
whereupon the holder of such Notes shall be entitled to Transfer such Notes in
accordance with the terms of the notice delivered by the holder to the Company.
Each Note transferred as above provided shall bear the legend set forth in
Section 8.02(a) except that such Note shall not bear such legend if the opinion
of counsel referred to above is to the further effect that neither such legend
nor the restrictions on Transfer in Sections 8.01 through 8.03 are required in
order to ensure compliance with the provisions of the Securities Act.
(b) Five Business Days prior to any proposed Transfer of any Notes
to be made in reliance on Rule 144A under the Securities Act ("Rule 144A"),
the holder thereof shall give written notice to the Company of such holder's
intention to effect such Transfer, setting forth the manner and circumstances
of the proposed Transfer and certifying that such Transfer will be made (i) in
full
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compliance with Rule 144A and (ii) to a transferee that (A) such holder
reasonably believes to be a "qualified institutional buyer" within the meaning
of Rule 144A and (B) is aware that such Transfer will be made in reliance on
Rule 144A. Such proposed Transfer may be effected only if the Company shall
have received such notice of transfer, whereupon the holder of such Notes shall
be entitled to Transfer such Notes in accordance with the terms of the notice
delivered by the holder to the Company. Each Note transferred as above provided
shall bear the legend set forth in Section 8.02(a).
ARTICLE 9
MISCELLANEOUS
SECTION 9.01. Notices. All notices, demands and other
communications to any party hereunder shall be in writing (including telecopier
or similar writing) and shall be given to such party at its address set forth
on the signature pages hereof, or such other address as such party may
hereinafter specify for the purpose. Each such notice, demand or other
communication shall be effective (i) if given by telecopy, when such telecopy
is received at the telecopy number specified on the signature page hereof, or
(ii) if given by overnight courier, addressed as aforesaid or by any other
means, when delivered at the address specified in this Section.
SECTION 9.02. No Waivers; Amendments. (a) No failure or delay on
the part of any party in exercising any right, power or remedy hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy. The remedies provided for
herein are cumulative and are not exclusive of any remedies that may be
available to any party at law or in equity or otherwise.
(b) Any provision of this Agreement may be amended, supplemented
or waived if, but only if, such amendment, supplement or waiver is in writing
and is signed by the Company, Holdings and the Majority Holders; provided, that
without the consent of each Holder of any Note affected thereby, an amendment,
supplement or waiver may not (a) reduce the aggregate principal amount of Notes
whose Holders must consent to an amendment, supplement or waiver, (b) reduce
the rate or extend the time for payment of interest on any Note, (c) reduce the
principal amount of or extend the stated maturity of any Note or alter the
redemption provisions with respect thereto or (d) make any Note payable in
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money or property other than as stated in the Notes. In determining whether the
Holders of the requisite principal amount of Notes have concurred in any
direction, consent, or waiver as provided in this Agreement or in the Notes,
Notes which are owned by the Company or any other obligor on or guarantor of
the Notes, or, except for DLJSC and its Subsidiaries (other than DLJMB, the
Company and its Subsidiaries) by any Person controlling, controlled by, or
under common control with any of the foregoing, shall be disregarded and deemed
not to be outstanding for the purpose of any such determination; and provided
further that no such amendment, supplement or waiver which affects the rights
of Purchaser and its Affiliates otherwise than solely in their capacities as
Holders of Notes shall be effective with respect to them without their prior
written consent.
SECTION 9.03. Indemnification. The Company (the "Indemnifying
Party") agrees to indemnify and hold harmless Purchaser, its Affiliates, and
each Person, if any, who controls Purchaser, or any of its affiliates, within
the meaning of the Securities Act or the Exchange Act (a "Controlling Person"),
and the respective partners, agents, employees, officers and directors of
Purchaser, its Affiliates and any such Controlling Person (each an "Indemnified
Party" and collectively, the "Indemnified Parties"), from and against any and
all losses, claims, damages, liabilities and expenses (including, without
limitation and as incurred, reasonable costs of investigating, preparing or
defending any such claim or action, whether or not such Indemnified Party is a
party thereto), arising out of, or in connection with any activities
contemplated by this Agreement or any other services rendered in connection
herewith, including, but not limited to, losses, claims, damages, liabilities
or expenses arising out of or based upon any untrue statement or any alleged
untrue statement of a material fact or any omission or any alleged omission to
state a material fact in any of the disclosure or offering or confidential
information documents (the "Disclosure Documents") pertaining to any of the
transactions or proposed transactions contemplated herein, including any
eventual refinancing or resale of the Notes, provided that the Indemnifying
Party will not be responsible for any claims, liabilities, losses, damages or
expenses that are determined by final judgment of a court of competent
jurisdiction to result from such Indemnified Party's gross negligence, willful
misconduct or bad faith. The Indemnifying Party also agrees that Purchaser
shall have no liability (except for breach of provisions of this Agreement) for
claims, liabilities, damages, losses or expenses, including legal fees,
incurred by the Indemnifying Party in connection with this Agreement unless
they are determined by final judgment of a court of competent jurisdiction to
result from (a) Purchaser's gross negligence, willful misconduct or bad faith,
(b) Purchaser's use of Disclosure Documents not approved by the Indemnifying
Party or (c) the failure of Purchaser to furnish to any purchaser of securities
any Disclosure
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Document furnished to Purchaser by the Indemnifying Party which corrected any
untrue statement of a material fact or omission to state a material fact
contained in a Disclosure Document previously furnished to such purchaser by
Purchaser.
If any action shall be brought against an Indemnified Party with
respect to which indemnity may be sought against the Indemnifying Party under
this Agreement, such Indemnified Party shall promptly notify the Indemnifying
Party in writing and the Indemnifying Party shall, if requested by such
Indemnified Party or if the Indemnifying Party desires to do so, assume the
defense thereof, including the employment of counsel reasonably satisfactory to
such Indemnified Party and payment of all reasonable fees and expenses. The
failure to so notify the Indemnifying Party shall not affect any obligations
the Indemnifying Party may have to such Indemnified Party under this Agreement
or otherwise unless the Indemnifying Party is materially adversely affected by
such failure. Such Indemnified Party shall have the right to employ separate
counsel in such action and participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party,
unless: (i) the Indemnifying Party has failed to assume the defense and employ
counsel or (ii) the named parties to any such action (including any impleaded
parties) include such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that there may be one or
more legal defenses available to it which are different from or additional to
those available to the Indemnifying Party, in which case, if such Indemnified
Party notifies the Indemnifying Party in writing that it elects to employ
separate counsel at the expense of the Indemnifying Party, the Indemnifying
Party shall not have the right to assume the defense of such action or
proceeding on behalf of such Indemnified Party, provided, however, that the
Indemnifying Party shall not, in connection with any one such action or
proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be responsible hereunder for the reasonable fees
and expenses of more than one such firm of separate counsel, in addition to any
local counsel, which counsel shall be designated by Purchaser. The Indemnifying
Party shall not be liable for any settlement of any such action effected
without the written consent of the Indemnifying Party (which shall not be
unreasonably withheld) and the Indemnifying Party agrees to indemnify and hold
harmless each Indemnified Party from and against any loss or liability by
reasons of settlement of any action effected with the consent of the
Indemnifying Party. In addition, the Indemnifying Party will not, without the
prior written consent of Purchaser, settle or compromise or consent to the
entry of any judgment in or otherwise seek to terminate any pending or
threatened action, claim, suit or proceeding in respect of which
indemnification or contribution may be sought
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hereunder (whether or not any Indemnified Party is a party thereto) unless such
settlement, compromise, consent or termination includes an express
unconditional release of Purchaser and the other Indemnified Parties,
reasonably satisfactory in form and substance to Purchaser, from all liability
arising out of such action, claim, suit or proceeding.
If for any reason the foregoing indemnity is unavailable
(otherwise than pursuant to the express terms of such indemnity) to an
Indemnified Party or insufficient to hold an Indemnified Party harmless, then
in lieu of indemnifying the Indemnified Party, the Indemnifying Party shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such claims, liabilities, losses, damages, or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Indemnifying Party on the one hand and by Purchaser on the other from the
transactions contemplated by this Agreement or (ii) if the allocation provided
by clause (i) is not permitted under applicable law, in such proportion as is
appropriate to reflect not only the relative benefits received by the
Indemnifying Party on the one hand and Purchaser on the other, but also the
relative fault of the Indemnifying Party and Purchaser as well as any other
relevant equitable considerations. Notwithstanding the provisions of this
Section 9.03, the aggregate contribution of all Indemnified Parties shall not
exceed the amount of fees actually received by Purchaser pursuant to this
Agreement. It is hereby further agreed that the relative benefits to the
Indemnifying Party on the one hand and Purchaser on the other with respect to
the transactions contemplated hereby shall be determined by reference to, among
other things, whether any untrue or alleged untrue statement of material fact
or the omission or alleged omission to state a material fact related to
information supplied by the Indemnifying Party or by Purchaser and the party's
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11 (f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
The indemnification, contribution and expense reimbursement
obligations set forth in this Section 9.03 (i) shall be in addition to any
liability the Indemnifying Party may have to any Indemnified Party at common
law or otherwise, (ii) shall survive the termination of this Agreement and the
payment in full of the Notes and (iii) shall remain operative and in full force
and effect regardless of any investigation made by or on behalf of Purchaser or
any other Indemnified Party.
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SECTION 9.04. Expenses, The Company agrees to pay all out-of-pocket
costs, expenses and other payments in connection with the purchase and sale of
the Notes as contemplated by this Agreement including without limitation (i)
reasonable fees and disbursements of special counsel and any local counsel for
Purchaser incurred in connection with the preparation of this Agreement, (ii)
all reasonable out-of-pocket expenses of Purchaser, including reasonable fees
and disbursements of counsel, in connection with any waiver or consent
hereunder or any amendment hereof or any Default or alleged Default hereunder
and (iii) if an Event of Default occurs, all reasonable out-of-pocket expenses
incurred by Purchaser and each holder of Notes, including reasonable fees and
disbursements of a single counsel for all Holders (which counsel shall be
selected by Purchaser if Purchaser is a holder of Notes when such Event of
Default occurs), in connection with such Event of Default and collection,
bankruptcy, insolvency and other enforcement proceedings resulting therefrom.
SECTION 9.05. Payment. The Company agrees that, so long as
Purchaser shall own any Notes purchased by it from the Company hereunder, the
Company will make payments to Purchaser of all amounts due thereon by wire
transfer by 1:00 P.M. (New York City time) on the date of payment to such
account as is specified beneath Purchaser's name on the signature page hereof
or to such other account or in such other similar manner as Purchaser may
designate to the Company in writing.
SECTION 9.06. Successors and Assigns. This Agreement shall be
binding upon and shall inure to the benefit of the Company, Holdings and
Purchaser and their respective successors and assigns; provided that the
Company may not assign or otherwise transfer its rights or obligations under
this Agreement to any other Person without the prior written consent of the
Majority Holders. All provisions hereunder purporting to give rights to DLJMB,
DLJSC and its Affiliates or to Holders are for the express benefit of such
Persons.
SECTION 9.07. Brokers. The Company represents and warrants that,
except FOR DLJSC, it has not employed any broker, finder, financial advisor or
investment banker who might be entitled to any brokerage, finder's or other fee
or commission in connection with the Acquisition or the sale of the Notes.
SECTION 9.08. New York Law; Submission to Jurisdiction; Waiver of
Jury Trial. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED
BY THE LAWS OF THE STATE OF NEW YORK. EACH PARTY HERETO HEREBY SUBMITS TO THE
NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT
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COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT
SITTING IN NEW YORK CITY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH
PARTY HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY
OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY
SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING
BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY
HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 9.09. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to
be invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
SECTION 9.10. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be an original with the same effect
as if the signatures thereto and hereto were upon the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their respective authorized officers, as of the date
first above written.
AHC I MERGER CORP.
By /s/ David Wittels
------------------------
Name: David Wittels
Title: Vice President
Address:c/o DLJ Merchant
Banking Partners II, L.P.
277 Park Avenue
New York, New York
10172
Attention: David Wittels
AHC I ACQUISITION CORP.
By /s/ David Wittels
------------------------
Name: David Wittels
Title: Vice President
Address:c/o DLJ Merchant
Banking Partners II, L.P.
277 Park Avenue
New York, New York
10172
Attention: David Wittels
SCRATCH & SNIFF FUNDING,
INC.
By /s/ Paul Tompson
------------------------
Name:
Title:
Address:c/o DLJ Merchant
Banking Partners II, L.P.
277 Park Avenue
New York, New York
10172
Attention: David Wittels
45
<PAGE>
EXHIBIT A
FORM OF NOTE
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD,
UNLESS IT HAS BEEN REGISTERED UNDER SUCH ACT AND APPLICABLE STATE SECURITIES
LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE AND THEN ONLY IN
COMPLIANCE WITH THE RESTRICTIONS ON TRANSFER SET FORTH IN THE SECURITIES
PURCHASE AGREEMENT DATED AS OF DECEMBER 15,1997, A COPY OF WHICH MAY BE
OBTAINED FROM THE ISSUER OF THIS SECURITY AT ITS PRINCIPAL EXECUTIVE OFFICE.
No. $
AHC I MERGER CORP.
Senior Increasing Rate Note
AHC I MERGER CORP., a Delaware corporation (together with its
successors, the "Company"), for value received hereby promises to pay to
Scratch & Sniff Funding, Inc. and registered assigns the principal sum of
by
wire transfer of immediately available funds to the Holder's account at such
bank in the United States as may be specified in writing by the Holder to the
Company, on December 15, 1998 in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts, and to pay interest on the unpaid principal amount
hereof on the dates and at the rate or rates provided for in the Securities
Purchase Agreement (as hereinafter defined). Reference is made to the
Securities Purchase Agreement for provisions for the prepayment hereof and the
acceleration of the maturity hereof.
This Note is one of a duly authorized issue of Senior Increasing
Rate Notes of the Company (the "Notes") referred to in the Securities Purchase
<PAGE>
Agreement dated as of December 15, 1997 among the Company, AHC I Acquisition
Corp, and Scratch & Sniff Funding, Inc, (as the same may be amended from time
to time in accordance with its terms, the "Securities Purchase Agreement").
The Notes are transferable and assignable to one or more purchasers (in minimum
denominations of $5,000,000 or larger multiples of $1,000,000), in accordance
with the limitations set forth in the Securities Purchase Agreement. The
Company agrees to issue from time to time replacement Notes in the form hereof
to facilitate such transfers and assignments.
Scratch & Sniff Funding, Inc., acting solely for this purpose as
agent for the Company, shall keep at its principal office a register (the
"Register") in which shall be entered the names and addresses of the registered
holders of the Notes and particulars of the respective Notes held by them and
of all transfers of such Notes. References to the "Holder" or "Holders" shall
mean the Person listed in the Register as the payee of any Note. The ownership
of the Notes shall be proven by the Register absent manifest error.
This Note shall be deemed to be a contract under the laws of the
State of New York, and for all purposes shall be construed in accordance with
the laws of said State. The parties hereto, including all guarantors or
endorsers, hereby waive presentment, demand, notice, protest and all other
demands and notices in connection with the delivery, acceptance, performance
and enforcement of this Note, except as specifically provided herein, and
assent to extensions of the time of payment, or forbearance or other indulgence
without notice.
IN WITNESS WHEREOF, the Company has caused this instrument to be
duly executed.
Dated:
-----------------------------------
AHC I MERGER CORP.
By:
------------------------
Name:
Title:
2
<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement"), dated as of November
14, 1997, is made among AHC I Acquisition Corp., a Delaware corporation
("Purchaser"), Arcade Holding Corporation, a Delaware corporation (the
"Company"), and the parties identified on the signature page hereto as
"Sellers" (each a "Seller" and collectively, "Sellers").
RECITALS
A. Sellers currently collectively own all of the issued and outstanding
shares (the "Shares") of the common stock, $.01 par value (the "Common
Stock"), of the Company.
B. State Board of Administration of Florida ("SBA") owns all of the
issued and outstanding shares of the preferred stock, $1.00 par value
(the "Preferred Stock"), of the Company. Liberty Partners Holdings 4,
L.L.C. ("Liberty Holdings") is the holder of an Arcade Holding
Corporation Common Stock Purchase Warrant dated November 4, 1993 (the
"Warrant") entitling Liberty Holdings to purchase shares of the common
stock of the Company.
C. The Company is a party to an Executive Stock Option Agreement (an
"Option Agreement") with certain executives of the Company or its
subsidiary who are Sellers under this Agreement (the "Option
Holders"), the terms of which provide for the immediate vesting of all
options to purchase shares of common stock of the Company ("Options")
thereunder upon, and forfeitability of any unexercised Options not
exercised prior to or in connection with, the sale contemplated
hereunder.
D. Arcade, Inc., a Tennessee corporation ("Arcade"), is a wholly-owned
subsidiary of the Company. Each of Scent Seal, Inc., a California
corporation ("Scent Seal"), and Arcade Europe SARL, a company
organized under the laws of France ("Arcade Europe"), is a
wholly-owned subsidiary of Arcade. Arcade, Scent Seal and Arcade
Europe are collectively referred to herein as the "Subsidiaries".
E. The Subsidiaries are engaged in the business of developing,
manufacturing, marketing and distributing olfactory sampling products
and related items (the "Business").
NOW, THEREFORE, in consideration of the foregoing Recitals (which are
hereby incorporated by reference), the agreements hereafter set forth and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
<PAGE>
ARTICLE 1. PURCHASE AND SALE OF SHARES; OPTIONS; WARRANTS; REDEMPTION OF
PREFERRED; DEBT CLOSING,
1.1 Agreement to Purchase and Sell. On the Closing Date (as defined in
Section 1.8) and upon the terms and subject to the conditions set forth in this
Agreement, Sellers shall sell, assign, transfer, convey and deliver the Shares
to Purchaser free and clear of all Liens (as hereinafter defined) and Purchaser
shall purchase the Shares from Sellers.
1.2 Treatment of Options. On the Closing Date and upon the terms and
subject to the conditions set forth in this Agreement, each Option that is
vested or would vest upon consummation of the transactions contemplated by this
Agreement immediately prior to the Closing (as defined in Section 1.8) shall be
cancelled and terminated without delivery of any shares of capital stock of the
Company and Purchaser shall pay each Option Holder in exchange for each such
Option the price to be paid for each Share hereunder (as the same may be
adjusted) less the Option Price (as defined in the Option Agreements)
applicable to such Option (any payments paid by Purchaser to the Option Holders
pursuant to this Section 1.2 are referred to herein as the "Option Payments").
Each Option Holder shall be deemed to be a "Seller" hereunder with respect to
the Options.
1.3 Treatment of Warrants. On the Closing Date and upon the terms and
subject to the conditions set forth in this Agreement, Liberty Holdings shall
deliver to Purchaser, and Purchaser shall purchase from Liberty Holdings, the
Warrant for a purchase price equal to the purchase price to be paid for each
Share hereunder (as the same may be adjusted) multiplied by the number of
shares of Common Stock issuable upon exercise of the Warrant, less the
aggregate exercise price payable under the Warrant (the payment paid by
Purchaser to Liberty Holdings pursuant to this Section 1.3 is referred to
herein as the "Warrant Payment"). Liberty Holdings shall be deemed to be a
"Seller" hereunder with respect to the Warrant.
1.4 Purchase Price. Subject to the terms and conditions set forth
herein and to adjustment as provided in Section 1.5, at the Closing, Purchaser
shall:
(i) pay the Sellers, the Option Holders and the Warrant Holder in the
aggregate the Pre-Closing Adjusted Purchase Price (as hereinafter
defined), less the Escrow Amount (as hereinafter defined) (the
"Closing Payment"). The Closing Payment shall be allocated among
the Sellers in accordance with Exhibit A attached hereto; and
(ii) deposit $5,000,000 in the aggregate (the "Escrow Amount") into an
escrow (the "Escrow") established pursuant to an escrow agreement
substantially in the form attached hereto as Exhibit B (the
"Escrow Agreement") among Purchaser, Sellers and a party,
reasonably acceptable to purchaser and that would qualify as a
successor escrow agent pursuant to the escrow agreement, selected
by Sellers to act as escrow agent (the "Escrow Agent"), which
Escrow Amount shall simultaneously with the
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<PAGE>
Closing without any further action by any Person (as defined in
Section 8.12) become subject to the terms and conditions of the
Escrow Agreement.
All payments to be made by Purchaser hereunder shall be made in cash by wire
transfer of immediately available funds to the account designated by the
recipient thereof in writing at least two business days prior to the Closing.
1.5 Purchase Price Adjustment.
(a) Pre-Closing Statement.
(i) At least two business days prior to the Closing Date, the Company
shall furnish to Purchaser a statement of the Company (the "Pre-
Closing Statement"), prepared as of a date which is no more than
five business days prior to the Closing Date, reflecting the
Company's good faith estimate of the Net Indebtedness (as
hereinafter defined), the Redemption Payments and the Transaction
Fees and Expenses (as hereinafter defined) immediately prior to
the Closing.
(ii) The "Pre-Closing Adjusted Purchase Price" shall be the amount
determined pursuant to this subsection 1.5(a)(ii) by subtracting
the sum of the Net Indebtedness, the Redemption Payments and the
Transaction Fees and Expenses, as set forth on the Pre-Closing
Statement, from the Unadjusted Purchase Price (as hereinafter
defined). The calculation of the Pre-Closing Adjusted Purchase
Price shall be set forth in reasonable detail on the Pre-Closing
Statement. At Closing, the Pre-Closing Adjusted Purchase Price
shall be used to determine the amounts to be paid to Sellers or
for the benefit of Sellers as described in Section 1.4.
(iii) As used herein,
(A) "Net Indebtedness" shall mean (1) the sum of (x) the
indebtedness of the Company and its Subsidiaries on a consolidated
basis for borrowed money (including accrued interest thereon and all
related charges, fees, expenses and penalties, including prepayment
penalties which become due as a result of the transactions
contemplated hereby), including amounts owed under the senior loan
agreement and the credit agreement plus amounts reflected in capital
leases to the extent such amounts would be required to be shown as
indebtedness on a consolidated balance sheet of the Company and its
Subsidiaries prepared in accordance with generally accepted accounting
principles applied in a manner consistent with the Financial
Statements (as hereinafter defined), and
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<PAGE>
(y) all amounts outstanding under the Conditional Promissory Note executed by
Arcade, dated June 9, 1995 for the original principal amount of $1,750,000
minus (2) the amount of cash and cash equivalents of the Company and its
Subsidiaries that would be shown on a consolidated balance sheet prepared in
accordance with generally accepted accounting principles applied in a manner
consistent with the Financial Statements, in each case as of the Closing Date.
(B) "Transaction Fees and Expenses" shall mean the aggregate amount of
the fees and expenses of the Company and its Subsidiaries or the Sellers (to
the extent paid or payable by the Company on behalf of the Sellers) incurred at
or prior to the Closing in connection with the negotiation and execution of
this Agreement and the consummation of the transactions contemplated hereby,
including any investment banking, brokers, finders and legal fees and including
the fees of the Seller Representative (as hereinafter defined), or transfer
taxes (including real property transfer taxes, change of control payments,
conveyance and recording fees, documentary stamp taxes and all other similar
charges); provided, however, that Transaction Fees and Expenses shall not
include any expenses or fees incurred in connection with the capitalization of
Purchaser and the financing (including broker and agent fees) to consummate the
transactions contemplated hereby.
(C) "Unadjusted Purchase Price" shall mean $195.0 million.
(b) Post-Closing Statement.
(i) As soon as practicable, but in no event more than 30 days
after the Closing Date, Purchaser shall furnish the Seller
Representative a statement (the "Post-Closing Statement")
reflecting its determination of the Net Indebtedness, the
Redemption Payments and the Transaction Fees and Expenses.
(ii) The "Adjusted Purchase Price" shall be the amount determined
pursuant to this subsection 1.5(b)(ii) by subtracting the sum
of the Net Indebtedness, the Redemption Payments and the
Transaction Fees and Expenses from the Unadjusted Purchase
Price as calculated based on the Post-Closing Statement. The
calculation of the Adjusted Purchase Price and the Proposed
Closing Differential (as hereinafter defined) shall be set
forth in reasonable detail on the post-closing statement.
(iii) As used herein,
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<PAGE>
(A) "Closing Differential" shall mean the Proposed Closing
Differential with such revisions, adjustments and changes thereto, if
any, as shall be effected pursuant to Section 1.5(b)(iv).
(B) "Proposed Closing Differential" shall mean the amount
(whether a positive or negative number) equal to the difference
between (1) the Adjusted Purchase Price determined based upon the
Post-Closing Statement minus (2) the Pre-Closing Adjusted Purchase
Price determined based upon the Pre-Closing Statement.
(iv) Within 60 days after the delivery of the Post-Closing
Statement to the Seller Representative, the Seller
Representative shall (on behalf of the Sellers) either accept
the amount of the Proposed Closing Differential as reflected
on the Post-Closing Statement as correct or object to the
Proposed Closing Differential, specifying in reasonable
detail in writing the nature of its objection(s). In the
event the Seller Representative does not object to the
Proposed Closing Differential within said 60-day period, the
Seller Representative shall be deemed to have accepted the
Proposed Closing Differential as the Closing Differential. In
the event the Seller Representative objects to the Proposed
Closing Differential, then, during a 30-day period subsequent
to the receipt by Purchaser of notice of the Seller
Representative's objection(s), Purchaser and the Seller
Representative shall attempt in good faith to resolve the
differences respecting such Proposed Closing Differential. In
the event Purchaser and the Seller Representative are unable
to resolve their differences within said 30-day period, the
parties agree that the matter shall be submitted to a
mutually acceptable firm of certified public accountants, the
costs and expenses of which firm shall be borne equally by
the Purchaser and the Sellers. If Purchaser and the Seller
Representative cannot mutually agree upon said firm of
certified public accountants within fifteen days, the
disputed Proposed Closing Differential shall be jointly
determined by two firms of certified public accountants, one
such firm being selected by each of Purchaser and the Seller
Representative, with Purchaser, on the one hand, and Sellers,
on the other hand, each paying the costs and expenses of the
firm selected by it. In the event that the respective firms
of certified public accountants of Purchaser and the Seller
Representative are unable to so agree, such firms of
certified public accountants shall select a third firm of
certified public accountants (which shall be one of the five
largest nationally-recognized public accounting firms in the
United States) to determine the Closing Differential pursuant
to this Section 1.5 and
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<PAGE>
whose determination shall be final and binding upon the
parties. The costs and expenses of such third firm of
certified public accountants shall be borne equally by
Purchaser, on the one hand, and Sellers, on the other
hand. During the period from the date of delivery of the
Post-Closing Statement to the Seller Representative through
the date of resolution of any dispute regarding the
Proposed Closing Differential as contemplated by this
Section 1.5(b)(iv), Purchaser shall cause the Company and
each of its Subsidiaries to provide the Seller
Representative and its agents and representatives
(including accountants) reasonable access to the books,
records (including those supplemental schedules prepared
by Purchaser in connection with preparation of the
Post-Closing Statement), facilities, employees and
accountants of the Company and each of its Subsidiaries
and to accountants' work papers for purposes relevant to
the review of such Post-Closing Statement and the
resolution of any related dispute. All determinations to
be made hereunder shall be made in accordance with the
terms of this Agreement consistently applied.
(c) Within three days after the final determination of the
Closing Differential, the Adjusted Purchase Price shall be determined
as follows: If the amount of the Closing Differential is a positive
amount, then the Adjusted Purchase Price shall be adjusted upward by
an amount equal to the Closing Differential. In such case, Purchaser
shall inform the Seller Representative and the Escrow Agent and fund
the Escrow Account under the Escrow Agreement with the amount of such
difference (for allocation among the Sellers in the manner
contemplated by Section 1.4 upon expiration of the Escrow Agreement in
accordance with its terms). Conversely, if the amount of the Closing
Differential is a negative amount, then the Adjusted Purchase Price
shall be adjusted downward by an amount equal to the Closing
Differential (expressed as a positive amount), which amount shall be
distributed to Purchaser in accordance with the terms of the Escrow
Agreement.
1.6 Redemption of Preferred Stock. Simultaneously with the
Closing, Purchaser shall pay or cause to be paid to SBA on behalf of
the Company the "Liquidation Value" (as defined in the Company's
Certificate of Incorporation (the "Certificate of Incorporation")) of
the Preferred Stock and all accrued and unpaid dividends thereon to
which SBA is entitled in accordance with the Certificate of
Incorporation as a result of the optional redemption of the Preferred
Stock by the Company. The Company shall take all action necessary
prior to Closing to provide for the redemption of the Preferred Stock
at the Closing, including delivering any notice of redemption required
under the Certificate of Incorporation. The amount payable pursuant to
this Section 1.6 is referred to herein as the "Redemption Payments".
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<PAGE>
1.7 Payment of Debt.
(a) SBA Payments. Simultaneously with the Closing, Purchaser
shall pay or cause to be paid to SBA on behalf of the Company the unpaid
principal balance (together with all interest accrued thereon and all other
amounts due) under Arcade's line of credit and term loan with SBA pursuant to
(i) the Senior Loan Agreement between SBA and Arcade dated November 4, 1993, as
amended (the "Senior Loan Agreement"), and (ii) the Subordinated Loan Agreement
between SBA and Arcade dated November 4, 1993, as amended (the "Subordinated
Loan Agreement"). The aggregate amounts payable pursuant to this Section 1.7(a)
are referred to herein as the "SBA Payments".
(b) Heller Payments. Simultaneously with the Closing, Purchaser
shall pay or cause to be paid on behalf of the Company to Heller Financial,
Inc. ("Heller") the unpaid principal balance (together with all interest
accrued thereon) of all Revolving Loans and Lender Guarantees (as such terms
are defined in the Credit Agreement dated as of April 30, 1996 between Arcade
and Heller (the "Credit Agreement")) and all other amounts due under the Credit
Agreement. The aggregate amounts payable pursuant to this Section 1.7(b) are
referred to herein as the "Heller Payments".
1.8 Closing. Subject to the satisfaction or waiver of the
conditions set forth in Article 7, consummation of the transactions
contemplated hereby (the "Closing") shall take place on December 15, 1997 or
such other time as the parties agree (the "Closing Date") at the offices of
Sonnenschein Nath & Rosenthal, 1221 Avenue of the Americas, 24th Floor, New
York, New York 10020, or at such other place as the parties agree.
Notwithstanding the foregoing, the parties agree that if any filing is
required under the HSR Act (as hereinafter defined) and early termination of
the waiting period thereunder is not received prior to December 15, 1997, then
the Closing shall occur on the third business day following receipt of notice
of early termination. At the Closing, Sellers shall deliver to Purchaser (i)
stock certificates representing the Common Stock, duly endorsed in blank for
transfer or accompanied by appropriate stock powers duly executed in blank,
(ii) the Option Agreements representing the Options to be cancelled pursuant to
Section 1.2, and (iii) the Warrant. Notwithstanding anything to the contrary
set forth herein, Purchaser shall use its best efforts to satisfy the
conditions set forth in Section 7.2 and, only with respect to its obligations
hereunder, cause the Closing to occur on or before December 1, 1997.
Notwithstanding anything to the contrary contained herein, in the event (i) the
Closing has not occurred on or before December 8, 1997, and (ii) the conditions
set forth in Section 7.1 have been satisfied as of that date, upon Closing
Purchaser shall pay to Sellers, in addition to its payment obligations under
Sections 1.4, 1.6 and 1.7, an amount that would equal the amount of interest on
$56.0 million at an annual rate equal to the prime rate as published from time
to time in the Wall Street Journal table of money rates from December 8, 1997
through the Closing Date.
1.9 Sellers' Closing Deliveries. Subject to the conditions set
forth in this Agreement, at the Closing, simultaneous with Purchaser's
deliveries hereunder, Sellers shall deliver or cause
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<PAGE>
to be delivered to Purchaser all of the documents and instruments set forth on
Schedule 1.9, all in form and substance reasonably satisfactory to Purchaser
and its counsel.
1.10 Purchaser's Closing Deliveries. Subject to the conditions set
forth in this Agreement, at the Closing, simultaneous with Sellers' deliveries
hereunder, Purchaser shall deliver or cause to be delivered to Sellers all of
the payments, documents and instruments set forth on Schedule 1.10, all in
form and substance reasonably satisfactory to Sellers and their counsel.
1.11 Withholding Taxes. All payments pursuant to this Agreement shall
be subject to and shall be reduced by any and all required withholding Tax (as
hereinafter defined) and other similar withholding requirements imposed by
applicable law or regulations.
1.12 Appointment of Seller Representative. Each Seller hereby appoints
and designates Victor J. Barnett and Michael J. Kluger, jointly (collectively,
the "Seller Representative") as the true and lawful agent and attorney-in-fact
of such Seller with full power of substitution. Any action or decision to be
made by the Seller Representative shall require the approval of both Victor J.
Barnett and Michael J. Kluger. The Seller Representative shall have the
authority to take such actions and exercise such discretion as is required of
the Seller Representative pursuant to the terms of this Agreement and the
Escrow Agreement (and any such actions shall be binding on each Seller)
including the following:
(a) to receive, hold and deliver to Purchaser the certificates
for the Common Stock and the Preferred Stock, the Option Agreements and the
Warrant and any other documents relating thereto on behalf of Sellers;
(b) to execute, acknowledge, deliver, record and file all
ancillary agreements, certificates and documents that the Seller Representative
deems necessary or appropriate in connection with the consummation of the
transactions contemplated by the terms and provisions of this Agreement;
(c) to receive any payments due under this Agreement and
acknowledge receipt for such payments;
(d) to waive any breach or default under this Agreement or to
waive any condition precedent to the Closing;
(e) to terminate this Agreement;
(f) to receive service of process in connection with any claims
under this Agreement;
(g) to give and receive all notices permitted hereunder; and
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<PAGE>
(h) to perform the obligations and exercise the rights under this
Agreement and the Escrow Agreement, including the settlement of any claims and
disputes with Purchaser and Sellers arising hereunder and thereunder.
The Sellers may, at any time, substitute or replace the Seller
Representative named above, if such action is agreed to in writing by Sellers
owning not less than a majority of the Common Stock on a fully-diluted basis
and a copy of such writing is delivered to each party to this Agreement.
ARTICLE 2. REPRESENTATIONS AND WARRANTIES BY EACH SELLER. Each Seller hereby,
severally for itself only and not jointly with any other Seller, represents and
warrants to Purchaser that the following statements are true with respect to
such Seller:
2.1 Ownership of Stock. Such Seller is the sole record owner of
the number of shares of Common Stock, Options and/or Warrant, as the case may
be, set forth opposite such Seller's name on Schedule 2.1, which ownership is
free and clear of all liens, security interests, mortgages, pledges, charges,
claims, restrictions and other encumbrances of any nature whatsoever
(collectively, "Liens") other than restrictions on transfer under federal and
state securities laws and restrictions which will be terminated in connection
with the consummation of the transactions contemplated hereby and as set forth
on Schedule 2.1, such shares of Common Stock have been validly issued and are
fully paid and are nonassessable and such shares of Common Stock represent all
of the issued and outstanding shares of Common Stock owned by such Seller. Upon
consummation of the transactions contemplated herein and delivery of and
payment for the Shares as set forth herein and assuming Purchaser has no actual
knowledge of any adverse claim to the Shares, Sellers shall convey to Purchaser
marketable title thereto. No Seller holds any Common Stock as a nominee.
2.2 Restrictions on Stock, Options and Warrant.
(a) Agreements Relating to Stock. Such Seller is not a party to
any agreement which will not be terminated prior to or as of the Closing and
which is not set forth on Schedule 2.2(a) creating rights with respect to such
Seller's shares of Common Stock, Options or Warrant in any Person and such
Seller has the full power and legal right to sell, assign, transfer and deliver
such Seller's shares of Common Stock, Options and Warrant.
(b) No Warrants, Options, Etc. Except for the Warrant, the
Options and the Option Agreements, there are no existing warrants, options,
stock purchase agreements, redemption agreements, restrictions of any nature,
calls or rights to subscribe of any character relating to the shares of Common
Stock owned by such Seller, which will not be terminated prior to or as of the
Closing and which is not set forth on Schedule 2.2(b).
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<PAGE>
2.3 Authority.
(a) Corporate Action; Capacity. If such Seller is not a natural
person, the execution and delivery to Purchaser of this Agreement and the
performance of such Seller's obligations under this Agreement have been duly
authorized by such Seller and its governing body, If such Seller is a natural
person, such Seller has the capacity and authority to execute and deliver to
Purchaser this Agreement and to perform such Seller's obligations under this
Agreement.
(b) Execution and Delivery. This Agreement has been duly and validly
executed and delivered to Purchaser by each Seller who is a signatory hereto
and constitutes a valid and binding obligation of such Seller, enforceable
against such Seller in accordance with its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights in general and subject to
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law.
(c) No Violation. Except for violations which will be waived prior to
the Closing, as set forth on Schedule 2.3(c), or Liens which will be released
concurrent with the Closing, the execution, delivery and performance of this
Agreement by such Seller do not: (i) constitute a breach, or a violation of, or
a default under, any organizing or governing document, if any, of such Seller,
or of any law, rule or regulation, agreement, indenture, deed of trust,
mortgage, loan agreement or other agreement or instrument to which such Seller
is a party or by which such Seller or any of such Seller's shares of Common
Stock, Options or Warrant are bound; (ii) constitute a violation of any order,
judgment or decree to which such Seller or any of such Seller's shares of
Common Stock, Options or Warrant are bound; or (iii) result in the creation of
any Lien upon any of the assets or properties of the Company, any Subsidiary or
such Seller, including any of such Seller's shares of Common Stock, Options or
Warrant.
2.4 Consents and Approvals No consent, approval, waiver or
authorization from any governmental and regulatory authorities, domestic and
foreign (collectively, "Consents") or notice or filing with any such
authorities is required to be obtained or made by such Seller in connection
with the execution or delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for Consents which have been obtained
or will have been timely obtained prior to Closing, which Consents are set
forth on Schedule 2.4.
ARTICLE 3. Representations and warranties of the company. The Company
hereby represents and warrants to Purchaser the following:
3.1 Corporate Organization; Authority; No Violation. Except as set
forth on Schedule 3.1, the Company and each Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and in each other jurisdiction (as set forth
on Schedule 3. 1) where the failure to so qualify would have a material
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<PAGE>
adverse effect on the business, assets, properties, operations or financial
condition of the Company and the Subsidiaries taken as a whole (a "Material
Adverse Effect"). Each of the Company and the Subsidiaries has all requisite
corporate power and authority to own, lease, operate or otherwise hold its
properties and assets and to carry on the Business as now being conducted. The
Company has the requisite corporate power to execute and to deliver this
Agreement and to perform the transactions contemplated hereby to be performed
by it. The execution and delivery by the Company of this Agreement and the
performance by it of the transactions contemplated hereby to be performed by it
have been duly authorized by all necessary corporate action on the part of the
Company. This Agreement has been duly executed and delivered by duly authorized
officers of the Company and, assuming the due execution and delivery of this
Agreement by the other parties hereto, constitutes a valid and binding
obligation of the Company enforceable against it in accordance with its terms,
except as may be limited by bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting the enforcement of creditors' rights in general
and subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law). The
execution, delivery and performance by the Company of this Agreement (i) do not
and will not conflict with or result in any violation of, or constitute a
breach or default under, any term of the charter documents, by-laws or other
organizational documents of the Company or the Subsidiaries, of any agreement,
permit or other instrument to which the Company or any Subsidiary is subject
(other than those violations, breaches or defaults for which the Company or
such Subsidiary shall have obtained a waiver prior to the Closing, which are
set forth on Schedule 3.1), or any domestic or foreign statute, ordinance,
law, regulation, order, judgment or decree of any court or other governmental
or regulatory authority to which any of the same are, subject, (ii) do not and
will not give rise to a right of termination which is not waived prior to
Closing, cancellation or acceleration of any obligation or to the loss of a
benefit under, any contract, permit, order, judgment or decree to which the
Company or any Subsidiary is a party or by which any of their respective
properties are bound, and (iii) do not and will not result in the creation of
any Lien upon any of the Common Stock, Options, Warrant, properties or assets
of the Company or any Subsidiary.
3.2 Capitalization Subsidiaries.
(a) The Company. The authorized capital stock of the Company consists
solely of (i) 100,000 shares of Common Stock, $.01 par value, of which there
are 48,000 shares issued and outstanding as of the date hereof, and (ii) 8,700
shares of preferred stock, $1.00 par value, of which there are 8,678.197 shares
issued and outstanding as of the date hereof. All of such shares of Common
Stock and Preferred Stock have been duly authorized and validly issued and are
fully paid and non-assessable and were not issued in violation of any
preemptive rights or federal or state securities laws.
(b) Subsidiaries. the authorized capital stock of each Subsidiary and
the number of issued and outstanding shares of such stock is set forth on
schedule 3.2. All of the outstanding shares of capital stock of Arcade are
owned beneficially and of record by the Company and all of the outstanding
shares of capital stock of Scent Seal and Arcade Europe are
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owned beneficially and of record by Arcade. All of the issued and outstanding
shares of capital stock of Arcade and Scent Seal have been duly authorized and
validly issued and are fully paid and non-assessable and were not issued in
violation of any preemptive rights or federal or state securities laws.
(c) Rights. Except as set forth on Schedule 3.2, (i) no other class of
capital stock of the Company or any Subsidiary is authorized or outstanding and
there are no securities convertible into or exchangeable for any shares of
capital stock of the Company or any Subsidiary or containing any profit
participation features, (ii) there are no existing warrants, options,
agreements, calls, conversion rights, exchange rights, preemptive rights which
will not be terminated prior to Closing or other rights to subscribe for,
purchase or otherwise acquire any of the shares of capital stock of the Company
or any of the Subsidiaries, (iii) none of the shares of capital stock of the
Company or any of the Subsidiaries is subject to any voting trust, transfer
restrictions or other similar arrangements which will not be terminated prior
to Closing, and (iv) except for ownership of the Subsidiaries, neither the
Company nor any Subsidiary has, directly or indirectly, any joint venture,
partnership, license or similar relationship with, or any ownership interest
in, any Person. All of the holders of Options are listed on Schedule 2.1 and
are designated therein as an Option Holder, The cancellation of the Options
pursuant to Section 1.2 hereof, is in compliance with the terms and conditions
of and does not constitute a breach of, or a violation of, or a default under
any applicable Option Agreement.
3.3 Financial Statements. The Company has previously delivered copies
of the following consolidated financial statements to Purchaser (collectively,
the "Financial Statements"): (a) audited balance sheets as of June 30, 1997,
1996 and 1995, and an unaudited internally-prepared balance sheet as of
September 30, 1997 (the "Balance Sheet"), and (b) audited income statements and
cash flow statements for the fiscal years ended June 30, 1997, 1996 and 1995
and unaudited internally-prepared income statements and cash flow statements for
the three months ended September 30, 1997, accompanied by the opinions of
Coopers & Lybrand on the audited Financial Statements. Except as set forth on
Schedule 3.3, the Financial Statements: (i) were prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, and (ii) present fairly, in all material respects, the
financial position, cash flows and results of operations of the Company and the
Subsidiaries at the dates and for the periods indicated therein.
3.4 Employees.
(a) Except as set forth on Schedule 3.4(a), neither the Company nor
any Subsidiary is a party to a collective bargaining agreement or any other
agreement with any labor organization applicable to its employees. No labor
organization or group of employees of the Company or any of its Subsidiaries
has made a pending demand for recognition or certification, and there are no
representation or certification proceedings or petitions seeking a
representation proceeding presently pending or threatened in writing to be
brought or filed with the National Labor Relations Board or any other labor
relations tribunal or authority. No unfair labor practice complaints are
pending or, to the Company's Knowledge (as defined in Section 8.12),
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threatened against the Company or any of the Subsidiaries before the National
Labor Relations Board, no similar claims are pending or, to the Company's
Knowledge, threatened before any similar foreign agency. To the Company's
Knowledge, no strike, slowdown, work stoppage, lockout or other collective
labor action by or with respect to any employees of the Company or any of the
Subsidiaries is in progress or has been threatened. The Company and its
Subsidiaries are in material compliance with all material laws, regulations and
orders relating to the employment of labor, including all such laws,
regulations and orders relating to wages, hours, the Workers Adjustment and
Retraining Notification Act and any similar state or local law ("WARN"),
collective bargaining, discrimination, civil rights, safety and health,
workers' compensation and the collection and payment of withholding and/or
social security taxes and any similar tax. There has been no "mass layoff" or
"plant closing" as defined by WARN with respect to the Company or any of its
Subsidiaries within the six months prior to Closing.
(b) Schedule 3.4(b) contains a complete and accurate list of each
material pension, retirement, profit sharing, savings, stock option, restricted
stock, severance, termination, bonus, fringe benefit, insurance, supplemental
benefit, medical, education reimbursement or other employee benefit plan,
including each "employee benefit plan" as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974 ("ERISA"), sponsored,
maintained or contributed to or required to be contributed to by the Company or
any of the Subsidiaries for the benefit of current or former employees of the
Company or any of the Subsidiaries within the three years prior to the Closing
(each a "Plan"). Schedule 3.4(b) separately indicates each Plan which is a
multiemployer plan, as defined in Section 3(37) of ERISA ("Multiemployer
Plan"). There are no trades or businesses (whether or not incorporated) which
are or have ever been under common control, or which are or have ever been
treated as a single employer, with the Company under Section 414(b), (c), (m)
or (o) of the Code, other than the Subsidiaries. During the past six years,
neither the Company nor any of its Subsidiaries have contributed to an employee
benefit plan subject to Title IV of ERISA, other than the Multiemployer Plan.
(c) Complete and accurate copies of the following items relating to
each Plan, where applicable, have been delivered to Purchaser or its
representatives:
(i) all material Plan documents and related trust agreements
including amendments thereto;
(ii) the most recent determination letter received from the
Internal Revenue Service (the "IRS") with respect to each such Plan
that is intended to be qualified under Section 401 of the Internal
Revenue Code (the "Code");
(ii) the most recent summary plan description, summary of
material modifications and all material communications to
participants; and
(iv) the most recent Annual Report (5500 Series) and accompanying
schedules for each Plan as filed with the IRS.
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(d) In connection with the operation and administration of the
Plans, the Company and the Subsidiaries have complied in all material respects
with, and are not in material violation of, the applicable provisions of ERISA
and the Code and the terms of such Plans.
(e) Each of the Plans that is intended to be "qualified" within
the meaning of Section 401(a) of the Code is so qualified and the trusts
maintained pursuant thereto are exempt from federal income taxation under
Section 501 of the Code, and to the Company's Knowledge, nothing has occurred
with respect to the operation of such Plans which is reasonably likely to cause
the loss of such qualification or exemption or the imposition of any liability,
penalty or tax under ERISA or the Code.
(f) Neither the Company nor any Subsidiary has any current
material liability with respect to a plan termination under Title IV of ERISA,
a funding deficiency under Section 412 of the Code or Section 302 of ERISA or a
withdrawal from a "multiemployer plan" as defined under Section 4063 of ERISA.
(g) Neither the Company nor any of its Subsidiaries has withdrawn
in a complete or partial withdrawal from any Multiemployer Plan within the
three years prior to the Closing Date, nor has any of them incurred any
liability due to the termination or reorganization of a Multiemployer Plan.
(h) All contributions (including all employer contributions and
employee salary reduction contributions) required to have been made under any
of the Plans or by law (without regard to any waivers granted under Section 412
of the Code), to any funds or trusts established thereunder or in connection
therewith have been made by the due date thereof (including any valid
extension), and all contributions for any period ending on or before September
30, 1997 which are not yet due will have been paid or accrued on the Balance
Sheet on or prior to the Closing Date.
(i) None of the Plans provide for post-employment life or health
insurance, benefits or coverage for any participant or any beneficiary of a
participant, except as may be required under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA") and at the expense of the
participant or the participant's beneficiary.
(j) There are no pending actions, claims or lawsuits which have
been asserted or instituted against the Plans, the assets of any of the trusts
under such Plans or the plan sponsor or the plan administrator, or against any
fiduciary of the Plans with respect to the operation of such Plans (other than
routine benefit claims), nor does the Company have Knowledge of any such
threatened claim or lawsuit.
3.5 Intangible Property. Set forth in Schedule 3.5 is a complete
and accurate list of all United States and foreign trademarks, service marks,
trade names and patents owned by, or registered or applied for in the name of,
or licensed to, the Company or any Subsidiary which
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are utilized in the operation of the Business (collectively, the "Intangible
Property"). Neither the Company nor any Subsidiary has any copyright
registrations or applications. Except as set forth on Schedule 3.5, (a) to the
Company's Knowledge, the Intangible Property does not infringe the rights of
any third party or is being infringed by any third party, (b) to the Company's
Knowledge, there is no material restriction or action threatened in writing
affecting the use of any of the Intangible Property by the Company or any
Subsidiary in the manner in which the Company or the Subsidiaries have been
using it, and (c) no license has been granted by the Company or any Subsidiary
to any third party with respect thereto. Except as set forth on Schedule 3.5,
the Company or a Subsidiary owns the entire right, title and interest in and to
the Intangible Property. Except as set forth on Schedule 3.5, there is, to the
Knowledge of the Company, no reasonable basis upon which any claim may be
asserted against the Company or a Subsidiary for infringement or
misappropriation of any of the Intangible Property. All letters patent,
registrations and certificates issued by any Governmental Authority relating to
any of the Intangible Property and all licenses and other agreements pursuant
to which the Company uses any of the Intangible Property, are, to the Company's
Knowledge, valid and subsisting, and neither the Company, nor in the case of
any such license or agreement to the Knowledge of the Company, any other
person, is in default or violation thereunder.
3.6 Assets; Inventory. Except as set forth on Schedule 3.6, all of the
material assets of the Company and the Subsidiaries are in good operating
condition and repair, subject to normal wear and tear, are usable in the
regular and ordinary course of business, and conform in all material respects
to all material applicable Laws, licenses, authorizations and approvals issued
to the Company by any Governmental Authority relating to their construction,
use and operation. The Assets constitute all material assets and rights
necessary to operate the Business as currently conducted and the Company or a
Subsidiary has marketable title to all such assets, free and clear of all Liens
other than Permitted Liens. The term "Permitted Liens" means (a) tax liens with
respect to taxes not yet due and payable or which are being contested in good
faith by appropriate proceedings and for which appropriate reserves have been
established in accordance with generally accepted accounting principles,
consistently applied; (b) deposits or pledges made in connection with, or to
secure payment of, utilities or similar services, workers' compensation,
unemployment insurance, old age pensions or other social security obligations;
(c) purchase money security interests in any property acquired by the Company
or any Subsidiary; (d) interests or title of a lessor under any lease; (e)
mechanics', materialmen's or contractors' liens or encumbrances or any similar
lien or restriction for amounts not yet past due; (f) easements, rights-of-way,
restrictions and other similar charges and encumbrances not interfering with
the ordinary conduct of the business of the Company and its Subsidiaries or
detracting from the value of the assets of the Company and its Subsidiaries;
(g) liens outstanding on the date hereof which secure the indebtedness
outstanding under the Senior Loan Agreement, the Subordinated Loan Agreement or
the Credit Agreement. The inventory of the Subsidiaries consists only of items
of quality and quantity commercially useable and saleable in the ordinary
course of the Subsidiaries' manufacturing processes, and is fit for the purpose
for which it was procured or manufactured, except for any items of obsolete
material or material below standard quality, all of which have been written
down to realizable market value, or for which adequate reserves have been
provided on the Balance Sheet and except for immaterial amounts. All such
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items of inventory are (and will be) carried at amounts which reflect
valuations pursuant to the normal inventory valuation policy of the Company and
the Subsidiaries of stating inventory at the lower of cost or market on a
last-in, first-out basis.
3.7 Litigation. Except as set forth on Schedule 3.7, there is no
action, suit, claim, judicial or administrative proceeding or arbitration which
is pending nor, to the Company's Knowledge, is there any pending investigation
nor to the Company's Knowledge is any of the foregoing overtly threatened,
against the Company or any Subsidiary before any court, arbitrator or
administrative or governmental body, nor is there any judgment, decree,
injunction, rule or order of any court, governmental department, commission,
agency, instrumentality or arbitrator outstanding against the Company or any
Subsidiary.
3.8 Real Property. Title to the real property owned by the Company and
described on Schedule 3.8 and all of the buildings, structures and other
improvements located thereon (collectively, the "Owned Real Property"), are,
and at Closing shall be, owned by the Company or a Subsidiary in fee simple
absolute, free and clear of all material Liens affecting title to or possession
of such Owned Real Property, including all material encroachments, boundary
disputes, covenants, restrictions, easements, rights of way, mortgages,
security interests, leases, encumbrances and title objections, excepting only
the Permitted Liens and such easements, restrictions and covenants set forth on
Schedule 3.8 (in a manner so that the Owned Real Property to which they relate
is readily identifiable). The Owned Real Property set forth on Schedule 3.8
constitutes all of the real property owned by the Company and the Subsidiaries
on the date hereof and as of the Closing Date. Schedule 3.8 contains a list of
all real property leased by the Company or any Subsidiary (collectively, the
"Leased Premises"). A complete and accurate copy of each lease, as amended to
date (a "Lease") for each of the Leased Premises has been provided to Purchaser
or its representatives. Except as set forth on Schedule 3.8, (i) each Lease is
valid and binding upon the Subsidiary which is a party thereto and, to the
Company's Knowledge, enforceable against the lessor in accordance with the
terms thereof, and (ii) the Subsidiary which is a party thereto has performed
all material obligations required to be performed by it under each Lease prior
to the date hereof and possesses and quietly enjoys the Leased Premises. Except
as set forth on Schedule 3.8, neither the Company nor, to the Company's
Knowledge, the landlord or sublandlord under any Lease is in material default
under any of the Real Property Leases, and no circumstances or state of facts
presently exists which, with the giving of notice or passage of time, or both,
would permit the landlord or sublandlord under any Lease to terminate such
Lease. For purposes of the following representations, the Owned Real Property
and the Leased Premises are collectively referred to as the "Real Property."
Neither the Company nor Sellers have received any written notice from any
Governmental Authority that the assessed value of the Real Property has been
determined to be greater than that upon which county, township or school tax
was paid for the 1996 tax year applicable to each such tax, or from any
insurance carrier of the Company of fire hazards with respect to the Real
Property. Neither the Company nor Sellers have received any written notice that
any Governmental Authority having the power of eminent domain over the Real
Property has commenced or intends to exercise the power of eminent domain or a
similar power with respect to all or any part of the Real Property. No
assessment for public improvements has been
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made against the Real Property that remains unpaid. No written, uncured notice
from any county, township or other Governmental Authority has been received by
the Company or Sellers requiring any work, repair, construction, alteration or
installation on or in connection with the Real Property that has not been
complied with. The Real Property complies with all applicable zoning and other
land use requirements. There are no restrictions on entrance to or exit from
the Real Property to adjacent public streets and no conditions that will result
in the termination of the present access from the Real Property to existing
highways and roads. No part of the Real Property contains, is located within,
or abuts any flood plain, navigable water, tideland, wetland, marshlands or any
other area that is subject to special state, federal or municipal regulation,
control or protection.
3.9 Consents and Approvals. Except for filings with the Federal Trade
Commission and the Antitrust Division of the United States Department of
Justice pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), the Company has obtained (or will have obtained
prior to the Closing) all consents, waivers, authorizations and approvals of,
and made all required filings with, all governmental and regulatory
authorities, domestic and foreign, and of all other Persons required or
necessary in connection with the execution, delivery and performance by the
Company of this Agreement. All material consents, waivers, authorizations,
approvals and filings required to be made by the Company in connection with
this Agreement are set forth on Schedule 3.9.
3.10 Contracts. Except for the contracts listed on Schedule 3.10 (the
"Contracts"), and except for purchase orders in the ordinary course of
business, neither the Company nor any Subsidiary is a party to or otherwise
bound by any written or oral contract for the purchase of materials, supplies,
goods, services, equipment or other assets providing for annual payments by the
Company or any Subsidiary of $50,000 or more, (ii) any sales, distribution,
agency, dealer, sales representative or other similar agreement providing for
annual payments by the Company or any Subsidiary or materials, goods, supplies,
services, equipment or other assets providing for annual payments to the
Company or any Subsidiary of $100,000 or more, (iii) any partnership, joint
venture or other similar contract, arrangement or agreement, (iv) any contract
relating to indebtedness for borrowed money, (v) any material license agreement
or franchise agreement granted to or held by the Company or any Subsidiary,
(vi) any contract or other document that limits the freedom of the Company or
any Subsidiary to compete in any line of business or with any Person or in any
area or which would so limit the freedom of the Company or any Subsidiary after
the Closing, (vii) any material contract or commitment not made in the ordinary
course of business other than contracts to be terminated effective upon the
Closing (none of which terminated contracts or commitments will result in any
material liability or obligation on the part of the Company), or (viii) any
collective bargaining agreement, or agreement providing for severance payments
in the event of the sale or change in control of the Company or any Subsidiary.
The Company has previously provided Purchaser or its representatives with
complete and accurate copies of the Contracts. The Contracts are in full force
and effect and are valid and binding upon the Company or the Subsidiary which
is a party thereto and, to the Company's KNOWLEDGE, THE OTHER PARTIES THERETO.
Neither the Company nor any Subsidiary is in material default under any
Contract, nor to the Company's Knowledge, is
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any other party thereto. The Company will have no liability or obligation under
any of the agreements set forth on Schedule 2.2(a) or 2.2(b) upon termination
of such agreements effective upon Closing.
3.11 Absence of Undisclosed Liabilities. As of the date of the Balance
Sheet (the "Balance Sheet Date"), neither the Company nor any Subsidiary had
any liability or obligation, either direct or indirect, matured or unmatured or
absolute, contingent or otherwise that should be reflected in balance sheets
prepared in accordance with generally accepted accounting principles (a
"Balance Sheet Liability") which was not fully disclosed on, or reflected or
reserved against in, the Balance Sheet; and except for liabilities which have
been incurred since the Balance Sheet Date in the ordinary course of business,
consistent with past business practice or liabilities, the incurrence of which
is contemplated by this Agreement, since the Balance Sheet Date, neither the
Company nor any Subsidiary has incurred any Balance Sheet Liability.
3.12 Licenses; Compliance with Laws. Since 1993, the Company or the
Subsidiaries have held all material licenses, franchises, permits and
authorizations ("Permits") necessary for the lawful conduct of the Business as
conducted by the Company during such time period and neither the Company nor
any Subsidiary is in material violation of any applicable material laws,
statutes, regulations, rules, ordinances, decrees, orders and judgments
(collectively, "Laws") of any governmental, regulatory or administrative body,
agency or authority (a "Governmental Authority"). The Company is not in
material default, nor has it received any written notice of any claim of
default. All such Permits are renewable by their terms or in the ordinary
course of business without the need to comply with any special qualification
procedures or to pay any amounts other than routine filing fees or other
immaterial amounts. None of such material Permits will be adversely affected by
consummation of the transactions contemplated hereby. No shareholder, director,
officer, employee or former employee of the Company or any Affiliates of the
Company (other than its Subsidiaries), or any other Person owns or has any
proprietary, financial or other interest (direct or indirect) in any Permits
that the Company owns, possesses or uses in the operation of the Business as
now conducted.
3.13 Environmental Matters. (a) Except as disclosed on Schedule 3.13,
(i) the Company and the Subsidiaries are in material compliance with
Environmental Laws; (ii) the Company and each Subsidiary has obtained and
currently maintains all Permits required under or pursuant to Environmental
Laws that are material to the conduct of the business or for the ownership or
use of their property or assets; (iii) there is no civil, criminal or
administrative order, action, suit, demand, claim, hearing, notice of
violation, investigation, proceeding or demand letter pending or, to the
Knowledge of the Company, threatened against the Company or any Subsidiary;
(iv) neither the Company nor any Subsidiary is otherwise subject to any
currently outstanding liabilities under Environmental Law, the effect of which
would result in material liabilities, losses or expenses under Environmental
Law; and (v) there is not now, nor, to the Knowledge of the Company, has there
been in the past, on, in or under any real property owned, leased or operated
by the Company or any Subsidiary (x) any underground storage tanks,
above-ground storage tanks, dikes or impoundments containing Hazardous
Materials, (Y) any asbestos-containing materials, or (Z) any polychlorinated
biphenyls, the presence of
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which could reasonably be expected to result in material liabilities, losses or
expenses under Environmental Law.
(b) Seller has provided Buyer with copies of all
environmentally-related audits, assessments, studies, reports, analyses, and
results of environmental investigations of any real property currently or
formerly owned, operated or leased by the Company that are in the possession,
custody or control of Sellers, the Company or any Subsidiary; and
(c) For purposes of this Agreement, the following terms have the
following definitions: (i) "Environmental Law" means any applicable federal,
state, local, or foreign law, statute, code, ordinance, rule, regulation or
other requirement relating to the environment, natural resources, or public or
employee health and safety and includes the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. ss. 9601 et
seq., the Hazardous Materials Transportation Act, 49 U.S.C. ss. 1801 et IM,,
the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. ss. 6901 seq.
seq., the Clean Water Act, 33 U.S.C. ss. 1251 et seq., the Clean Air Act, 33
U.S.C. ss. 2601 et seq., the Toxic Substances Control Act, 15 U.S.C. ss. 2601
et seq., the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. ss.
136 et seq., the Oil Pollution Act of 1990, 33 U.S.C. ss. 2701 et seq. and the
Occupational Safety and Health Act, 29 U.S.C. ss. 651 et seq., as such laws
have been amended or supplemented, and the regulations promulgated pursuant
thereto, and all analogous state or local statutes; and (ii) "Hazardous
Material" means any substance, material or waste which is regulated by or forms
the liability under any Environmental Law, including petroleum, petroleum
products, asbestos, urea formaldehyde and polychlorinated biphenyls.
3.14 Tax Matters. Except as set forth on Schedule 3.14:
(i) All Tax Returns (as hereinafter defined) required to be filed
by or with respect to the Company or any Subsidiary have been duly and
timely filed and all such Tax Returns are complete. Each of the
Company and its Subsidiaries has duly and timely paid all Taxes that
are due. With respect to any period for which Taxes are not yet due
from the Company or any Subsidiary up to September 30, 1997, the
Company has made sufficient current accruals for such Taxes in the
Financial Statements and the Balance Sheet. The Company and each
Subsidiary has made all required estimated Tax payments sufficient to
avoid any material underpayment penalties. The Company and each
Subsidiary has withheld and paid all material Taxes required by all
applicable Laws to be withheld or paid in connection with any amounts
paid or owing to any employee, creditor, independent contractor, or
other third person.
(ii) There are no outstanding agreements, waivers, or
arrangements extending the statutory period of limitation applicable
to any claim for, or the period for the collection or assessment of,
Taxes due from or with respect to the Company or any Subsidiary for
any taxable period. No audit or other proceeding by any court,
governmental or regulatory authority, or similar person is pending or,
to the Knowledge of the Company, threatened in regard to any Taxes due
from or with respect to the
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Company or any Subsidiary or any Tax Return filed by or with respect to the
Company or any Subsidiary. No assessment of Taxes is proposed in writing
against the Company or any Subsidiary or any of their respective assets.
(iii) Neither the Company nor any Subsidiary has agreed to make any
adjustment pursuant to Section 481(a) of the Code (or any predecessor
provision) by reason of any change in any accounting method, and there is no
application pending with any taxing authority requesting permission for any
changes in any accounting method of the Company or any Subsidiary.
(iv) Neither the Company nor any Subsidiary is a party to, is bound
by, or has any obligation under, any Tax sharing agreement, Tax allocation
agreement, Tax indemnity agreement, or similar contract by which the Company or
any Subsidiary has a current or potential obligation to indemnify another
person with respect to Taxes.
(v) There is no contract, option, agreement, plan, or arrangement
covering any person that, individually or collectively, could give rise to the
payment of any amount that would not be deductible by the Company or any
Subsidiary by reason of Section 280G of the Code.
(vi) None of the Sellers is a foreign person for purposes of Section
1445(b)(2) of the Code.
(vii) The Company is not (and during the preceding five years has not
been) a "U.S. real property holding corporation" as defined in Section
897(c)(2) of the Code.
(viii) None of the outstanding indebtedness of the Company or any
Subsidiary is "corporate acquisition indebtedness" for purposes of Section 279
of the Code,
(ix) Since 1996, none of the Company or any Subsidiary has ever been a
member of a consolidated, combined, or affiliated group other than any group of
which the Company is the common parent. There are no deferred gains
attributable to "intercompany transactions" for purposes of Treas. Reg.
ss. 1.1502-13 with respect to the Company or any Subsidiary, and there are no
"excess loss accounts" for purposes of Treas. Reg. ss. 1.1502-19 with respect
to any Subsidiary.
(x) "Taxes" shall mean all taxes, charges, fees, levies, or other
similar assessments or liabilities, including (a) income, gross receipts, ad
valorem, premium, excise, real property, personal property, sales, use,
transfer, withholding, employment, payroll, and franchise taxes imposed by the
United States of America, or by any state, local, or foreign government, or any
subdivision, agency, or other similar person of the United States or any such
government; and (b) any interest, fines, penalties, assessments, or additions
to taxes resulting from, attributable to, or incurred in connection with any
tax or any contest, dispute, or refund thereof. "Tax Returns" shall mean any
report,
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return, or statement required to be supplied to a taxing authority in connection
with Taxes.
3.15 Accounts Receivable. Except as reserved against on the Balance
Sheet or in the books and records of the Company and the Subsidiaries for
receivables arising since the Balance Date, the accounts and notes receivable
reflected on such Balance Sheet and all accounts or notes receivable arising
since the Balance Sheet Date are valid and genuine and represent bona fide
claims against debtors for sales, services performed or other charges arising
on or before the date of recording thereof in the ordinary course of business
consistent with past practice, and are not subject to valid defenses, set-offs
or counterclaims, other than adjustments, which in the aggregate are not
material, made in the ordinary course of business.
3.16 Conduct of Business Since Balance Sheet Date. Since the Balance
Sheet Date, except as contemplated by this Agreement or as set forth on
Schedule 3.16:
(a) the Company and the Subsidiaries have conducted the
Business only in the ordinary course of business consistent with past practice;
(b) except for equipment, inventory and supplies purchased,
sold or otherwise disposed of in the ordinary course of business consistent
with past practice, the Company and the Subsidiaries have not purchased, sold,
leased, mortgaged, pledged, assigned, transferred or otherwise acquired or
disposed of any properties or assets;
(c) neither the Company nor any Subsidiary has sustained or
incurred any material loss or damage with respect to the Business (whether or
not insured against) on account of fire, flood, accident or other calamity;
(d) neither the Company nor any Subsidiary has increased the
rate of compensation of any officer or other employee, or made any advance or
loan to (except for advances for business expenses in the ordinary course of
business), any officer or other employee, or made any increase in, or any
addition to, other benefits to which any officer or other employee may be
entitled, except in the ordinary course of business consistent with past
practice;
(e) neither the Company nor any Subsidiary has changed any
accounting methods or practices;
(f) neither the company nor any subsidiary has incurred any
liabilities, other than liabilities incurred in the ordinary course of business
consistent with past practice, or discharged or satisfied any Lien or paid, or
failed to pay or discharge when due, any liabilities, other than in the ordinary
course of business consistent with past practice;
(g) neither the company nor any subsidiary has made or
suffered any amendment or termination of any material agreement, contract,
commitment, lease or plan to
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which it is a party or by which it is bound, or cancelled, modified or waived
any substantial debts or claims held by it or waived any rights of substantial
value, other than modifications of customer orders in the ordinary course of
business;
(h) neither the Company nor any Subsidiary has declared, set
aside or paid any dividend or made or agreed to make any other distribution or
payment in respect to its capital shares or redeemed, purchased or otherwise
acquired or agreed to redeem, purchase or acquire any of its capital shares;
(i) the Company and the Subsidiaries have not entered into
any material transaction other than in the ordinary course of business
consistent with past practice;
(j) the Company and the Subsidiaries have not suffered any
Material Adverse Effect; and
(k) neither the Company nor any Subsidiary has agreed to take
any of the actions described in paragraphs (b), (d), (e), (f), (g), (h) or (i)
above.
3.17 Affiliated Transactions. Except for compensation and benefits
arrangements in the ordinary course of business and as disclosed on Schedule
3.17, no Seller, no member of any Seller's family nor any entity controlled by
or under control of any Seller (i) has borrowed from or loaned money or other
property to the Company or any Subsidiary which has not been repaid or
returned; or (ii) has any direct or indirect interest in any Person which is a
customer or supplier of the Company or the Subsidiaries.
3.18 Names. The Company has not conducted business under any names
other than the names set forth on Schedule 3.18 during the past three years.
3.19 Brokers and Finders. Except for amounts which may become due from
the Company to Bowles Hollowell Conner & Co. ("Bowles"), there are no
outstanding broker, finder or investment banker fees or commissions owed or to
be owed by the Company or the Subsidiaries in connection with the transactions
contemplated by this Agreement.
3.20 Schedules. Notwithstanding any specific reference to the
disclosure of any matter pursuant to any section of this Article 3 or to any
Schedule, all disclosures made pursuant to any section hereunder or on the
Schedules shall be deemed made for all other sections of the Schedules to which
such disclosure is readily apparent on the face of the Schedules and any
headings or captions on any section herein or therein are for convenience of
reference only; provided, however, that no disclosure on the Schedules shall be
deemed effective unless the reason such item is being disclosed on a particular
schedule is adequately explained to be informative of the matter at issue with
respect to the disclosure to be set forth on such schedule. Sellers shall be
entitled to supplement or amend the Schedules delivered in connection herewith
with respect to any matter occurring after the date hereof which, if existing
or occurring at the date of this Agreement, would have been required to be set
forth or described in any such
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Schedule, and whether or not such matter is material. No supplement or
amendment shall have any effect for the purpose of determining satisfaction of
the conditions set forth in Section 7.1(a) hereof or the compliance by
Sellers with the covenant set forth in Section 5.2 hereof; provided, however,
that by consummating the transactions contemplated hereby, Purchaser waives any
right or claim it may have or have had on account of or relating to such
failure to satisfy such conditions or comply with such covenant or on account
of or relating to any such breach of representation or warranty of Sellers.
3.21 DISCLAIMER OF WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS
ARTICLE 3, NEITHER THE COMPANY NOR ANY SELLER MAKES ANY REPRESENTATION OR
WARRANTY, WHATSOEVER, EXPRESS OR IMPLIED, RELATING TO THE COMPANY'S OR THE
SUBSIDIARIES' BUSINESS OR ASSETS, INCLUDING ANY REPRESENTATION OR WARRANTY AS
TO THE FUTURE SALES OR PROFITABILITY OF THE COMPANY'S OR THE SUBSIDIARIES'
BUSINESS OR AS TO THE MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE, OF
ANY OF THE COMPANY'S OR THE SUBSIDIARIES' ASSETS OR REPRESENTATIONS OR
WARRANTIES ARISING BY STATUTE OR OTHERWISE IN LAW, FROM A COURSE OF DEALING OR
USAGE OF TRADE. ALL SUCH OTHER REPRESENTATIONS AND WARRANTIES ARE HEREBY
EXPRESSLY DISCLAIMED BY THE COMPANY AND SELLERS.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser hereby
represents and warrants to the Company and each Seller the following:
4.1 Organization; Authority; Capitalization. Purchaser is a
corporation duly organized, existing and in good standing under the laws of the
State of Delaware, Purchaser has the requisite corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by Purchaser,
the performance by Purchaser of its obligations hereunder and the consummation
by Purchaser of the transactions contemplated hereby have been duly authorized
pursuant to and in accordance with the laws governing Purchaser and no other
proceedings on the part of Purchaser are necessary to authorize such execution,
delivery and performance. This Agreement has been duly and validly executed and
delivered by Purchaser and constitutes a valid and binding obligation of
Purchaser, enforceable against Purchaser in accordance with its terms, except
as may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the enforcement of creditors' rights in general
and subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
4.2 No Violation. The execution, delivery and performance by Purchaser
of this Agreement and the transactions contemplated hereby do not and will not
conflict with or result in any violation of, or constitute a breach or default
under, any term of the charter documents, by-laws or other organizational
documents of Purchaser, of any agreement, permit or other instrument to which
Purchaser is a party or by which Purchaser is subject, or any law,
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regulation, order, judgment or decree of any court or other governmental or
regulatory authority to which Purchaser is subject.
4.3 Consents and Approvals. Except for filings pursuant to the HSR
Act, Purchaser has obtained (or will obtain prior to Closing) all necessary
consents, waivers, authorizations and approvals of all governmental and
regulatory authorities, domestic and foreign, and of all other Persons required
in connection with the execution, delivery and performance by Purchaser of this
Agreement, all of which are set forth on Schedule 4.3.
4.4 Financing; Solvency.
(a) Purchaser currently has or will have as of the Closing all funds
necessary to consummate the transactions contemplated by this Agreement.
Attached hereto as Exhibit C is a commitment letter with respect to the equity
financing necessary to consummate the transactions contemplated by this
Agreement. No transfer of property is being made and no obligation is being
incurred in connection with the transactions contemplated by this Agreement or
with the financing to be obtained by or on behalf of the Purchaser in
connection with consummating the transaction contemplated by this Agreement
with the intent to hinder, delay or defraud either present or future creditors
of the Company or any of its Subsidiaries.
(b) Neither the Company nor any subsidiary shall become insolvent as a
result of the consummation of the transactions contemplated by this Agreement
or the financing to be obtained by or on behalf of Purchaser in connection with
consummating the transactions contemplated by this Agreement. The Company and
each of its subsidiaries, after giving effect to the transactions contemplated
by this Agreement and the financing to be obtained by or on behalf of Purchaser
in connection with consummating the transactions contemplated by this
Agreement, shall be able to pay their debts as they become due, and the
Company's and each Subsidiary's property, after giving effect to the
transactions contemplated hereby, shall have a fair salable value greater than
the amounts required to pay its debts (including a reasonable estimate of the
amount of all contingent liabilities). The Company and each subsidiary, after
giving effect to the transactions contemplated by this Agreement, shall have
adequate capital to carry on its business.
4.5 Litigation. Purchaser has not received any notice of any action,
suit, inquiry, judicial or administrative proceeding, arbitration or
investigation which is pending and, to the knowledge of Purchaser, none of the
foregoing is threatened, against or involving Purchaser before any Governmental
Authority, nor is there any judgment, decree, injunction, rule or order of any
Governmental Authority outstanding against Purchaser which, individually or in
the aggregate, could impair the ability of Purchaser to consummate the
transactions contemplated by this Agreement.
4.6 Brokers and Finders. There are no outstanding broker, finder or
investment banker fees or commissions owed or to be owed by Purchaser in
connection with the transactions contemplated by this Agreement other than
amounts that will be fully satisfied by Purchaser.
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4.7 Investment Intent; Sophistication. Purchaser is acquiring the
Common Stock hereunder solely for its own account and not for any other Person
and for investment purposes only and without any intent to distribute, resell
or otherwise transfer any of such Common Stock. Purchaser represents, warrants
and acknowledges that it is an "accredited investor" as defined in Rule 501(a)
under the Securities Act of 1933, as amended (the "Securities Act"), that it
has such knowledge and experience in business and financial matters as to be
capable of evaluating the merits and risks of the investment contemplated to be
made hereunder, that it has sufficient financial strength to hold the same as
an investment and to bear the economic risks of such investment (including
possible loss of such investment) for an indefinite period of time. Purchaser
acknowledges that it is fully informed that the shares of Common Stock being
sold hereunder are being sold pursuant to a private offering exemption of the
Securities Act and are not being registered under the Securities Act or under
the securities or blue sky laws of any state or foreign jurisdiction; and that
such securities must be held indefinitely unless they are subsequently
registered under the Securities Act and any applicable state securities or blue
sky laws, or unless an exemption from registration is available thereunder.
Purchaser acknowledges that it has such knowledge and experience in financial
and business matters so as to be capable of evaluating the risks and merits of
this investment, that all documents and records pertaining to the investment in
the Company requested by Purchaser have been made available or delivered to it;
and that it has had an opportunity to ask questions of and receive answers from
Sellers concerning the terms and conditions of this Agreement and to obtain
additional information.
ARTICLE 5. COVENANTS.
5.1 Indemnification of Directors and Officers. Notwithstanding any
provision to the contrary in Section 8.13 hereof, Purchaser acknowledges that
each Person who served prior to the Closing as a director or officer of the
Company or any of the Subsidiaries shall be entitled to all rights to
indemnification existing in favor of the directors and officers of the Company
or such Subsidiaries, as applicable, as provided in their respective articles
of incorporation and bylaws during the time any such Person served as an
officer or director.
5.2 Satisfaction of Conditions. Purchaser shall use all reasonable
efforts to cooperate with Sellers to satisfy the conditions set forth in
Section 7.2 and Sellers shall use all reasonable efforts to cooperate with
Purchaser to satisfy the conditions set forth in Section 7. 1.
5.3 Conduct of Business. Except as disclosed on Schedule 5.3 or as
reasonably contemplated as a result and in anticipation of the transactions
contemplated hereby, from the date hereof through the Closing Date, the Company
shall use reasonable efforts to continue to conduct the business in the
ordinary course consistent with past practice and to preserve the Company's
present business operations, and to keep available the services of their key
employees and to preserve their relationship with their customers and
suppliers, licensors and others having a business relationship with the Company
and the Subsidiaries. Without limiting the generality of the foregoing, the
Company and the Subsidiaries shall not, without the written consent of
Purchaser which consent shall not be unreasonably withheld or delayed, (a)
declare or pay any dividend with respect to its capital stock (except for
dividends payable with respect
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to the Preferred Stock), (b) redeem or repurchase any of its capital stock or
otherwise make or commit to make any distribution to its stockholders, (c) fail
to maintain their cash management practices and all related policies, practices
and procedures with respect to collection of trade accounts receivable, accrual
of accounts receivable, inventory control, prepayment of expenses, payment of
trade accounts payable, accrual of other expenses, deferral of revenue, and
acceptance of customer deposits in the ordinary course of business, (d) fail to
pay or discharge when due any material liabilities, (e) make or suffer any
amendment or termination of any Contract or Permit, or cancel, modify or waive
any substantial debts or claims held by it or waive any rights of substantial
value, other than modifications of customer orders in the ordinary course of
business, (f) make commitments or agreements for capital expenditures or
capital additions or betterments in excess of $250,000 except as set forth in
Schedule 5.3, (g) change any of the accounting principles followed by it or the
methods of applying such principles, (h) amend its certificate of incorporation
or bylaws nor take any action with respect to any such amendment, (i) authorize
or issue any shares of the Company's capital stock or other equity securities
nor grant any option, warrant, or right calling for the authorization or
issuance of any such shares, j) enter into any contract or other transaction
with any Seller or any affiliate of the Company or any Seller, and (k) agree,
in writing or otherwise, to do any of the foregoing.
5.4 Taxes. Sellers agree to pay all sales and other taxes (except
income taxes), if any, arising from the sale of the Shares, Options and
Warrants to Purchaser pursuant to this Agreement.
5.5 Further Assurances. Upon the reasonable request of any party after
the Closing, the other parties shall promptly execute and deliver such
documents and instruments as necessary to further effectuate the transactions
contemplated herein.
5.6 Books and Records: Personnel. Purchaser hereby covenants and
agrees with Sellers as follows:
(a) Retention of Records; Purchaser shall not, for a period of five
years after the Closing Date, dispose of or destroy any of the business records
and files of the Company or the Subsidiaries relating to the period prior to
the Closing Date without first offering to turn over possession thereof to
Sellers by written notice to Sellers at least 30 days prior to the proposed
date of such disposition or destruction.
(b) Access to Records. Purchaser shall, for a period of five years
after the Closing date, allow Sellers access to all business records and files
of the Company and the Subsidiaries relating to the period prior to the Closing
Date, upon prior written request of Sellers and during normal working hours at
the principal places of business of the Company and the Subsidiaries or at any
location where such records are stored, and sellers Shall have the right, at
their own expense, to make copies of any such records and files; provided,
however, that any such access or copying shall be had or done in such a manner
so as not to interfere unreasonably with the normal conduct of the business of
the Company and the Subsidiaries.
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(c) Assistance with Records. Purchaser, shall make available to
Sellers, consistent with the business requirements of the Company, (i) the
Company's personnel to assist Seller in locating and obtaining records and
files maintained by the Company, and (ii) any of the Company's personnel whose
assistance or participation is reasonably required by Sellers in anticipation
of, or preparation for, any existing or future litigation, tax or other matters
in which Sellers or any of their past, present or future affiliates are
involved and which related to the business of the Company.
5.7 Hart-Scott-Rodino. As promptly as practicable, and in any event
within seven business days following the execution and delivery of this
Agreement by the parties, Purchaser and the Company shall each prepare and file
any required notification and report form under the HSR Act, in connection with
the transactions contemplated hereby or mutually agree no filing is necessary.
Purchaser and the Company shall request early termination of the waiting period
thereunder. Purchaser and the Company shall respond with reasonable diligence
to, and reasonably cooperate with each other with respect to, any request for
additional information made in response to such filings and shall promptly
notify the other party of any such request. Purchaser and the Company shall
each pay one-half of any filing fee associated with the notification and report
forms required under the HSR Act.
5.8 Resignation of Directors. Sellers shall cause such members of the
board of directors of the Company and such officers of the Company as are
designated by Purchaser to tender, effective at the Closing, their resignations
from such positions with the Company.
5.9 Confidentiality. Purchaser and each Seller shall keep confidential
all information obtained by it with respect to the other pursuant to this
Agreement and the negotiations preceding this Agreement, and will use such
information solely in connection with the transactions contemplated by this
Agreement, and if the transactions contemplated hereby are not consummated,
each shall return to the other, without retaining a copy thereof, any
schedules, documents or other written information obtained from the other in
connection with this Agreement and the transactions contemplated hereby.
Notwithstanding the foregoing, neither party shall be required to keep
confidential or return any information which (a) is known or available through
other lawful sources, (b) is or becomes publicly known through no fault of the
receiving party or its agents, (c) is required to be disclosed pursuant to an
order or request of a judicial authority or Governmental Authority (provided
the disclosing party is given reasonable prior notice), or (d) is developed by
the receiving party independently of the disclosure by the disclosing party.
5.10 Acquisition Proposals. From and after the date of this Agreement
unless this agreement is terminated pursuant to the terms hereof, Sellers shall
not, nor shall they authorize or permit any officer, director or employee of,
or any investment banker, attorney, accountant or other representative retained
by, any seller, the company or any Subsidiary to, directly or indirectly,
solicit, initiate or encourage submission of any proposal or offer (including
by way of furnishing information) from any person which constitutes, or may
reasonably be expected to lead to, any proposal for a merger or other business
combination involving the Company or
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any Subsidiary or any proposal or offer to acquire any of the capital stock or
any of the assets of the Company or any Subsidiary.
5.11 Access. Prior to the Closing, the Company shall make reasonably
available to Purchaser, at locations other than the facilities of the Company
or any Subsidiary, the business records of the Company and access to Victor
Barnett, Roger Barnett and Gordon Jones and the Company's independent
accountants upon Purchaser's prior written request and subject to reasonable
time, place and manner restrictions imposed by the Company.
5.12 Noncompetition. Effective upon Closing, Victor Barnett agrees to
be bound by the noncompete terms set forth on Exhibit H.
5.13 Minority Investors' Agreements. Concurrent with the Closing,
Purchaser shall execute and deliver to Liberty Holdings and Roger Barnett the
Common Stock Purchase Agreement and the Minority Investors' Stockholders'
Agreement, as set forth on Schedule 1.10, and Liberty Holdings and Roger
Barnett shall execute and deliver to Purchaser the Common Stock Purchase
Agreement and the Minority Investors' Stockholders' Agreement as set forth on
Schedule 1.9.
ARTICLE 6. INDEMNIFICATION.
6.1 Sellers' Indemnification. Subject to the provisions of this
Article 6 (including Sections 6.5 and 6.8), Sellers shall indemnify and hold
harmless Purchaser and its successors and permitted assigns and their
affiliates and their respective directors, officers, partners, employees,
agents and each person who controls Purchaser (collectively, "Purchaser
Indemnified Parties") from and against and in respect of any and all losses,
costs, fines, liabilities, claims, penalties, damages and expenses (including
reasonable legal fees and expenses incurred in the investigation and defense of
claims and actions) (collectively "Losses") resulting from, in connection with
or arising out of:
(a) any breach of any representation or warranty made by Sellers in
Article 2 of this Agreement or by the Company in Article 3 of this Agreement or
in any closing certificate executed and delivered by Sellers or the Company in
connection with this Agreement;
(b) any breach or non-fulfillment of any covenant made by Sellers or
the Company under the terms of this Agreement; or
(c) any action, suit or proceeding relating to any of the foregoing.
6.2 Purchaser's Indemnification. Subject to the provisions of this
Article 6 (including Sections 6.5 and 6.8), Purchaser shall indemnify and hold
harmless Sellers and their respective successors, permitted assigns, personal
representatives and heirs and their affiliates and their respective directors,
officers, partners, employees, agents and each person who controls any
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Seller (collectively, "Seller Indemnified Parties") from and against and in
respect of any and all Losses resulting from, in connection with or arising out
of:
(a) any breach of any representation or warranty made by Purchaser in
Article 4 of this Agreement or in any closing certificate executed and
delivered by Purchaser in connection with this Agreement;
(b) any breach or non-fulfillment of any covenant made by Purchaser
under the terms of this Agreement; or
(e) any action, suit or proceeding relating to any of the foregoing.
6.3 Indemnification Procedures.
(a) Procedures Relating to Indemnification . In the event that a third
party files a lawsuit, enforcement action or other proceeding against a party
entitled to indemnification under this Article 6 (an "Indemnified Party") or
the Indemnified Party receives notice of assertion, or knowledge, of a claim by
a third party (a "Third Party Claim"), the Indemnified Party shall give written
notice thereof (the "Claim Notice") promptly, but in any event not later than
30 days after receipt of notice of such Third Party Claim, to Purchaser, with
respect to a claim for indemnification made pursuant to Section 6.2, or to
Seller Representative, with respect to a claim for indemnification made
pursuant to Section 6.1, other than with respect to any breach of a
representation or warranty made by Sellers in Article 2 of this Agreement, in
which case to any such Seller breaching such representation or warranty. The
Claim Notice shall describe in reasonable detail the nature of the claim,
including an estimate, if practicable, of the amount of Losses that have been
or may be suffered or incurred by the Indemnified Party attributable to such
claim and the basis of the Indemnified Party's request for indemnification
under this Agreement (the "Claim Detail"). Notwithstanding the foregoing,
failure by an Indemnified Party to provide notice on a timely basis of a Third
Party Claim or include any information required to be included in such notice
shall not relieve the party obligated to provide indemnification pursuant to
this Article 6 (an "Indemnifying Party") of its obligations hereunder, except
to the extent that the Indemnifying Party is actually damaged thereby
(including by incurring additional fees or expenses in defending such claim,
having to pay greater damages or being precluded from asserting certain claims
or defenses).
(b) Conduct of Defense. The Indemnifying Party shall have the right,
upon written notice to the Indemnified Party (the "Defense Notice") within
fifteen days of its receipt from the Indemnified Party of the Claim Notice, to
conduct and control the defense against such Third Party Claim in its own name,
or, if necessary, in the name of the Indemnified Party and the Indemnifying
Party shall have the right subject to the terms of the Escrow Agreement, TO
withdraw funds from the Escrow to pay for the conduct of Such Defense, and
shall not be liable for any legal expenses incurred in connection with such
Third Party Claim by the Indemnitee subsequent to the receipt of such Defense
Notice, except as otherwise provided herein. When the Indemnifying Party
conducts and controls the defense, the Indemnified Party shall have the
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right to approve the defense counsel representing the Indemnifying Party in
such defense, which approval shall not be unreasonably withheld or delayed, and
in the event the Indemnifying Party and the Indemnified Party cannot agree upon
such counsel within ten days after the Defense Notice is provided, then the
Indemnifying Party shall propose an alternate defense counsel, which shall be
subject again to the Indemnified Party's approval, which approval shall not be
unreasonably withheld or delayed. The Indemnifying Party shall have the right
to withdraw from the defense of any Third Party Claim with respect to which the
Indemnifying Party had previously delivered a Defense Notice at any time upon
reasonable notice to the Indemnified Party.
(c) Conduct by Indemnified Party. In the event that the Indemnifying
Party shall fail to give the Defense Notice within the time prescribed by
Section 6.3(b) or the Indemnifying Party withdraws from the defense of a Third
Party Claim as contemplated by Section 6.3(b), the Indemnified Party shall have
the right to conduct and control such defense in good faith with counsel
reasonably acceptable to the Indemnifying Party, but the Indemnified Party
shall be prohibited from compromising or settling the claim without the prior
written consent of the Indemnifying Party, which consent shall not be
unreasonably withheld or delayed. Failure at any time of the Indemnifying Party
to diligently defend a Third Party Claim as required herein or failure of the
Indemnifying Party to undertake to fully indemnify the Indemnified Party with
respect to Losses relating to the Third Party Claim shall entitle the
Indemnified Party to assume the defense and settlement of such Third Party
Claim as if the Indemnifying Party had never elected to do so as provided in
this Section.
(d) Cooperation. In the event that the Indemnifying Party does deliver
a Defense Notice and thereby elects to conduct the defense of such Third Party
Claim in accordance with Section 6.3(b), the Indemnified Party will cooperate
with and make available to the Indemnifying Party such assistance, personnel,
witnesses and materials as the Indemnifying Party may reasonably request.
Regardless of which party defends such Third Party Claim, the other party shall
have the right at its expense to participate in the defense assisted by counsel
of its own choosing.
(e) Settlements. Without the prior written consent of the Indemnified
Party (which shall not be unreasonably withheld or delayed), the Indemnifying
Party shall not enter into any settlement of any Third Party Claim if pursuant
to or as a result of such settlement, such settlement would result in any
liability, obligation or material hardship on the part of the Indemnified Party
for which the Indemnified Party is not entitled to indemnification hereunder.
If a firm offer is made to settle a Third Party Claim, without leading to
liability or creation of a financial or other obligation on the part of the
Indemnified Party for which the Indemnified Party would not be entitled to
indemnification hereunder or any other Material Adverse Effect on the Company
and the Indemnifying Party desires to accept and agree to such offer, the
Indemnifying Party shall give written notice to the Indemnified Party to that
effect. If the Indemnified Party fails to consent to such firm offer within ten
days after its receipt of such notice, the Indemnified Party may continue to
contest or defend such Third Party Claim and, in such event, the maximum
liability of the Indemnifying Party as to such Third Party Claim
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shall not exceed the amount of such settlement offer, plus other Losses paid or
incurred by the Indemnified Party up to the expiration of such ten-day period.
(f) Binding Obligations. Any judgment entered or settlement agreed
upon in the manner provided herein shall be binding upon the Indemnifying Party
and shall be conclusively deemed to be an obligation with respect to which the
Indemnified Party is entitled to prompt indemnification hereunder, subject to
the Indemnifying Party's right to appeal an appealable judgment or order.
(g) Mitigation. Each Indemnified Party shall reasonably consult and
cooperate with each Indemnifying Party with a view towards mitigating Losses,
in connection with claims for which a party seeks indemnification under this
Section 6.3.
(h) Seller Representative. If a Purchaser Indemnified Party seeks
indemnification hereunder from the Sellers collectively, the Seller
Representative shall be deemed to be the Indemnifying Party for purposes of
giving and receiving notices and consents hereunder,
6.4 Nature of Other Liabilities. In the event any Indemnified Party
should have a claim against any Indemnifying Party hereunder which does not
involve a Third Party Claim, the Indemnified Party shall promptly transmit to
the Indemnifying Party a written notice (the "Indemnity Notice") setting forth
applicable Claim Detail. Notwithstanding the foregoing, failure by an
Indemnified Party to provide notice on a timely basis of such a claim or
include any information required to be included in such notice shall not
relieve the Indemnifying Party of its obligations hereunder, except to the
extent that the Indemnifying Party is actually damaged thereby (including by
incurring additional fees or expenses in defending such claim, or having to pay
greater damages or being precluded from asserting certain claims or defenses).
6.5 Certain Limitations on Remedies. No Seller shall be obligated to
indemnify or hold harmless any Person entitled to indemnification under Section
6.1(a) or (c) (with respect to any action, suit or proceeding relating to
Section 6.1(a)) (collectively, the "Purchaser Indemnified Parties") unless
claims for indemnification on account of. any breaches of representations or
warranties exceed in the aggregate $500,000 (the "Basket") after which point
any such Person entitled to indemnification shall be entitled to
indemnification only for Losses in excess of the Basket; provided, however,
that under no circumstance shall any Seller be obligated to pay Losses for
indemnity claims made pursuant to Section 6.1(a) with respect to the breach
by any other Seller of any representations and warranties set forth in Article
2; provided, further that nothing shall prohibit Purchaser Indemnified Parties
from making a claim under the Escrow Agreement in respect of such claims.
Notwithstanding anything to the contrary in this Agreement, Purchaser
acknowledges that the sole and exclusive recourse and remedy of the Purchaser
Indemnified Parties with respect to the breach of any representation or
warranty or pre-Closing covenant of the Company contained in this Agreement or
in any closing certificate executed and delivered by Sellers or the Company in
connection herewith shall be indemnification in accordance with the provisions
of this Article 6 and limited to the amounts
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of the Escrow then on deposit with the Escrow Agent subject to the terms and
conditions of the Escrow Agreement.
6.6 Amount of Losses. The amount of any Loss payable hereunder shall
be reduced by any insurance proceeds which the Indemnified Party may receive
with respect to the event or occurrence giving rise to such Losses and shall be
reduced by any amounts which Purchaser may receive from third parties in
connection with Losses for which indemnification is sought under this Article 6
and shall be reduced by any net reduction in Taxes actually realized by the
Indemnified Party in connection with such Losses; provided, however, that the
Indemnifying Party shall repay to the Indemnified Party the amount of such net
actual reduction in Taxes which is subsequently disallowed pursuant to a
determination of a taxing authority. Purchaser shall use commercially
reasonable efforts to pursue insurance claims or third party claims that may
reduce or eliminate Losses. If the Indemnified Party both collects proceeds
from any insurance company or third party and receives a payment from the
Indemnifying Party hereunder, and the sum of such proceeds and payment is in
excess of the amount payable with respect to the matter that is the subject of
the indemnity, then the Indemnified Party shall promptly refund to the
Indemnifying Party (or to the Escrow) the amount of such excess to the extent
of such Indemnifying Party's indemnification Payments.
6.7 Subrogation. After any indemnification payment is made to any
Purchaser Indemnified Party pursuant to this Article 6, Sellers shall, to the
extent of such payment, be subrogated to all rights (if any) of the Purchaser
Indemnified Party against any third party in connection with the Losses to
which such payment relates. Without limiting the generality of the preceding
sentence, any Purchaser Indemnified Party receiving an indemnification payment
pursuant to the preceding sentence shall execute, upon the written request of
the Indemnifying Party, any instrument reasonably necessary to evidence such
subrogation rights.
6.8 Survival of Representations, Warranties and Pre-Closing Covenants.
The respective representations and warranties of each of the parties to this
Agreement shall survive the Closing and the consummation of the transactions
contemplated hereby until December 31, 1998 (the "Expiration Date"), and any
claim for indemnification which is not asserted by notice as herein provided
within such period of survival may not be pursued and is hereby irrevocably
waived after such time. Any claim for indemnification asserted within such
period of survival as herein provided will be timely made for purposes hereof
and may be pursued after the expiration of such period of survival.
6.9 Purchase Price Adjustment. Any indemnification payment pursuant to
this Article 6 shall be treated by sellers and Purchaser as an adjustment to
the purchase price hereunder for the Shares, Options or Warrants, as the case
may be.
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ARTICLE 7. CONDITIONS TO CLOSING.
7.1 Conditions to Obligations of Purchaser. All obligations of
Purchaser to close the transactions contemplated by this Agreement are subject
to the fulfillment, at or prior to the Closing, of the following conditions:
(a) Representations and Warranties of Sellers and the
Company. All representations and warranties made by Sellers and the Company in
this Agreement or any other certificate delivered in connection herewith shall
be true and correct in all material respects on and as of the Closing Date, as
if again made by Sellers and the Company on and as of such date,
(b) Performance of Obligations. The Company and the Sellers
shall have delivered all documents and agreements described in Section 1.8 and
shall have otherwise performed in all material respects all obligations
required under this Agreement to be performed by them on or prior to the
Closing Date.
(c) Pending Proceedings; Legal Restraints. No injunction,
restraining order or other ruling or order issued by any court of competent
jurisdiction or governmental authority or other legal restraint or prohibition
preventing the consummation of the transactions contemplated by this Agreement
shall be in effect. No action or proceeding shall be pending by or before any
court or other governmental authority seeking to restrain, prohibit or
invalidate the transactions contemplated by this Agreement which is reasonably
expected to restrain, prohibit or invalidate such transactions.
(d) HSR Waiting Period. Any waiting period applicable to the
consummation of the transactions contemplated by this Agreement under the HSR
Act shall have expired or been terminated.
(e) FIRPTA Certificate. Each of the Sellers shall have
provided a nonforeign affidavit pursuant to Section 1445(b)(2) of the Code and
the Treasury Regulations thereunder.
(f) Consents and Approvals. Sellers and the Company shall
have obtained all material consents, waivers, authorizations and approvals of
any Person required in connection with their execution, delivery and
performance of this Agreement.
7.2 Conditions to Obligations of Sellers. All obligations of Sellers
to close the transactions contemplated by this Agreement are subject to the
fulfillment, at or prior to the Closing, of the following conditions:
(a) Representations and Warranties of Purchaser. All
representations and warranties made by Purchaser in this agreement or any
other certificate delivered in connection herewith shall be true and correct in
all material respects on and as of the Closing Date, as if again made by
Purchaser on and as of such date.
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(b) Performance of Purchaser's Obligations. Purchaser shall
have delivered all documents and agreements described in Section 1.9 and shall
have otherwise performed in all material respects all obligations required
under this Agreement to be performed by Purchaser on or prior to the Closing
Date.
(c) Pending Proceedings; Legal Restraints. No injunction,
restraining order or other ruling or order issued by any court of competent
jurisdiction or governmental authority or other legal restraint or prohibition
preventing the consummation of the transactions contemplated by this Agreement
shall be in effect. No action or proceeding shall be pending by or before any
court or other governmental authority seeking to restrain, prohibit or
invalidate the transactions contemplated by this Agreement which is reasonably
expected to restrain, prohibit or invalidate such transactions.
(d) HSR Waiting Period. Any waiting period applicable to the
consummation of the transactions contemplated by this Agreement under the HSR
Act shall have expired or been terminated.
7.3 Termination.
(a) Methods of Termination. This Agreement may be terminated
and the transactions contemplated hereby may be abandoned at any time prior to
the Closing:
(i) by mutual consent of the Seller Representative
and Purchaser;
(ii) by either Purchaser or the Seller Representative
if there shall have been entered a final, nonappealable order
or injunction of any governmental authority restraining or
prohibiting the consummation of the transactions contemplated
hereby or any material part thereof;
(iii) by the Purchaser if the Sellers or the Company
is in material breach of any material representation,
warranty, covenant or agreement herein contained and such
breach shall not be cured within fifteen days of the date of
notice of default served by the Purchaser; provided, that
Purchaser shall not have the right to terminate pursuant to
this provision if Purchaser is in material breach of any
representation, warranty, covenant or agreement herein
contained at the time such notice of default is served;
(iv) by the Seller Representative if the Purchaser
is in material breach of any representation, warranty,
covenant or agreement herein contained and such breach shall
not be cured within fifteen days of the date of notice of
default served by the Seller Representative; provided, that
the Seller Representative shall not have the right to
terminate pursuant to this provision if the Sellers or the
Company is in material breach of any representation,
warranty, covenant or agreement herein contained at the time
such notice of default is served.
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<PAGE>
(v) by either Purchaser or the Seller Representative
if the Closing has not occurred on or before December 31,
1997; provided, however, that if the Closing has not occurred
by such date solely because applicable waiting periods (and
any extensions thereof) under the HSR Act shall not have
expired or otherwise been terminated, no party shall be
entitled to terminate this Agreement pursuant to this Section
7.3(a)(v) until January 31, 1998; provided, further, that the
right to terminate this Agreement shall not be available to
any party whose breach of this Agreement has been the cause
of, or resulted in, the failure of the Closing to occur on or
before such date.
(b) Procedure and Effect of Termination. In the event of
written notice of termination of this Agreement by the Sellers or Purchaser,
this Agreement shall immediately become void and there shall be no liability
hereunder on the part of any party except as follows;
(i) the Confidentiality Agreement shall remain in
full force and effect; and
(ii) nothing contained in this Section shall relieve
any party hereto from any liability for any material breach of a
representation or warranty contained in this Agreement or the material
breach of any covenant contained herein prior to the date of
termination.
ARTICLE 8. MISCELLANEOUS PROVISIONS.
8.1 Successors and Assigns. This Agreement shall inure to the benefit
of, and be binding upon, the parties hereto and their respective successors and
assigns; provided, however, that no party shall assign or delegate this
Agreement or any of its rights or obligations created hereunder without the
prior consent of the other parties, which consent shall not be unreasonably
withheld or delayed.
8.2 Remedies. In the absence of fraud, no party shall be liable or
responsible in any manner whatsoever to any other party, whether for
indemnification or otherwise, with respect to any matter arising out of the
representations, warranties or covenants of this Agreement or any Schedule
hereto or any opinion or certificate delivered in connection herewith, except
for (i) equitable relief as described below, (ii) indemnity as provided in
Article 6, or (iii) pursuant to other remedies expressly provided for in this
Agreement all of which provide the exclusive remedies of the parties. Each of
the parties acknowledges and agrees that each other party would be damaged
irreparably in the event any of the provisions of this Agreement are not
performed in accordance with their specific terms or otherwise are breached.
Accordingly, each of the parties agrees that each other party shall be entitled
to an injunction or injunctions to prevent breaches of the provisions of this
Agreement and to enforce specifically this Agreement and the terms and
provisions hereof in addition to any other remedy to which it may be entitled
at law or in equity.
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<PAGE>
8.3 Publicity. No party shall issue or cause the publication of any
press release or other announcement with respect to this Agreement or the
transactions contemplated hereby or disclose the identity of any party hereto
or its principals without the prior written consent of the other parties,
except where such release or announcement is required by applicable law,
provided that the other parties are notified in writing as to the content of
such release or announcement prior to the publication thereof.
8.4 Notices. All notices, requests, consents, instructions and other
communications required or permitted to be given hereunder shall be in writing
and hand delivered, sent by nationally-recognized, next-day delivery service
or mailed by certified or registered mail, return receipt requested, postage
prepaid, addressed as set forth below; receipt shall be deemed to occur on the
earlier of the date of actual receipt or receipt by the sender of confirmation
that the delivery was completed or that the addressee has refused to accept
such delivery or has changed its address without giving notice of such change
as set forth herein.
(a) if to Purchaser, as follows:
DLJ Merchant Banking II, Inc.
277 Park Avenue, 19th Floor
New York, New York 10172
Attention: Tom Dean
with a copy to counsel for Purchaser:
Weil, Gotshal & Manges LLP
100 Crescent Court, Suite 1300
Dallas, Texas 75201
Attention: R. Scott Cohen
(b) if to any Seller, to each of the following:
Vilarc Capital
895 Park Avenue
New York, NY 10021
Attention: Victor J. Barnett
Liberty Partners
1177 Avenue of the Americas
New York, New York 10036
Attention: Michael J. Kluger
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<PAGE>
with a copy to counsel for Sellers:
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, IL 60606
Attention: Donald G. Lubin
Michael M. Froy
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Edward T. Swan
Mark B. Tresnowski
or such other address or persons as the parties may from time to time designate
in writing in the manner provided in this Section.
8.5 Entire Agreement. This Agreement, together with the Schedules and
Exhibits attached hereto, represent the entire agreement and understanding of
the parties hereto with respect to the transactions contemplated herein and
therein, and no representations, warranties or covenants have been made in
connection with this Agreement, other than those expressly set forth herein and
therein, or in the certificates delivered in accordance herewith or therewith.
Except for the Confidentiality Agreement, which shall remain in effect unless
and until consummation of the Closing, this Agreement supersedes all prior
negotiations, discussions, correspondence, communications, understandings and
agreements among the parties relating to the subject matter of this Agreement
and such other agreements and all prior drafts of this Agreement and such other
agreements are merged into this Agreement. No Seller shall have any liability
for statements, claims, forecasts, projections or other information, financial
or otherwise, provided by or on behalf of any Seller, the Company or any
Subsidiary or in connection with the Business prior to the Closing (including
information contained in the September 1997 Arcade, Inc. Confidential
Information Memorandum prepared by Bowles). Purchaser agrees that it is not
relying on any financial data, statements, claims, projections, forecasts or
other information other than as expressly set forth in Article 3 in entering
into this Agreement or consummating the transactions contemplated hereby.
8.6 Amendments and Waivers. This Agreement may be amended, superseded,
cancelled, renewed or extended, and the terms hereof may be waived, only by a
written instrument signed by the purchaser, the Company, and the Sellers set
forth on schedule 8.6 or, in the case of a waiver, by the party waiving
compliance (or by the Sellers set forth on Schedule 8.6 on behalf of all of the
Sellers). No delay on the part of any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof; nor shall any waiver on
the part of any party of any such right, power or privilege, nor any single or
partial exercise of any such right, power or privilege, preclude any further
exercise thereof or the exercise of any other such right, power or privilege.
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<PAGE>
8.7 Severabilily. This Agreement shall be deemed severable and the
invalidity or unenforceability of any term or provision hereof shall not affect
the validity or enforceability of this Agreement or of any other term or
provision hereof.
8.8 Headings. The article and section headings contained in this
Agreement are solely for convenience of reference and shall not affect the
meaning or interpretation of this Agreement or of any term or provision hereof.
8.9 Terms. All references herein to Articles, Sections, Schedules and
Exhibits shall be deemed references to such parts of this Agreement, unless the
context shall otherwise require. All references to singular or plural shall
include the other as the context may require.
8.10 Governing Law; Jurisdiction; Venue. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York,
without giving effect to choice of law principles. The parties agree that (a)
the United States District Court for the State of New York (or, in the absence
of diversity jurisdiction, the courts of the State of New York) shall have
exclusive jurisdiction of any action or proceeding relating to, or arising
under or in connection with this Agreement and each party consents to personal
jurisdiction of such courts and waives any objection to such courts'
jurisdiction, and (b) service of any summons and complaint or other process in
any such action or proceeding may be made by registered or certified mail
directed to each party at the address set forth in Section 8.4, and service so
made shall be deemed to be completed upon the earlier of actual receipt or five
days after posting, each party hereby waiving personal service thereof.
8.11 Schedules and Exhibits. The Schedules and Exhibits attached
hereto are a part of this Agreement as if fully set forth herein.
8.12 Definitions.
(a) "Person". The term "Person" as used in this Agreement shall
mean any individual, partnership, corporation, company, limited
liability company, trust or other entity.
(b) "Knowledge". The term "Knowledge" (or any form of such term,
such as "Knows", "Known", etc.) as used in this Agreement with respect
to the Company's awarness of the presence or absence of a fact, event
or condition shall mean actual, not implied or imputed, then present
knowledge of the following individuals, after due inquiry: Victor
Barnett, Roger Barnett and Gordon Jones. Purchaser acknowledges that
none of Victor Barnett, Roger Barnett or Gordon Jones have advised
other officers or employees of the Company or its Subsidiaries (other
than Hubert Brown) of this Agreement or the transactions contemplated
hereby, nor have they discussed or reviewed with any such officers or
employees the representations and warranties of the Company set forth
herein.
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<PAGE>
(c) "Including". The term "including" as used in this Agreement
shall mean including, without limitation, and shall not be deemed to
indicate an exhaustive enumeration of the items at issue.
8.13 No Third Party Beneficiaries. Except as expressly contemplated in
this Agreement (including pursuant to Sections 1.2 and 5.1), this Agreement
shall be binding upon and inure solely to the benefit of each party hereto and
nothing in this Agreement is intended to confer upon any other Person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
8.14 Expenses. All transaction fees and expenses (including fees and
expenses of legal counsel, accountants, investment bankers, brokers, finders or
other representatives and consultants) incurred in connection with the
preparation, negotiation, execution and performance of this Agreement and the
transactions contemplated hereby are referred to herein as the "Deal Expenses."
Except as expressly provided otherwise in this Agreement, Purchaser shall bear
its own Deal Expenses and the Company shall bear the Deal Expenses of itself
and the Sellers; provided, that any filing fee paid under the HSR Act shall be
borne between the parties as set forth in Section 5.7.
8.15 Construction. The language used in this Agreement shall be deemed
to be the language chosen by the parties to express their mutual intent and no
rule of strict construction shall be applied against any party. Without limiting
the generality of the foregoing, the parties acknowledge that they have jointly
participated in the negotiation and drafting of this Agreement and that in the
event of an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties and no
presumptions or burdens of proof shall arise favoring any party by virtue of
the authorship of any of the provisions of this Agreement.
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<PAGE>
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original and all of which together shall be considered
one and the same agreement.
PURCHASER:
By: /s/ Tompson Dean
_________________________________
Name: _______________________________
Title: ______________________________
ARCADE HOLDING CORPORATION
By: /s/ Victor Barnett
_________________________________
Name: _______________________________
Title: ______________________________
SELLERS:
VILARC CAPITAL
By: /s/ Michael Kluger
_________________________________
Name: _______________________________
Title: ______________________________
LIBERTY PARTNERS HOLDINGS 4, L,L.C.
By: /s/ Michael Kluger
_________________________________
Name: _______________________________
Title: ______________________________
STATE BOARD OF ADMINISTRATION OF FLORIDA
By: LIBERTY PARTNERS, L.P.,
ITS ATTORNEY-IN-FACT
By: LIBERTY CAPITAL PARTNERS, INC.,
ITS GENERAL PARTNER
By: /s/ Michael Kluger
_________________________________
Name: _______________________________
Title: ______________________________
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<PAGE>
/s/ Roger L. Barnett
-------------------------------
Roger L. Barnett
/s/ Victor J. Barnett
-------------------------------
Victor J. Barnett
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<PAGE>
FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT
This First Amendment to Stock Purchase Agreement (this "Amendment"),
dated December 2, 1997, by and among AHC I Acquisition Corp., a Delaware
corporation ("Purchaser"), Arcade Holding Corporation, a Delaware corporation
(the "Company"), and Victor J. Barnett and Michael J. Kluger (collectively, the
"Seller Representative").
RECITALS
WHEREAS, Purchaser will acquire all of the issued and outstanding
capital stock of the Company pursuant to that certain Stock Purchase Agreement,
dated November 14, 1997, by and among Purchaser, the Company and certain other
parties identified on the signature pages thereto (the "Stock Purchase
Agreement"); and
WHEREAS, Purchaser, the Company and the Seller Representative desire
to amend certain provisions of the Stock Purchase Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein contained, the parties hereto agree as follows:
ARTICLE I
AMENDMENT OF AGREEMENT
Section 1.1 Amendment to Section 1.7(b). Section 1.7(b) of the Stock
Purchase Agreement is hereby amended to add thereto the following at the end of
such Section 1.7(b):
Notwithstanding the foregoing, Purchaser may, at its sole option,
elect not to pay or cause to be paid the Heller Payments. If Purchaser so
elects, Sellers shall not be obligated to deliver to Purchaser any pay-off
letter or termination statements with respect thereto as provided in Schedule
1.9.
Section 1.2 Amendment to Article 1. Article 1 of the Stock Purchase
Agreement is hereby amended to add the following section as follows:
<PAGE>
1.13 Purchase and Sale Obligations. Notwithstanding any other
provision herein, with respect to Sellers' obligation to sell, assign,
transfer, convey and deliver the Shares, Options or Warrants, as applicable, to
Purchaser and Purchaser's obligation to purchase the Shares, Options or
Warrants, as applicable, from Sellers, Purchaser shall have the right to either
(i) effect such transactions directly or (ii) designate and cause a
wholly-owned subsidiary of Purchaser to effect such transactions and, in such
case, Sellers shall sell, assign, transfer, convey and deliver the Shares,
Options or Warrants, as applicable, to such wholly-owned subsidiary.
ARTICLE II
MISCELLANEOUS
Section 2.1 Defined Terms. All capitalized terms used and not defined
herein shall have the meanings ascribed to such terms in the Stock Purchase
Agreement as hereby amended.
Section 2.2 Effect of Amendment. Except as specifically provided
herein, the Stock Purchase Agreement is in all respects ratified and confirmed.
All of the terms, conditions and provisions of the Stock Purchase Agreement as
hereby amended shall be and remain in full force and effect.
Section 2.3 Entire Agreement. This Amendment and the unaltered
portions of the Stock Purchase Agreement, together with the Schedules and
Exhibits attached to the Stock Purchase Agreement, represent the entire
agreement and understanding of the parties to the Stock Purchase Agreement with
respect to the transactions contemplated herein and therein, and no
representations, warranties or covenants have been made in connection with this
Amendment or the Stock Purchase Agreement, other than those expressly set forth
herein and therein, or in certificates delivered in accordance herewith or
therewith. Except for the Confidentiality Agreement, which shall remain in
effect unless and until consummation of the Closing, this Amendment and the
unaltered portions of the Stock Purchase Agreement supersedes all prior
negotiations, discussions, correspondence, communications, understandings and
agreements among the parties relating to the subject matter of this Amendment
and the Stock Purchase Agreement and such agreements and all prior drafts of
this Amendment and the Stock Purchase Agreement and such other agreements are
merged into this Amendment and the unaltered portions of the Stock Purchase
Agreement.
Section 2.4 Amendments and Waivers. This Amendment and the Stock
Purchase Agreement as hereby amended may be amended, superseded, cancelled,
2
<PAGE>
renewed or extended, and the terms hereof may be waived, only by a written
instrument signed by the Purchaser, the Company, and the Sellers set forth on
Schedule 8.6 to the Stock Purchase Agreement or, in the case of a waiver, by
the party waiving compliance (or by Sellers set forth on Schedule 8.6 to the
Stock Purchase Agreement on behalf of all Sellers).
Section 2.5 Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to choice of laws principles.
Section 2.6 Seller Representative. Victor J. Barnett and Michael J.
Kluger have all requisite power and authority to execute and deliver this
Amendment on behalf of all of the Sellers pursuant to Section 8.6 of the Stock
Purchase Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
3
<PAGE>
This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original and all of which together shall be considered
one and the same agreement.
AHC I ACQUISITION CORP.
By: /s/ David Wittels
-----------------------
David Wittels,
Vice President
ARCADE HOLDING CORPORATION
By: /s/ Victor J. Barnett
-----------------------
Victor J. Barnett,
Chairman
SELLER REPRESENTATIVE
By: /s/ Victor J. Barnett
-----------------------
Victor J. Barnett
By: /s/ Michael J. Kluger
-----------------------
Michael J. Kluger
4
<PAGE>
EXECUTION COPY
SECOND AMENDMENT TO STOCK PURCHASE AGREEMENT
This Second Amendment to Stock Purchase Agreement (this "Amendment"),
dated December 12, 1997, by and among AHC I Acquisition Corp., a Delaware
corporation ("Purchaser"), Arcade Holding Corporation, a Delaware corporation
(the "Company"), and Victor J. Barnett and Michael J. Kluger (collectively, the
"Seller Representative").
RECITALS
WHEREAS, Purchaser will acquire all of the issued and outstanding
capital stock of the Company pursuant to that certain Stock Purchase Agreement,
dated November 14, 1997, by and among Purchaser, the Company and certain other
parties identified on the signature pages thereto, as amended by that certain
First Amendment to Stock Purchase Agreement dated December 2, 1997 (as amended,
the "Stock Purchase Agreement"); and
WHEREAS, Purchaser, the Company and the Seller Representative desire
to amend certain provisions of the Stock Purchase Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein contained, the parties hereto agree as follows:
ARTICLE I
AMENDMENT OF AGREEMENT
Section 1.1 Amendment to Section 1.2. Section 1.2 of the Stock
Purchase Agreement is hereby amended to add thereto the following at the end
thereof:
Notwithstanding the foregoing, Roger Barnett's Options to purchase
1,368.55 Shares (the "Exchanged Shares") shall be surrendered and exchanged for
options to receive 100,000 shares of preferred stock, $0.01 par value, of
Purchaser, in accordance
<PAGE>
with the Option Substitution Agreement dated as of December 15, 1997, among the
Company, Purchaser and Roger Barnett.
Section 1.2 Amendment to Section 1.5. Section 1.5(a)(iii)(C) is hereby
amended by replacing "$195.0 million" with "$192,636,855."
Section 1.3 Amendment to Section 1.5(c)Section 1.5(c) of the Stock
Purchase Agreement is hereby amended to read in its entirety as follows:
(c) Within three days after the final determination of the
Closing Differential, the Adjusted Purchase Price shall be determined as
follows: If the amount of the Closing Differential is a positive amount, then
the Adjusted Purchase Price shall be adjusted upward by an amount equal to the
Closing Differential. In such case, Purchaser shall inform the Seller
Representative and pay the amount of such difference to the Seller
Representative, which shall allocate the amount among the Sellers in accordance
with Exhibit A attached to the original Stock Purchase Agreement. Conversely,
if the amount of the Closing Differential is a negative amount, then the
Adjusted Purchase Price shall be adjusted downward by an amount equal to the
Closing Differential (expressed as a positive amount), which amount shall be
distributed to Purchaser in accordance with the terms of the Escrow Agreement.
For purposes of calculating Net Indebtedness, (i) no indebtedness incurred in
connection with the financing of the transactions contemplated by this
Agreement shall be taken into consideration; provided that no credit shall be
given for indebtedness paid in connection with the transactions contemplated by
this Agreement, and (ii) the amount of cash and cash equivalents under Section
1.5(a)(iii)(A) shall be determined as of the close of business on the Closing
Date.
ARTICLE II
MISCELLANEOUS
Section 2.1 Defined Terms. All capitalized terms used and not defined
herein shall have the meanings ascribed to such terms in the Stock Purchase
Agreement as hereby amended.
Section 2.2 Effect of Amendment. Except as specifically provided
herein, the Stock Purchase Agreement is in all respects ratified and confirmed.
All of the terms, conditions and provisions of the Stock Purchase Agreement as
hereby amended shall be and remain in full force and effect.
2
<PAGE>
Section 2.3 Entire Agreement. This Amendment and the unaltered
portions of the Stock Purchase Agreement, together with the Schedules and
Exhibits attached to the Stock Purchase Agreement, represent the entire
agreement and understanding of the parties to the Stock Purchase Agreement with
respect to the transactions contemplated herein and therein, and no
representations, warranties or covenants have been made in connection with this
Amendment or the Stock Purchase Agreement, other than those expressly set forth
herein and therein, or in certificates delivered in accordance herewith or
therewith. Except for the Confidentiality Agreement, which shall remain in
effect unless and until consummation of the Closing, this Amendment and the
unaltered portions of the Stock Purchase Agreement supersedes all prior
negotiations, discussions, correspondence, communications, understandings and
agreements among the parties relating to the subject matter of this Amendment
and the Stock Purchase Agreement and such agreements and all prior drafts of
this Amendment and the Stock Purchase Agreement and such other agreements are
merged into this Amendment and the unaltered portions of the Stock Purchase
Agreement.
Section 2.4 Amendments and Waivers. This Amendment and the Stock
Purchase Agreement as hereby amended may be amended, superseded, cancelled,
renewed or extended, and the terms hereof may be waived, only by a written
instrument signed by the Purchaser, the Company, and the Sellers set forth on
Schedule 8.6 to the Stock Purchase Agreement or, in the case of a waiver, by
the party waiving compliance (or by Sellers set forth on Schedule 8.6 to the
Stock Purchase Agreement on behalf of all Sellers).
Section 2.5 Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to choice of laws principles.
Section 2.6 Seller Representative. Victor J. Barnett and Michael J.
Kluger have all requisite power and authority to execute and deliver this
Amendment on behalf of all of the Sellers pursuant to Section 8.6 of the Stock
Purchase Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
3
<PAGE>
This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original and all of which together shall be considered
one and the same agreement.
AHC I ACQUISITION CORP.
By: /s/ David Wittels,
-----------------------
David Wittels,
Vice President
ARCADE HOLDING CORPORATION
By: Victor J. Barnett
-----------------------
Victor J. Barnett,
Chairman
SELLER REPRESENTATIVE
By: /s/ VIctor J. Barnett
-----------------------
Victor J. Barnett
By: /s/ Michael J. Kluger
-----------------------
Michael J. Kluger
4
<PAGE>
Exhibit 10.11
December 12, 1997
PRIVATE AND CONFIDENTIAL
AHC I Acquisition Corp.
c/o DLJ Merchant Banking II, Inc.
277 Park Avenue
New York, NY 10172
Attention: David Wittels
Gentlemen:
This letter agreement (the "Agreement") confirms our understanding
that AHC I Acquisition Corp. (which together with its subsidiaries is
hereinafter referred to as the "Company") has engaged Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ") to act as its (i) exclusive financial
advisor commencing with the acceptance of this Agreement with respect to the
acquisition of Arcade Holding Corporation (the "Acquisition"), and (ii)
following the closing of the Acquisition and continuing for a period through
December 31, 2002 (the "Engagement Period") with respect to the review and
analysis of financial and structural alternatives available to the Company with
a view to meeting its long term strategic objectives.
As discussed, we propose to undertake certain services on your
behalf, to the extent requested by you, which shall consist of the following:
(i) advising you with regard to the Acquisition, (ii) assisting you in
analyzing the Company's operations and its historical performance; and (iii)
assisting you in analyzing the Company's future prospects.
As compensation for the services to be provided by DLJ hereunder,
the Company agrees to pay DLJ (i) a financial advisory fee of $2,000,000 for
services related to the Acquisition, payable upon consummation of the
Acquisition and (ii) an annual advisory fee of $250,000, payable quarterly in
equal installments of $62,500, payable March 31, June 30, September 30 and
December 31 of each year. As further compensation, the Company agrees that in
the event the Company determines to pursue any Transaction (as hereinafter
defined) during the period of our engagement, DLJ shall have the right to act
as the Company's exclusive financial advisor, sole placement agent, sole
initial purchaser or sole managing underwriter or sole dealer-manager, as the
case may be, with respect to each such Transaction.
For purposes of this letter, the term "Transaction" shall include
each of the following: (i) the sale, merger, consolidation or any other
business combination, in one or a series of transactions, involving any portion
of the business, securities or assets of the Company; (ii) the acquisition (and
any related matters such as financings, divestitures, etc.), in one or a series
of transactions, of all or a portion of the business, securities or assets of
another entity or person; (iii) any recapitalization, refinancing, repurchase
or restructuring of the Company's equity or debt securities or indebtedness or
any amendments or modifications to the Company's debt securities or indentures
whether or not in connection therewith, involving, by or on behalf of the
Company, an offer to purchase or
<PAGE>
AHC I Acquisition Corp.
Page 2 December 12, 1997
exchange for cash, property, securities, indebtedness or other consideration,
or a solicitation of consents, waivers of authorizations with respect thereto;
(iv) any spin-off, split-off or other extraordinary dividend of cash,
securities or other assets to stockholders of the Company; or (v) any sale of
securities of the Company effected pursuant to a private sale or an
underwritten public offering.
If the Company determines to pursue any such Transaction, DLJ and
the Company will enter into an agreement appropriate to the circumstances,
containing provisions for, among other things, compensation, indemnification,
contribution, and representations and warranties, which are usual and customary
for similar agreements entered into by DLJ or other investment bankers of
international standing acting in similar transactions. DLJ shall have no
obligation to act as placement agent, initial purchaser, underwriter, or dealer
manager to the Company or to place or purchase any securities of the Company,
except to the extent that such obligations arise out of a placement agent
agreement, purchase agreement, underwriting agreement or dealer-manager
agreement, as the case may be, with respect to a particular Transaction
executed and delivered by both DLJ and the Company.
As further consideration for its services hereunder, the Company
shall, upon request by DLJ from time to time, reimburse DLJ promptly for all
out-of-pocket expenses (including the reasonable fees and expenses of counsel)
incurred by DLJ in connection with its engagement hereunder, regardless of
whether a Transaction is consummated. As DLJ will be acting on your behalf, it
is our practice to receive indemnification and the Company agrees to the
indemnification and other obligations set forth in Schedule I attached hereto,
which Schedule is an integral part hereof.
The Company acknowledges and agrees that DLJ has been retained
solely to provide the advice or services set forth in this Agreement. In such
capacity, DLJ shall act as an independent contractor, and any duties of DLJ
arising out of its engagement hereunder shall be owed solely to the Company.
The Company shall make available to DLJ all available financial and
other information concerning its business and operations which DLJ reasonably
requests and will provide DLJ with access to the Company's officers, directors,
employees, independent accountants and legal counsel. In performing its
services hereunder, DLJ shall be entitled to rely without investigation upon
all information that is available from public sources as well as all other
information supplied to it by or on behalf of the Company or its advisors and,
except as otherwise specifically agreed to in a writing signed by both parties,
shall not in any respect be responsible for the accuracy or completeness of, or
have any obligation to verify, the same or to conduct any appraisal of assets.
To the extent consistent with legal requirements, all information given to DLJ
by the Company, unless publicly available or otherwise available to DLJ without
restriction or breach of any confidentiality agreement, will be held by DLJ in
confidence and will not be disclosed to anyone other than DLJ's agents and
advisors without the Company's prior approval or used for any purpose other
than those referred to in this Agreement.
Any advice, written or oral, provided by DLJ pursuant to this
Agreement will be treated by the Company as confidential, will be solely for
the information and assistance of the Company in connection with the advisory
services performed by DLJ hereunder and will not be reproduced, summarized,
described or referred to, or furnished to any other party or used for any other
purpose, except in each case with our prior written consent.
<PAGE>
AHC I Acquisition Corp.
Page 3 December 12, 1997
This Agreement may be terminated by DLJ at any time or by the
Company upon expiration of the Engagement Period upon receipt of written notice
to that effect by the other party. Upon any termination or expiration of this
Agreement, DLJ will be entitled to prompt payment of all fees accrued prior to
such termination or expiration and reimbursement of all out-of-pocket expenses
as described above. The indemnity and other provisions contained in Schedule I
will also remain operative and in full force and effect regardless of any
termination or expiration of this Agreement. This Agreement shall be extended
automatically and without further action by the parties for an additional term
of one (1) year, unless otherwise terminated by either party in writing within
60 days prior to the expiration of the initial term or the applicable renewal
term.
The Company further agrees that it will not enter into a
Transaction referred to in the preceding paragraph unless, prior to or
simultaneously with consummation of such Transaction, adequate provision is
made with respect to the payment of compensation to DLJ as contemplated by such
paragraph.
This Agreement including Schedule I hereto, incorporates the entire
understanding of the parties and supersedes all previous agreements with
respect to the subject matter hereof and shall be governed by, and construed
and enforced in accordance with, the laws of the State of New York. This
Agreement shall be binding upon and inure to the benefit of the Company, DLJ,
each Indemnified Person (as defined in Schedule I hereto) and their respective
successors and assigns.
The Company irrevocably and unconditionally submits to the
exclusive jurisdiction of any State or Federal court sitting in New York City
over any suit, action or proceeding arising out of or relating to this
Agreement (including Schedule I). The Company hereby agrees that service of any
process, summons, notice or document by U.S. registered mail addressed to the
Company shall be effective service of process for any action, suit or
proceeding brought in any such court. The Company irrevocably and
unconditionally waives any objection to the laying of venue of any such suit,
action or proceeding brought in any such court and any claim that any such
suit, action or proceeding brought in such a court has been brought in an
inconvenient forum. The Company agrees that a final judgment in any such suit,
action or proceeding brought in any such court shall be conclusive and binding
upon the Company and may be enforced in any other courts to whose jurisdiction
the Company is or may be subject, by suit upon such judgment.
The Company irrevocably and unconditionally submits to the
exclusive jurisdiction of any State or Federal court sitting in New York City
over any suit, action or proceeding arising out of or relating to this
Agreement (including Schedule I). The Company hereby agrees that service of any
process, summons, notice or document by U.S. registered mail addressed to the
Company shall be effective service of process for any action, suit or
proceeding brought in any such court. The Company irrevocably and
unconditionally waives any objection to the laying of venue of any such suit,
action or proceeding brought in any such court and any claim that any such
suit, action or proceeding brought in such a court has been brought in an
inconvenient forum. The Company agrees that a final judgment in any such suit,
action or proceeding brought in any such court shall be conclusive and binding
upon the Company and may be enforced in any other courts to whose jurisdiction
the Company is or may be subject, by suit upon such judgment.
The prevailing party in any suit, action or proceeding arising out
of or relating to this Agreement shall be entitled to recover from the
non-prevailing party all of the attorney fees and
<PAGE>
AHC I Acquisition Corp.
Page 4 December 12, 1997
other expenses the prevailing party may incur in such suit, action or
proceeding and in any subsequent suit to enforce a judgment.
This letter agreement shall be binding upon and inure to the
benefit of the Company, DLJ, each Indemnified Person (as defined in Schedule I
hereto) and their respective successors and assigns.
If any term, provision, covenant or restriction contained in this
Agreement, including Schedule I, is held by a court of competent jurisdiction
or other authority to be invalid, void, unenforceable or against its regulatory
policy, the remainder of the terms, provisions, covenants and restrictions
contained in this Agreement shall remain in full force and effect and shall in
no way be affected, impaired or invalidated.
After reviewing this letter, please confirm that the foregoing is
in accordance with your understanding by signing and returning to me the
duplicate of this Agreement attached hereto, whereupon it shall be our binding
Agreement.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ Colin Knudsen
-----------------------------
Colin Knudsen
Managing Director
Accepted and agreed to
this 12th day of December, 1997
AHC I ACQUISITION CORP.
By: /s/ David Wittels
---------------------------
David Wittels
<PAGE>
SCHEDULE I
This Schedule I is a part of and is incorporated into that certain
letter agreement (together, the "Agreement") dated December 12, 1997 by and
between AHC I Acquisition Corp. (the "Company") and Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ").
The Company will indemnify and hold harmless DLJ and its
affiliates, and the respective directors, officers, agents and employees of DLJ
and its affiliates (other than the Company) (DLJ and each such entity or
person, an "Indemnified Person"), from and against any losses, claims, damages,
judgments, assessments, costs and other liabilities (collectively
"Liabilities"), and will reimburse each Indemnified Person for all fees and
expenses (including the reasonable fees and expenses of counsel) (collectively,
"Expenses") as they are incurred in investigating, preparing, pursuing or
defending any claim, action, proceeding or investigation, whether or not in
connection with pending or threatened litigation and whether or not any
Indemnified Person is a party (collectively, "Actions"), arising out of or in
connection with advice or services rendered or to be rendered by any
Indemnified Person pursuant to this Agreement, the transactions contemplated
hereby or any Indemnified Person's actions or inactions in connection with any
such advice, services or transactions; provided that the Company will not be
responsible for any Liabilities or Expenses of any Indemnified Person that are
determined by a judgment of a court of competent jurisdiction which is no
longer subject to appeal or further review to have resulted solely from such
Indemnified Person's gross negligence or willful misconduct in connection with
any of the advice, actions, inactions or services referred to above. The
Company also agrees to reimburse each Indemnified Person for all Expenses as
they are incurred in connection with enforcing such Indemnified Person's rights
under this Agreement (including, without limitation, its rights under this
Schedule I).
Upon receipt by an Indemnified Person of actual notice of an Action
against such Indemnified Person with respect to which indemnity may be sought
under this Agreement, such Indemnified Person shall promptly notify the Company
in writing; provided that failure so to notify the Company shall not relieve
the Company from any liability which the Company may have on account of this
indemnity or otherwise, except to the extent the Company shall have been
materially prejudiced by such failure. The Company shall, if requested by DLJ,
assume the defense of any such Action including the employment of counsel
reasonably satisfactory to DLJ. Any Indemnified Person shall have the right to
employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Person, unless: (i) the Company has failed promptly to assume
the defense and employ counsel or (ii) the named parties to any such Action
(including any impleaded parties) include such Indemnified Person and the
Company, and such Indemnified Person shall have been advised by counsel that
there may be one or more legal defenses available to it which are different
from or in addition to those available to the Company; provided that the
Company shall not in such event be responsible hereunder for the fees and
expenses of more than one firm of separate counsel in connection with any
Action in the same jurisdiction, in addition to any local counsel. The Company
shall not be liable for any settlement of any Action effected without its
written consent. In addition, the Company will not, without prior written
consent of DLJ, settle, compromise or consent to the entry of any judgment in
or otherwise seek to terminate any pending or threatened Action in respect of
which indemnification or contribution may be sought hereunder (whether or not
any Indemnified Person is a party thereto) unless such settlement, compromise,
consent or termination includes an unconditional release of each Indemnified
Person from all Liabilities arising out of such Action.
<PAGE>
In the event the foregoing indemnity is unavailable to an
Indemnified Person other than in accordance with this Agreement, the Company
shall contribute to the Liabilities and Expenses paid or payable by such
Indemnified Person in such proportion as is appropriate to reflect (i) the
relative benefits to the Company and its shareholders, on the one hand, and to
DLJ, on the other hand, of the matters contemplated by this Agreement or (ii)
if the allocation provided by the immediately preceding clause is not permitted
by the applicable law, not only such relative benefits but also the relative
fault of the Company, on the one hand, and DLJ, on the other hand, in
connection with the matters as to which such Liabilities or Expenses relate, as
well as any other relevant equitable considerations; provided that in no event
shall the Company contribute less than the amount necessary to ensure that all
Indemnified Persons, in the aggregate, are not liable for any Liabilities and
Expenses in excess of the amount of fees actually received by DLJ pursuant to
the Agreement. For purposes of this paragraph, the relative benefits to the
Company and its shareholders, on the one hand, and to DLJ, on the other hand,
of the matters contemplated by the Agreement shall be deemed to be in the same
proportion as (a) the total value paid or contemplated to be paid or received
or contemplated to be received by the Company or the Company's shareholders, as
the case may be, in the transaction or transactions that are within the scope
of the Agreement, whether or not any such transaction is consummated, bears to
(b) the fees paid or to be paid to DLJ under the Agreement.
The Company also agrees that no Indemnified Person shall have any
liability (whether direct or indirect, in contract or tort or otherwise) to the
Company for or in connection with advice or services rendered or to be rendered
by any Indemnified Person pursuant to this Agreement, the transactions
contemplated hereby or any Indemnified Person's actions or inactions in
connection with any such advice, services or transactions except for
Liabilities (and related Expenses) of the Company that are determined by a
judgment of a court of competent jurisdiction which is no longer subject to
appeal or further review to have resulted solely from such Indemnified Person's
gross negligence or willful misconduct in connection with any such advice,
actions, inactions or services.
The reimbursement, indemnity and contribution obligations of the
Company set forth herein shall apply to any modification of this Agreement and
shall remain in full force and effect regardless of any termination of, or the
completion of any Indemnified Person's services under or in connection with,
this Agreement.
<PAGE>
REPLACEMENT STOCK OPTION AGREEMENT
This Replacement Stock Option Agreement is made as of December 15,
1997 between AHC I Acquisition Corp., a Delaware corporation (the "Company"),
and Roger L. Barnett (the "Barnett"),
1. BACKGROUND. As of August 4, 1994, Barnett was granted a stock
option ("Arcade Option") under the 1993 Stock Option Plan of Arcade Holding
Corporation, a Delaware Corporation ("Arcade"). In connection with the
acquisition of all the shares of common stock of Arcade by the Company (the
"Transaction") and pursuant to the terms of an Option Substitution Agreement
dated as of December 15, 1997 ("Option Substitution Agreement") among the
Company, Barnett and Arcade, a portion of the Arcade Option ("Surrendered
Arcade Option") was surrendered, terminated and cancelled. This option is
granted in replacement of the Surrendered Arcade Option to preserve those
opportunities and benefits under the Arcade Option which were terminated and
cancelled in connection with the Transaction,
2. GRANT OF OPTION. The Company hereby irrevocably grants to Barnett a
stock option (the "Option") to purchase all or any part of an aggregate of
100,000 shares of 15% Senior Preferred Stock Due 2012, per value $.01 per share
of the Company (the "Preferred Stock") (such number being subject to adjustment
as provided in Section 8) on the terms and conditions hereinafter set forth.
The number of shares of Preferred Stock subject to the Option has been
determined in accordance with the Option Substitution Agreement.
3. PURCHASE PRICE. The per share purchase price of the shares of
Preferred Stock deliverable upon exercise of the Option shall be $1.37. The per
share purchase price has been determined in accordance with the Option
Substitution Agreement.
4. VESTING AND TERM. The Option shall be fully vested and may be
exercised, in part or in full, at any time and from time to time prior to the
expiration or termination thereof.
The term of the Option shall expire, if not sooner terminated as
provided herein, on August 4, 2004, (which is the 10th anniversary of the date
of grant of the Arcade Option), and the Option is not exercisable as to any
shares on or after such date.
5. PUT AND CALL AGREEMENT. Barnett and the Company agree that this
Option and any Preferred Shares acquired pursuant to the Option shall be
subject to the terms and conditions of that certain Put and Call Agreement
dated as of December 15, 1997, a copy of which is attached hereto.
6. NONTRANSFERABILITY. The Option shall not be transferable (other
than pursuant to the Put and Call Agreement dated the date hereof among the
parties hereto and certain shareholders of the Company) otherwise than by will
or the laws of descent and distribution and the Option may be exercised, during
the lifetime of Barnett, only by him (or in the event of Executive's death, his
estate),
<PAGE>
7. CHARACTERIZATION. The Option granted hereunder is intended to be a
nonqualified stock option and not an incentive stock option.
8. RECAPITALIZATION AND OTHER ADJUSTMENTS. The number of shares
subject to the Option (and the purchase price of such shares) will be equitably
adjusted for any reorganization, recapitalization, reclassification, stock
split, stock dividend or similar change in the Preferred Stock which occurs
subsequent to the date of this agreement, it being understood that no
adjustment shall be made to the shares subject to the Option in respect of the
accretion to liquidation value or payment of dividends on such shares In
accordance with the terms of the Preferred Stock.
9. SALE OR REORGANIZATION. In case the Company is merged or
consolidated with another corporation and the Company is not the surviving
company, or in case all or substantially all the assets of the Company is
acquired by another corporation, or in case of a reorganization or liquidation
of the Company, the Board of Directors of the Company or the board of directors
of any corporation assuming the obligations of the Company hereunder, shall
either (i) make appropriate provisions for the protection of the value of any
outstanding portion of the Option by the substitution on an equitable basis of
appropriate stock of the Company, or an appropriate stock of the merged,
consolidated, or otherwise reorganized corporation following written notice to
the holder of the Option, or (ii) give written notice to the holder of the
Option of the contemplated transaction in order to permit the holder of the
Option to elect to exercise prior to the effectiveness of such transaction.
10. METHOD OF EXERCISING OPTION. At any time and from time to time
prior to the termination or cancellation of the Option, Barnett may exercise
all or a portion of the Option by delivering written notice of exercise to the
Company, together with (i) a written acknowledgment, reasonably satisfactory to
the Company, that Barnett has read and has been afforded an opportunity to ask
questions of management of the Company regarding all financial and other
information provided to Barnett regarding the Company and (ii) payment in full
of the amount of the purchase price with respect to the number of shares with
respect to which the Option is being exercised ("Exercise Price") by delivery
to the Company of a cashier's or certified check or by wire transfer in
immediately available funds in the amount of the Exercise Price. Barnett shall
be liable for and shall remit to the Company all federal, state, local and
foreign withholding taxes for which the Company may be liable with respect to
the Option. As a condition to any exercise of the Option, Barnett will permit
the Company to deliver to him all financial and other information regarding the
Company and its affiliates which the Company believes necessary to enable
Barnett to make an informed investment decision. In the event the Option shall
be exercised by any person or persons other than Barnett, such notice of
exercise shall be accompanied by appropriate proof of the right of such person
or persons to exercise the Option.
11. SECURITIES LAWS RESTRICTIONS. Barnett represents that when Barnett
exercises the Option, Barnett will be purchasing Preferred Shares for Barnett's
own account and not on behalf of any other person. Barnett understands and
acknowledges that federal and state
-2-
<PAGE>
securities laws govern and restrict Barnett's right to offer, sell, pledge or
otherwise dispose of any Preferred Stock acquired on exercise of the Option
unless Barnett's offer, sale or other disposition thereof is registered under
the Securities Act of 1933, as amended (the "1933 Act"), and applicable state
securities laws or such offer, sale or other disposition is exempt from
registration thereunder. Barnett agrees that Barnett will not offer, sell or
otherwise dispose of any shares of Preferred Stock acquired on exercise of the
Option in any manner which would (i) require the Company to file any
registration statement (or similar filing under state law) with the Securities
and Exchange Commission (or with any state securities commission or agency) or
to amend or supplement any such filing or (ii) violate or cause the Company to
violate the 1933 Act, the rules and regulations promulgated thereunder or any
other state or federal law. Barnett further understands that the certificates
for any Preferred Stock Barnett purchases will bear the legend set forth below
or such other legend as the Company deems necessary or desirable to assure
compliance with the 1933 Act and other applicable laws, rules and regulations.
The certificates representing Preferred Stock acquired on exercise of the
Option will bear the following legend:
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAWS. THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD,
PLEDGED, TRANSFERRED, OR OTHERWISE DISPOSED OF (OTHER THAN PURSUANT
TO THE PUT AND CALL AGREEMENT DESCRIBED BELOW) UNTIL HOLDER HEREOF
PROVIDES EVIDENCE SATISFACTORY TO THE ISSUER (WHICH, IN THE
DISCRETION OF THE ISSUER, MAY INCLUDE AN OPINION OF COUNSEL
SATISFACTORY TO THE ISSUER) THAT SUCH OFFER, SALE, PLEDGE, TRANSFER,
OR OTHER DISPOSITION WILL NOT VIOLATE APPLICABLE FEDERAL OR STATE
SECURITIES LAWS.
THE ISSUER IS AUTHORIZED TO ISSUE SHARES OF MORE THAN ONE CLASS AND
TO ISSUE SHARES IN MORE THAN ONE SERIES OF AT LEAST ONE CLASS. THE
ISSUER WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS A STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND
RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH
CLASS OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS
OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
THIS SECURITY IS SUBJECT TO CERTAIN VOTING AGREEMENTS, RESTRICTIONS
ON TRANSFER, AND OTHER TERMS AND CONDITIONS SET FORTH IN THE
STOCKHOLDERS AGREEMENT, DATED AS OF DECEMBER 15, 1997, AS THE SAME
MAY BE AMENDED FROM TIME TO
-3-
<PAGE>
TIME, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER AT ITS PRINCIPAL
EXECUTIVE OFFICES.
THIS SECURITY IS SUBJECT TO CERTAIN REPURCHASE RIGHTS UPON THE TERMS
AND SUBJECT TO THE CONDITIONS SET FORTH IN THAT CERTAIN PUT AND CALL
AGREEMENT, DATED AS OF DECEMBER 15, 1997, AS THE SAME MAY BE AMENDED
FROM TIME TO TIME, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER AT
ITS PRINCIPAL EXECUTIVE OFFICES, AND THIS SECURITY MAY NOT BE OFFERED
FOR SALE, SOLD, PLEDGED, TRANSFERRED, OR OTHERWISE DISPOSED OF ON OR
PRIOR TO THE LAST DAY SUCH REPURCHASE RIGHTS MAY BE EXERCISED BY THE
COMPANY.
12. NO RIGHTS OF OWNERSHIP. Barnett shall have no rights of a
stockholder with respect to shares of Preferred Stock to be acquired by the
exercise of the Option until the date of issuance of a certificate or
certificates representing such shares. Except as otherwise expressly provided
herein, no adjustment shall be made for dividends or other rights for which the
record date is prior to the date such stock certificate is issued. All shares
of Preferred Stock purchased upon the exercise of the Option as provided herein
shall be fully paid and non-assessable. The Company shall give Barnett advance
notice prior to declaring any cash dividend on the Preferred Stock to allow
Barnett time to exercise the Option prior to the record date of any such
dividend.
13. OBLIGATION OF THE COMPANY. The Company shall at all times during
the term of the Option reserve and keep available such number of shares of
Preferred Stock (which may be newly issued or treasury shares) as will be
sufficient to satisfy the requirements of this agreement, shall pay all
original issue taxes, if any, with respect to the issuance of shares of
Preferred Stock pursuant hereto and all other fees and expenses necessarily
incurred by the Company in connection therewith, and shall, from time to time,
use its best efforts to comply with all laws and regulations which, in the
opinion of counsel for the Company, shall be applicable thereto.
14. MISCELLANEOUS.
a. Notices. All notices, requests, consents, instructions and other
communications required or permitted to be given hereunder shall be in writing
and hand delivered, sent by nationally-recognized, next-day delivery service or
mailed by certified or registered mail, return receipt requested, postage
prepaid, addressed as set forth below; receipt shall be deemed to occur on the
earlier of the date of actual receipt or receipt by the sender of confirmation
that the delivery was completed or that the addressee has refused to accept
such delivery or has changed its address without giving notice of such change
as set forth herein.
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<PAGE>
(i) if to the Company as follows:
DLJ Merchant Banking II, Inc.
277 Park Avenue, 19th Floor
New York, New York 10172
Attention: Thompson Dean
with a copy to:
Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Attention: Ivy Dodes
with a copy to:
Weil, Gotshal & Manges LLP
100 Crescent Court, Suite 1300
Dallas, Texas 75201
Attention: R. Scott Cohen
(ii) if to RLB, as follows:
Roger L. Barnett
903 Park Avenue
New York, NY 10021
with a copy to counsel for RLB;
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, IL 60606
Attention: Donald G. Lubin
Michael M. Froy
or such other address or persons as the parties may from time to time designate
in writing in the manner provided in this Section.
b. Binding Effect. This agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors,
assigns, spouses, heirs and personal and legal representatives.
-5-
<PAGE>
C. Headings. The headings contained in this agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this agreement.
d. Amendments/Waivers. No supplement, modification or amendment of
this agreement shall be binding unless executed in writing by each of the
parties hereto, No waiver of any of the provisions of this agreement shall be
deemed or shall constitute a waiver of any other provision hereof (whether or
not similar), nor shall such waiver constitute a continuing waiver.
e. Invalid Provisions. If any provision of this agreement is held to
be invalid or unenforceable, such provision shall be automatically severed from
this agreement and there shall be added to this agreement a provision as
similar as possible to such severed provision as may be valid and enforceable,
and the validity and enforceability of the other provisions of this agreement
shall not be affected thereby.
f. Survival. The representations, warranties and covenants hereunder
shall survive any exercise of the Option.
g. Governing Law. This agreement shall be governed and construed in
accordance with the laws of the State of New York, other than its laws
respecting choice of laws,
h. Counterpart. This agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
i. Entire Agreement. This agreement evidences the entire understanding
and agreement of the parties relative to the matters discussed herein. This
agreement supersedes any and all other agreements and understandings, whether
written or oral, relative to the matters discussed herein.
-6-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this agreement to be duly
executed by its officer thereunto duly authorized, and Barnett has hereunto set
his hand, all as of the day and year first above written.
AHC I Acquisition Corp.
By /s/ David Wittels
--------------------------
Its Vice President
Roger L. Barnett
/s/ ROGER L. BARNETT
-----------------------------
<PAGE>
OPTION SUBSTITUTION AGREEMENT
OPTION SUBSTITUTION AGREEMENT (the "Agreement"), made and entered into
as of the 15th day of December, 1997, by and among Arcade Holding Corporation,
a Delaware corporation ("Arcade"), Roger L. Barnett ("Barnett"), and AHC I
Acquisition Corp., a Delaware corporation ("Acquiror").
Recitals
WHEREAS, pursuant to a Stock Option Agreement dated as of August 4,
1994 ("Option Agreement"), Arcade granted to Barnett an option (the "Option")
to purchase 2,096 shares of the common stock of Arcade ("Common Stock"),
WHEREAS, Arcade, its shareholders, and Acquiror have entered into a
Stock Purchase Agreement dated as of November 14, 1997, as amended by that
certain First Amendment to Stock Purchase Agreement dated as of December 2,
1997 and that certain Second Amendment to Stock Purchase Agreement dated as of
December 12, 1997 (as amended, the "Stock Purchase Agreement"), pursuant to
which Acquiror will acquire all the Common Stock (the "Transaction");
WHEREAS, in connection with the Transaction, a portion of the Option
will be acquired pursuant to the terms of the Stock Purchase Agreement, and a
portion of the Option (the "Surrendered Option") will be surrendered for
cancellation and in lieu thereof, Acquiror will grant Barnett a substitute
option ("Replacement Option") to purchase 15% Senior Preferred Stock due 2012,
par value $.01 per share, of Acquiror ("Acquiror Stock").
Agreement
NOW, THEREFORE, the parties agree as follows:
1. Surrender and Cancellation of Surrendered Option. The Surrendered
Option is for 1,368. 55 shares of Common Stock. Barnett agrees that, on the date
(the "Effective Date") of the closing of the Transaction (the "Closing"), and
concurrently therewith, Barnett shall, and hereby does, surrender to Arcade the
Surrendered Option for cancellation, and hereby relinquishes all right, title
and interest in and to the Surrendered Option and any Common Stock that would
be issuable upon exercise of such Surrendered Option. Upon such surrender,
which shall take place concurrently with the consummation of the Closing, the
Surrendered Option shall be, and hereby is cancelled and terminated.
2. Issuance of Acquiror Option.
a. On the Effective Date, and concurrently with the consummation of
the Closing, Acquiror shall grant to Barnett a Replacement Option to purchase
100,000 shares of Acquiror Stock ("Replacement Share Number") and at an
exercise price ("Replacement Exercise Price") equal to $1.37 per share.
<PAGE>
b. The Replacement Option shall be subject to terms and conditions
substantially as set forth in the form of replacement option agreement
("Replacement Option. Agreement") attached hereto and hereby made a part
hereof.
3. Certain Warranties and Understandings of Barnett. Barnett
represents and warrants to Arcade and Acquiror that (a) he is the owner, of
record and beneficially, of the Option, free and clear of any liens, claims,
encumbrances, restrictions on transfer (except for those existing under
applicable securities laws) and any other rights of others, (b) he has all
power and authority necessary to enter into and perform his obligations under
this agreement, (c) the execution and delivery of this Agreement shall
constitute his valid and binding obligation, enforceable against him in
accordance with its terms, and (d) the execution, delivery and performance of
this Agreement by him will not breach or violate any contract or agreement to
which he is a party or by which he is bound or any law, court order, rule or
regulation applicable to him,
4. Certain Warranties of Arcade and Acquiror. Each of Arcade and
Acquiror represent and warrant to Barnett that (a) It has all corporate power
and authority to enter into and perform its obligations under this Agreement,
(b) the execution, delivery and performance of this Agreement by it will not
breach or violate its corporate charter or by laws or any contract or agreement
to which it is a party or by which it is bound or any law, court order, rule or
regulation applicable to it, (c) the execution and delivery of this Agreement
shall constitute a valid and binding obligation, enforceable against it in
accordance with its terms, and (d) the purchase price per share being paid to
Acquiror for Acquiror Stock on the date hereof in connection with the
consummation of the Transaction is $25.00, except with respect to Acquiror
Stock issued as a unit with notes and common stock of Acquiror.
5. Miscellaneous.
a. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors, assigns,
spouses, heirs and personal and legal representatives. None of the parties may
assign its rights or delegate its obligations under this Agreement without the
prior written consent of the other parties hereto,
b. Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
c. Amendments/Waivers. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by each of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a
-2-
<PAGE>
waiver of any other provision hereof (whether or not similar), nor shall such
waiver constitute a continuing waiver,
d. Invalid Provisions. If any provision of this Agreement is held to
be invalid or unenforceable, such provision shall be automatically severed from
this Agreement and there shall be added to this Agreement a provision as
similar as possible to such severed provision as may be valid and enforceable,
and the validity and enforceability of the other provisions of this Agreement
shall not be affected thereby.
e. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of New York, other than its laws
respecting choice of laws.
f. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
-3-
<PAGE>
g. Entire Agreement. This Agreement evidences the entire understanding
and agreement of the parties relative to the matters discussed herein. This
Agreement supersedes any and all other agreements and understandings, whether
written or oral, relative to the matters discussed herein,
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above,
ARCADE HOLDING CORPORATION
By /s/ David Wittels
-----------------------------------
Name:
Title:
AHC I ACQUISITION CORP.
By /s/ David Wittels
-----------------------------------
Name:
Title:
/s/ Roger Barnett
-------------------------------------
Roger L. Barnett
-4-
<PAGE>
EXECUTION COPY
TERMINATION OF PUT AND CALL AGREEMENT
This Termination of Put and Call Agreement (this "Termination"), dated
June 17, 1998, by and among DLJMB Funding II, Inc., DLJ Merchant Banking
Partners II, L.P., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified
Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners,
L.P., DLJ Millennium Partners-A, L.P., DLJ First ESC L.P., DLJ Offshore
Partners II, C.V., DLJ EAB Partners, L.P. and UK Investment Plan 1997 Partners
(collectively, the "DLJMB Parties"), Roger L. Barnett ("RLB") and AHC I
Acquisition Corp., a Delaware corporation (the "Company").
RECITALS
WHEREAS, the DLJMB Parties, RLB and the Company entered into that
certain Put and Call Agreement, dated as of December 15, 1997, that certain
First Amendment to Put and Call Agreement, dated as of February 2, 1998, and
that certain Second Amendment to Put and Call Agreement, dated as of April 1,
1998, and that certain Third Amendment to Put and Call Agreement, dated as of
April ___, 1998 (as amended, the "Agreement"); and
WHEREAS, the DLJMB Parties, RLB and the Company desire to terminate
the provisions of the Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein contained, the parties hereto agree as follows:
ARTICLE 1.
TERMINATION OF AGREEMENT
For good and valuable consideration, the receipt and adequacy of which
is hereby acknowledged, and subject to, and conditioned upon, the execution of
the Put Option Agreement, dated as of the date hereof, by and among the DLJMB
Parties, RLB and the Company, the DLJMB Parties, RLB and the Company agree that
the Agreement is hereby terminated and of no further force and effect and that,
by its execution and delivery of this Termination, each of the DLJMB Parties,
RLB and the Company shall be deemed to have released its or his right and
interests in, to and under the Agreement.
<PAGE>
ARTICLE 2.
MISCELLANEOUS
Section 2.1. Defined Terms. All capitalized terms used and not defined
herein shall have the meanings ascribed to such terms in the Agreement.
Section 2.2. Entire Agreement. This Termination represents the final
agreement and understanding of the parties to the Agreement with respect to the
transactions contemplated therein, and no representations, warranties or
covenants have been made in connection with this Termination or the Agreement,
other than those expressly set forth herein and therein. This Termination
supersedes all prior negotiations, discussions, correspondence, communications,
understandings and agreements among the parties relating to the subject matter
of this Termination and the Agreement and such agreements and all prior drafts
of this Termination and the Agreement and such other agreements are merged into
this Termination.
Section 2.3. Amendments and Waivers. This Termination may be amended,
superseded, cancelled, renewed or extended, and the terms hereof may be waived,
only by a written instrument signed by the DLJMB Parties, RLB and the Company
or, in the case of a waiver, by the party waiving compliance.
Section 2.4. Governing Law. This Termination shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to choice of laws principles.
2
<PAGE>
This Termination may be executed in two or more counterparts, each of
which shall be deemed an original and all of which together shall be considered
one and the same agreement.
AHC I ACQUISITION CORP.
By: /s/ David M. Wittels
--------------------------------
David M. Wittels
Vice President
/s/ Roger L. Barnett
--------------------------------
Roger L. Barnett
DLJMB FUNDING II, INC.
By: /s/ David M. Wittels
--------------------------------
David M. Wittels
Attorney-in-Fact
DLJ MERCHANT BANKING PARTNERS II, L.P.
By: DLJ MERCHANT BANKING II, INC.
Managing General Partner
By: /s/ David M. Wittels
--------------------------------
David M. Wittels
Attorney-in-Fact
<PAGE>
DLJ MERCHANT BANKING PARTNERS II-A, L.P.
By: DLJ MERCHANT BANKING II, INC.
Managing General Partner
By: /s/ David M. Wittels
--------------------------------
David M. Wittels
Attorney-in-Fact
DLJ DIVERSIFIED PARTNERS, L.P.
By: DLJ DIVERSIFIED PARTNERS, INC.
By: /s/ David M. Wittels
--------------------------------
David M. Wittels
Attorney-in-Fact
DLJ DIVERSIFIED PARTNERS-A, L.P.
By: DLJ DIVERSIFIED PARTNERS, INC.
By: /s/ David M. Wittels
--------------------------------
David M. Wittels
Attorney-in-Fact
DLJ MILLENNIUM PARTNERS, L.P.
By: DLJ MERCHANT BANKING II, INC.
By: /s/ David M. Wittels
------------------------------------
David M. Wittels
Attorney-in-Fact
<PAGE>
DLJ MILLENNIUM PARTNERS-A, L.P.
By: DLJ MERCHANT BANKING II, INC.
By: /s/ David M. Wittels
------------------------------------
David M. Wittels
Attorney-in-Fact
DLJ FIRST ESC L.P.
By: DLJ LBO PLANS MANAGEMENT
CORPORATION
General Partner
By: /s/ David M. Wittels
------------------------------------
David M. Wittels
Attorney-in-Fact
DLJ OFFSHORE PARTNERS II, C.V.
By: DLJ MERCHANT BANKING II, INC.
Managing General Partner
By: /s/ David M. Wittels
------------------------------------
David M. Wittels
Attorney-in-Fact
DLJ EAB PARTNERS, L.P.
By: DLJ LBO PLANS MANAGEMENT
CORPORATION
By: /s/ David M. Wittels
------------------------------------
David M. Wittels
Attorney-in-Fact
<PAGE>
UK INVESTMENT PLAN 1997 PARTNERS
By: DONALDSON LUFKIN & JENRETTE, INC.
By: /s/ David M. Wittels
------------------------------------
David M. Wittels
Attorney-in-Fact
<PAGE>
EXHIBIT 12.1
AKI HOLDING CORP. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(dollars in thousands)
<TABLE>
<CAPTION>
PREDECESSOR HOLDING
------------------------------------------ -----------------------------
PRO FORMA
------------
FISCAL YEAR ENDED JUNE JULY 1, DECEMBER 16, FISCAL YEAR
30, 1997 TO 1997 TO ENDED
------------------------- DECEMBER 15, JUNE 30, JUNE 30,
1996 1997 1997 1998 1998
----------- ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Income (loss) before
income taxes ........... 4,279 7,117 3,234 (7,545) (3,620)
Add:
Interest on all
indebtedness which
includes amortization
of deferred financing
costs .................. 6,762 6,203 2,646 11,327 16,730
----- ----- ----- ------ ------
Earnings available for
fixed charges .......... 11,041 13,320 5,880 3,782 13,110
Fixed charges ........... 6,762 6,203 2,646 11,327 16,730
------ ------ ----- ------ ------
Ratio of earnings to
fixed charges ......... 1.6 2.1 2.2 -- --
</TABLE>
Earnings were not sufficient to cover fixed charges by $7,545 and $3,620 for
the period from December 16, 1997 to June 30, 1998 and the pro forma fiscal
year ended June 30, 1998, respectively.
<PAGE>
[Letterhead of PricewaterhouseCoopers LLP]
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549
Commissioners:
We have read the statements made by AKI Holding Corp. appearing in its
registration statement on Form S-4 dated October 13, 1998. We agree with
the statements concerning Coopers & Lybrand L.L.P. in such registration
statement.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated July 31, 1998 relating
to the consolidated financial statements of AKI Holding Corp. and Subsidiaries,
formerly known as Arcade Holding Corporation (the "Predecessor") which appears
in such Prospectus. We also consent to the application of such report to the
Financial Statement Schedule for the three years ended June 30, 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
report. The audits referred to in such report also included this schedule. We
also consent to the reference to us under the headings "Experts" in such
Prospectus.
PricewaterhouseCoopers LLP
Nashville, Tennessee
October 9, 1998
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM T-1
--------
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an Application to Determine Eligibility
of a Trustee Pursuant to Section 305(b)(2)
STATE STREET BANK AND TRUST COMPANY
(Exact name of trustee as specified in its charter)
Massachusetts 04-1867445
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification No.)
225 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Maureen Scannell Bateman, Esq. Executive Vice President and General Counsel
225 Franklin Street, Boston, Massachusetts 02110
(617) 654-3253
(Name, address and telephone number of agent for service)
(AKI HOLDING CORP.)
(Exact name of obligor as specified in its charter)
DELAWARE 74-2883163
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
(1815 EAST MAIN STREET
CHATTANOOGA, TENNESSEE 37404)
(Address of principal executive offices) (Zip Code)
(13 1/2% SENIOR DISCOUNT DEBENTURES DUE 2009)
(Title of indenture securities)
<PAGE>
GENERAL
ITEM 1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO
WHICH IT IS SUBJECT.
Department of Banking and Insurance of The Commonwealth of
Massachusetts, 100 Cambridge Street, Boston, Massachusetts.
Board of Governors of the Federal Reserve System, Washington,
D.C., Federal Deposit Insurance Corporation, Washington, D.C.
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
The obligor is not an affiliate of the trustee or of its
parent, State Street Corporation.
(See note on page 2.)
ITEM 3. THROUGH ITEM 15. NOT APPLICABLE.
ITEM 16. LIST OF EXHIBITS.
LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF
ELIGIBILITY.
1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN
EFFECT.
A copy of the Articles of Association of the trustee, as now in
effect, is on file with the Securities and Exchange Commission as
Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and
Qualification of Trustee (Form T-1) filed with the Registration
Statement of Morse Shoe, Inc. (File No. 22-17940) and is
incorporated herein by reference thereto.
2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE
BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION.
A copy of a Statement from the Commissioner of Banks of
Massachusetts that no certificate of authority for the trustee to
commence business was necessary or issued is on file with the
Securities and Exchange Commission as Exhibit 2 to Amendment No.
1 to the Statement of Eligibility and Qualification of Trustee
(Form T-1) filed with the Registration Statement of Morse Shoe,
Inc. (File No. 22-17940) and is incorporated herein by reference
thereto.
3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE
TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS
SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE.
A copy of the authorization of the trustee to exercise corporate
trust powers is on file with the Securities and Exchange
Commission as Exhibit 3 to Amendment No. 1 to the Statement of
Eligibility and Qualification of Trustee (Form T-1) filed with
the Registration Statement of Morse Shoe, Inc. (File No.
22-17940) and is incorporated herein by reference thereto.
4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS
CORRESPONDING THERETO.
A copy of the by-laws of the trustee, as now in effect, is on
file with the Securities and Exchange Commission as Exhibit 4 to
the Statement of Eligibility and Qualification of Trustee (Form
T-1) filed with the Registration Statement of Eastern Edison
Company (File No. 33-37823) and is incorporated herein by
reference thereto.
1
<PAGE>
5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS
IN DEFAULT.
Not applicable.
6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY
SECTION 321(B) OF THE ACT.
The consent of the trustee required by Section 321(b) of the Act
is annexed hereto as Exhibit 6 and made a part hereof.
7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED
PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING
AUTHORITY.
A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or
examining authority is annexed hereto as Exhibit 7 and made a
part hereof.
NOTES
In answering any item of this Statement of Eligibility which relates
to matters peculiarly within the knowledge of the obligor or any underwriter
for the obligor, the trustee has relied upon information furnished to it by the
obligor and the underwriters, and the trustee disclaims responsibility for the
accuracy or completeness of such information.
The answer furnished to Item 2. of this statement will be amended, if
necessary, to reflect any facts which differ from those stated and which would
have been required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, State Street Bank and Trust Company, a corporation
organized and existing under the laws of The Commonwealth of Massachusetts, has
duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of Boston and The
Commonwealth of Massachusetts, on the {AUGUST 6, 1998}.
STATE STREET BANK AND TRUST COMPANY
By: /s/ Steven Cimalore
NAME: STEVEN CIMALORE
TITLE: VICE PRESIDENT
2
<PAGE>
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture
Act of 1939, as amended, in connection with the proposed issuance by {AKI
HOLDING CORP.}. of its {13 1/2% SENIOR DISCOUNT DEBENTURES DUE 2009}, we hereby
consent that reports of examination by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon request therefor.
STATE STREET BANK AND TRUST COMPANY
By: /s/ Steven Cimalore
NAME: STEVEN CIMALORE
TITLE: VICE PRESIDENT
DATED: AUGUST 6, 1998
3
<PAGE>
EXHIBIT 7
Consolidated Report of Condition of State Street Bank and Trust Company,
Massachusetts and foreign and domestic subsidiaries, a state banking
institution organized and operating under the banking laws of this commonwealth
and a member of the Federal Reserve System, at the close of business March 31,
1998, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act and in
accordance with a call made by the Commissioner of Banks under General Laws,
Chapter 172, Section 22(a).
<TABLE>
<CAPTION>
Thousands of
ASSETS Dollars
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin ......................................... 1,144,309
Interest-bearing balances .................................................................. 9,914,704
Securities...................................................................................... 10,062,052
Federal funds sold and securities purchased
under agreements to resell in domestic offices
of the bank and its Edge subsidiary......................................................... 8,073,970
Loans and lease financing receivables:
Loans and leases, net of unearned income ................................................... 6,433,627
Allowance for loan and lease losses ........................................................ 88,820
Allocated transfer risk reserve............................................................. 0
Loans and leases, net of unearned income and allowances .................................... 6,344,807
Assets held in trading accounts................................................................. 1,117,547
Premises and fixed assets....................................................................... 453,576
Other real estate owned......................................................................... 100
Investments in unconsolidated subsidiaries...................................................... 44,985
Customers' liability to this bank on acceptances outstanding.................................... 66,149
Intangible assets............................................................................... 263,249
Other assets.................................................................................... 1,066,572
----------
Total assets.................................................................................... 38,552,020
==========
LIABILITIES
Deposits:
In domestic offices......................................................................... 9,266,492
Noninterest-bearing ................................................................... 6,824,432
Interest-bearing ...................................................................... 2,442,060
In foreign offices and Edge subsidiary...................................................... 14,385,048
Noninterest-bearing ................................................................... 75,909
Interest-bearing ...................................................................... 14,309,139
Federal funds purchased and securities sold under
agreements to repurchase in domestic offices of
the bank and of its Edge subsidiary......................................................... 9,949,994
Demand notes issued to the U.S. Treasury and Trading Liabilities ............................... 171,783
Trading liabilities............................................................................. 1,078,189
Other borrowed money............................................................................ 406,583
Subordinated notes and debentures............................................................... 0
Bank's liability on acceptances executed and outstanding........................................ 66,149
Other liabilities............................................................................... 878,947
Total liabilities............................................................................... 36,203,185
----------
EQUITY CAPITAL
Perpetual preferred stock and related surplus................................................... 0
Common stock.................................................................................... 29,931
Surplus......................................................................................... 450,003
Undivided profits and capital reserves/Net unrealized holding gains (losses).................... 1,857,021
Net unrealized holding gains (losses) on available-for-sale securities.......................... 18,136
Cumulative foreign currency translation adjustments............................................. (6,256)
Total equity capital............................................................................ 2,348,835
----------
Total liabilities and equity capital............................................................ 38,552,020
----------
</TABLE>
4
<PAGE>
I, Rex S. Schuette, Senior Vice President and Comptroller of the above named
bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Rex S. Schuette
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
David A. Spina
Marshall N. Carter
Truman S. Casner
5
<PAGE>
LETTER OF TRANSMITTAL
OFFER TO EXCHANGE
13 1/2% SENIOR DISCOUNT DEBENTURES DUE 2009,
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED,
FOR AN EQUAL PRINCIPAL AMOUNT AT MATURITY OF
13 1/2% SENIOR DISCOUNT DEBENTURES DUE 2009
OF
AKI HOLDING CORP.
- -------------------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON 1998, (AS SUCH DATE AND TIME MAY BE EXTENDED BY THE COMPANY IN
ITS SOLE DISCRETION (THE "EXPIRATION DATE")). TENDERS MAY BE WITHDRAWN PRIOR TO
THE EXPIRATION DATE.
- -------------------------------------------------------------------------------
The Exchange Agent For The Exchange Offer Is
STATE STREET BANK AND TRUST COMPANY
<TABLE>
<CAPTION>
<S> <C> <C>
By Registered or Certified Mail: Facsimile Transmissions: By Hand Or Overnight Delivery in Boston:
(Eligible institutions only)
State Street Bank and Trust Company (617) 664-5371 State Street Bank and Trust Company
P.O. Box 778 Two International Plaza
Boston, Massachusetts 02102 Fourth Floor
Attn.: Corporate Trust Department Boston, Massachusetts 02110
Attn.: Corporate Trust Department
For Information Call: By Hand Or Overnight Delivery in New York (as Drop
(617) 664-5587 Agent):
State Street Bank and Trust Company, N.A.
61 Broadway, 15th Floor
Corporate Trust Window
New York, New York 10006
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO
A NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
1
<PAGE>
The undersigned hereby acknowledges receipt of the Prospectus dated
October ___ , 1998 ( the "Prospectus") of AKI Holding Corp., a Delaware
corporation (the "Company"), and this Letter of Transmittal (the "Letter of
Transmittal"), that together constitute the Company's offer (the "Exchange
Offer") to exchange $1,000 in principal amount at maturity of its newly issued
13 1/2% Senior Discount Debentures due 2009, which have been registered under
the Securities Act of 1933, as amended (the "Securities Act") (the "New
Debentures") for each $1,000 in principal amount at maturity of its outstanding
13 1/2% Senior Discount Debentures due 2009, (the "Old Debentures"). The New
Debentures and the Old Debentures are collectively referred to as the
"Debentures." Capitalized terms used and not defined herein have the meanings
ascribed to them in the Prospectus.
This Letter of Transmittal is to be completed by holders of Old
Debentures either if Old Debentures are to be forwarded herewith or if tenders
of Old Debentures are to be made by book-entry transfer to an account
maintained by State Street Bank and Trust Company (the "Exchange Agent") at The
Depository Trust Company (the "Book-Entry Transfer Facility" or "DTC") pursuant
to the procedures set forth in "The Exchange Offer--Procedure for Tendering" in
the Prospectus.
Holders of Old 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."
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY
BEFORE COMPLETING THE BOXES
The undersigned has completed the appropriate boxes below and
signed this Letter of Transmittal to indicate the action the undersigned
desires to take with respect to the Exchange Offer.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
BOX 1
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DESCRIPTION OF OLD DEBENTURES TENDERED 1 2 3
Name(s) and Address(es) of Registered Holder(s), Certificate Number(s)* Aggregate Principal Amount of Principal Amount of Old
exactly as name(s) appear(s) on Old Debentures Old Debentures Debentures Tendered**
Certificate(s): (Please fill in, if blank)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Total
- -----------------------------------------------------------------------------------------------------------------------------------
* Need not be completed if Old Debentures are being tendered by book-entry holders.
** Unless otherwise indicated in the column, a holder will be deemed to have tendered all Old Debentures
- -----------------------------------------------------------------------------------------------------------------------------------
2
<PAGE>
- -----------------------------------------------------------------------------------------------------------------------------------
represented by the aggregate principal amount of Old Debentures indicated in Column 2. See Instruction 4.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
BOX 2
- -----------------------------------------------------------------------------------------------------------
BENEFICIAL OWNER(S)
- -----------------------------------------------------------------------------------------------------------
<S> <C>
State of Principal Residence of Aggregate Principal Amount of Tendered Debentures
Each Beneficial Owner of Tendered Debentures Tendered Held For Account of Beneficial Owner
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
- -------------------------------------------------------------------------------
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY)
[ ] CHECK HERE IF OLD DEBENTURES TENDERED ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE
AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE
FOLLOWING:
Name of Tendering Institution
--------------------------------------------------
Account Number
-----------------------------------------------------------------
Transaction Code Number
--------------------------------------------------------
[ ] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED
DELIVERY IF OLD DEBENTURES TENDERED ARE BEING DELIVERED PURSUANT TO
A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE
AGENT AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s)
---------------------------------------------------
Window Ticket Number (if any)
--------------------------------------
Date of Execution of Notice of Guaranteed Delivery
-----------------
Name of Institution which Guaranteed Delivery
----------------------------------
If Guaranteed Delivery is to be made By Book-Entry Transfer:
Name of Tendering Institution
--------------------------------------------------
Account Number
-----------------------------------------------------------------
Transaction Code Number
--------------------------------------------------------
[ ] CHECK HERE IF OLD DEBENTURES TENDERED BY BOOK-ENTRY TRANSFER AND
NOT ACCEPTED FOR EXCHANGE OR OTHERWISE NOT EXCHANGED ARE TO BE
RETURNED BY CREDITING THE BOOK-ENTRY TRANSFER FACILITY ACCOUNT
NUMBER SET FORTH ABOVE.
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE OLD
DEBENTURES FOR ITS OWN ACCOUNT AS A RESULT OF MARKET MAKING OR
OTHER TRADING ACTIVITIES (A "PARTICIPATING BROKER-DEALER") AND WISH
TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF
ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name:
--------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Address:
-----------------------------------------------------------------------
4
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders the principal amount of Old
Debentures described in the Box 1 above (the "Tendered Debentures") pursuant to
the terms and conditions described in the Prospectus and this Letter of
Transmittal. The undersigned is the registered owner of all the Tendered
Debentures and the undersigned represents that it has received from each
beneficial owner of the Tendered Debentures ("Beneficial Owners") a duly
completed and executed form of "Instruction to Registered Holder and/or book
entry transfer participant from Beneficial Owner" accompanying this Letter of
Transmittal, instructing the undersigned to take the action described in the
Letter of Transmittal.
Subject to, and effective upon, the acceptance for exchange of all
or any portion of the Tendered Debentures, the undersigned hereby exchanges,
assigns and transfers to, or upon the order of, the Company, all right, title
and interest in, to and under the Tendered Debentures.
Unless otherwise indicated herein in the box entitled "Special
Issuance Instructions" below, the undersigned hereby directs that the New
Debentures be issued in the name(s) of the undersigned or, in the case of a
book-entry transfer of Tendered Debentures, that such New Debentures be
credited to the account indicated above maintained at DTC. If applicable,
substitute Certificates representing Old Debentures not exchanged or not
accepted for exchange will be issued to the undersigned or, in the case of a
book-entry transfer of Tendered Debentures, will be credited to the account
indicated above maintained at DTC. Similarly, unless otherwise indicated under
"Special Delivery Instructions, " please deliver New Debentures to the
undersigned at the address shown below the undersigned's signature.
The undersigned hereby irrevocably constitutes and appoints the
Exchange Agent as its agent and attorney-in-fact (with full knowledge that the
Exchange Agent also acts as the agent of the Company in connection with the
Exchange Offer and as Trustee under the Indenture for the Debentures) with
respect to the Tendered Debentures, with full power of substitution (such power
of attorney being deemed to be an irrevocable power coupled with an interest),
subject only to the right of withdrawal described in the Prospectus, to (i)
deliver Tendered Debentures to the Company together with all accompanying
evidences of transfer and authenticity to, or upon the order of, the Company,
upon receipt by the Exchange Agent, as the undersigned's agent, of the New
Debentures to be issued in exchange for Tendered Debentures, (ii) present such
Tendered Debentures for transfer, and to transfer the Tendered Debentures on
the books of the Company, and (iii) receive for the account of the Company all
benefits and otherwise exercise all rights of beneficial ownership of such
Tendered Debentures, all in accordance with the terms and conditions of the
Exchange Offer.
The undersigned understands that tenders of Old Debentures pursuant
to any one of the procedures described in "The Exchange Offer--Procedure for
Tendering" in the Prospectus and in the instructions attached hereto will, upon
the Company's acceptance for exchange of such Old Debentures tendered,
constitute a binding agreement between the undersigned and the Company upon the
terms and subject to the conditions of the Exchange Offer. The undersigned
recognizes that, under certain circumstances set forth in the Prospectus, the
Company may not be required to accept for exchange any of the Old Debentures
tendered hereby. All authority herein conferred or agreed to be conferred shall
survive the death or incapacity of the undersigned and any Beneficial Owner(s),
and every obligation of the undersigned or any
5
<PAGE>
Beneficial Owners hereunder shall be binding upon their heirs, representatives,
successors, and assigns of the undersigned and such Beneficial Owner(s).
The undersigned hereby represents and warrants that the undersigned
has full power and authority to tender, exchange, assign and transfer the
Tendered Debentures and that, when the same are accepted for exchange, the
company will acquire good, marketable and unencumbered title thereto, free and
clear of all liens, restrictions, charges and encumbrances, and that the Old
Debentures tendered hereby are not subject to any adverse claims or proxies.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the company or the exchange agent to be necessary or
desirable to complete the exchange, assignment and transfer of the Tendered
Debentures, and the undersigned will comply with its obligations under the
registration rights agreement. The undersigned has read and agrees to all of
the terms of the Exchange Offer.
If any Old Debentures tendered are not exchanged pursuant to the
Exchange Offer for any reason, or if the certificate or certificates (the
"Certificates") for such Old Debentures are submitted in a principal amount not
tendered or accepted for exchange, Certificates for such nonexchanged or
nontendered Old Debentures will be returned (or, in the case of Old Debentures
tendered by book-entry transfer, such Old Debentures will be credited to an
account maintained at DTC), without expense to the tendering holder, promptly
following the expiration or termination of the Exchange Offer.
The undersigned hereby represents and warrants that the information
set forth in Box 2 is true and correct.
By tendering Old Debentures and executing this Letter of
Transmittal, the undersigned, and each Beneficial Owner hereby represents and
warrants that (i) the New Debentures acquired pursuant to the Exchange Offer
are being acquired in the ordinary course of business of the undersigned, (ii)
neither the undersigned nor any such other person has an arrangement or
understanding with any person to participate in the distribution within the
meaning of the Securities Act of such New Debentures, (iii) if the undersigned
is not a broker-dealer, or is a broker-dealer but will not receive New
Debentures for its own account in exchange for Old Debentures, neither the
undersigned nor any such other person is engaged in or intends to participate
in the distribution of such New Debentures and (iv) neither the undersigned nor
any such other person is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act or, if the undersigned is an "affiliate,"
that the undersigned will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
The undersigned and each Beneficial Owner acknowledge and agree
that any person participating in the Exchange Offer for the purpose of
distributing the New Debentures must comply with the registration and
prospectus delivery requirements of the Securities Act, in connection with a
secondary resale transaction of the New Debentures acquired by such person and
cannot rely on the position of the Staff of the Securities and Exchange
Commission (the "Commission") set forth in the no-action letters that are
discussed in the section of the Prospectus entitled "The Exchange
Offer--Purpose and Effects of the Exchange Offer." The undersigned and each
Beneficial Owner understands that any such secondary resale transaction should
be covered by an effective registration statement containing the selling
security holder information required by Item 507 of Regulation S-K of the
Commission.
6
<PAGE>
If the undersigned is a broker-dealer that will receive New
Debentures for its own account in exchange for Old Debentures that were
acquired as a result of market-making or other trading activities, it
acknowledges that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Debentures; however,
by so acknowledging and delivering a prospectus, the undersigned will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
The New 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. 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.
7
<PAGE>
- -------------------------------------------------------------------------------
HOLDER(S) SIGN HERE
(SEE INSTRUCTIONS 2, 5 AND 6)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 ON PAGE 19)
(NOTE: SIGNATURE(S) MUST BE GUARANTEED
IF REQUIRED BY INSTRUCTION 2)
Must be signed by registered holder(s) exactly as name(s) appear(s)
on the face of the Certificate(s) for the Old Debentures hereby tendered or in
whose name Old Debentures are registered on the books of the Company, or by any
person(s) authorized to become the registered holder(s) by endorsements and
documents transmitted herewith (including such opinions of counsel,
certifications and other information as may be required by the Company for the
Old Debentures to comply with the restrictions on transfer applicable to the
Old Debentures). If signature is by an attorney-in-fact, executor,
administrator, trustee, guardian, officer of a corporation or another acting in
a fiduciary capacity or representative capacity, please set forth the signer's
full title. See Instruction 5.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(SIGNATURE(S) OF HOLDER(S))
Date: , 199
---------------------
Name(s)
------------------------------------------------------------------------
------------------------------------------------------------------------
(PLEASE PRINT)
Capacity (full title)
----------------------------------------------------------
Address
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number
-------------------------------------------------
- -------------------------------------------------------------------------------
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER(S))
- -------------------------------------------------------------------------------
8
<PAGE>
- -------------------------------------------------------------------------------
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 2 AND 5)
- -------------------------------------------------------------------------------
AUTHORIZED SIGNATURE
Date: , 199
---------------------
Name of Firm
-------------------------------------------------------------------
Capacity (full title)
----------------------------------------------------------
(PLEASE PRINT)
Address
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number
-------------------------------------------------
- -------------------------------------------------------------------------------
9
<PAGE>
- -------------------------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6)
To be completed ONLY if the New Debentures or Old Debentures not tendered are
to be issued in the name of someone other than the registered holder of the Old
Debentures whose name(s) appear(s) above.
Issue
[ ] Old Debentures not tendered to:
[ ] New Debentures to:
Name(s)
------------------------------------------------------------------------
Address
------------------------------------------------------------------------
------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and
Telephone Number
---------------------------------------------------------------
- -------------------------------------------------------------------------------
(TAX IDENTIFICATION OR SOCIAL
SECURITY NUMBER(S))
- -------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6)
To be completed ONLY if New Debentures or Old Debentures not tendered are to be
sent to someone other than the registered holder of the Old Debentures whose
name(s) appear(s) above, or such registered holder(s) at an address other than
that shown above.
Mail
[ ] Old Debentures not tendered to:
[ ] New Debentures to:
Name(s)
------------------------------------------------------------------------
Address
------------------------------------------------------------------------
------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and
Telephone Number
---------------------------------------------------------------
- -------------------------------------------------------------------------------
(TAX IDENTIFICATION OR SOCIAL
SECURITY NUMBER(S))
- -------------------------------------------------------------------------------
11
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED
DELIVERY PROCEDURES. This Letter of Transmittal is to be completed either if
(a) Certificates are to be forwarded herewith or (b) tenders are to be made
pursuant to the procedures for tender by book-entry transfer set forth in "The
Exchange Offer-- Procedure for Tendering" in the Prospectus. Certificates, or
timely confirmation of a book-entry transfer of such Old Debentures into the
Exchange Agent's account at DTC, as well as this Letter of Transmittal (or
facsimile thereof), properly completed and duly executed, with any required
signature guarantees, and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at its address set forth
herein on or prior to the Expiration Date. Old Debentures may be tendered in
whole or in part.
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."
Pursuant to such procedures: (i) such tender must be made by or through an
Eligible Institution (as defined below); (ii) a properly completed and duly
executed Notice of Guaranteed Delivery, substantially in the form made
available by the Company, must be received by the Exchange Agent prior to the
Expiration Date; and (iii) the Certificates (or a book-entry confirmation (as
defined in the Prospectus)) representing all tendered Old Debentures, in proper
form for transfer, together with a Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, with any required signature
guarantees and any other documents required by this Letter of Transmittal, must
be received by the Exchange Agent within three business days after the date of
execution of such Notice of Guaranteed Delivery, all as provided in "The
Exchange Offer--Guaranteed Delivery Procedures" in the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or
overnight courier or transmitted by telegram, telex, facsimile or mail to the
Exchange Agent, and must include a guarantee by an Eligible Institution in the
form set forth in such Notice. For Old Debentures to be properly tendered
pursuant to the guaranteed delivery procedure, the Exchange Agent must receive
a Notice of Guaranteed Delivery on or prior to the Expiration Date. As used
herein and in the Prospectus, "Eligible Institution" means a firm or other
entity identified in Rule 17Ad-15 under the Exchange Act as an "eligible
guarantor institution," including (as such terms are defined therein) (i) a
bank; (ii) a broker, dealer, municipal securities broker or dealer or
government securities broker or dealer; (iii) a credit union; (iv) a national
securities exchange, registered securities association or clearing agency; or
(v) a savings association that is a participant in a Securities Transfer
Association.
THE METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE
TENDERING HOLDER AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH
RETURN RECEIPT REQUESTED, PROPERLY INSURED, OR OVERNIGHT DELIVERY SERVICE IS
12
<PAGE>
RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY
DELIVERY.
DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The Company will not accept any alternative, conditional or
contingent tenders. Each tendering holder, by execution of a Letter of
Transmittal (or facsimile thereof), waives any right to receive any notice of
the acceptance of such tender.
2. GUARANTEE OF SIGNATURES. No signature guarantee on this Letter
of Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder
(which term, for purposes of this document, shall include any participant in
DTC whose name is registered on the books of the Company as the owner of the
Old Debentures) of Old Debentures tendered herewith, unless such holder(s) has
completed either the box entitled "Special Issuance Instructions" or the box
entitled "Special Delivery Instructions" above, or
(ii) such Old Debentures are tendered for the account of a firm
that is an Eligible Institution.
In all other cases, an Eligible Institution must guarantee the
signature(s) on this Letter of Transmittal. See Instruction 5.
3. INADEQUATE SPACE. If the space provided in the box captioned
"Description of Old Debentures" is inadequate, the Certificate number(s) and/or
the aggregate principal amount of Old Debentures and any other required
information should be listed on a separate signed schedule which is attached to
this Letter of Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. If less than all the Old
Debentures evidenced by any Certificate submitted are to be tendered, fill in
the principal amount of Old Debentures which are to be tendered in the box
entitled "Principal Amount of Old Debentures Tendered." In such case, new
Certificate(s) for the remainder of the Old Debentures that were evidenced by
your old Certificate(s) will only be sent to the holder of the Old Debentures,
promptly after the Expiration Date. All Old Debentures represented by
Certificates delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Old 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 the Expiration Date and
prior to acceptance for exchange by the Company. Any such notice of withdrawal
must (i) specify the name of the person having deposited the Old Debentures to
be withdrawn (the "Depositor"), (ii) identify the Old Debentures to be
withdrawn (including the certificate number or numbers and principal
13
<PAGE>
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 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
the Company, 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 promptly as practicable after withdrawal, rejection of
ender or termination of the Exchange Offer. Properly withdrawn Old Debentures
may be retendered by following one of the procedures described in "The Exchange
Offer--Procedure for Tendering" in the Prospectus at any time prior to the
Expiration Date.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND
ENDORSEMENTS. If this Letter of Transmittal is signed by the registered
holder(s) of the Old Debentures tendered hereby, the signature(s) must
correspond exactly with the name(s) as written on the face of the
Certificate(s) without alteration, enlargement or any change whatsoever.
If any of the Old Debentures tendered hereby are owned of record by
two or more joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Old Debentures are registered in different name(s)
on several Certificates, it will be necessary to complete, sign and submit as
many separate Letters of Transmittal (or facsimiles thereof) as there are
different registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers
are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing and must
submit proper evidence satisfactory to the Company, in their sole discretion,
of each such person's authority so to act.
When this Letter of Transmittal is signed by the registered
owner(s) of the Old Debentures listed and transmitted hereby, no endorsement(s)
of Certificate(s) or separate bond power(s) are required unless New Debentures
are to be issued in the name of a person other than the registered holder(s).
Signature(s) on such Certificate(s) or bond power(s) must be guaranteed by an
Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Old Debentures listed, the Certificates must be
endorsed or accompanied by appropriate bond powers, signed exactly as the name
or names of the registered owner(s) appear(s) on the face of the Certificates,
and also must be accompanied by such opinions of counsel, certifications and
other information as the Company may require in accordance with the
restrictions on transfer applicable to the Old Debentures. Signatures on such
Certificates or bond powers must be guaranteed by an Eligible Institution.
14
<PAGE>
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If New Debentures
are to be issued in the name of a person other than the signer of this Letter
of Transmittal, or if New Debentures are to be sent to someone other than the
signer of this Letter of Transmittal or to an address other than that shown
above, the appropriate boxes on this Letter of Transmittal should be completed.
Certificates for Old Debentures not exchanged will be returned by mail or, if
tendered by book-entry transfer, by crediting the account indicated above
maintained at DTC. See Instruction 4.
7. IRREGULARITIES. The Company will determine, in its sole
discretion, all questions as to the form of documents, validity, eligibility
(including time of receipt) and acceptance for exchange of any tender of Old
Debentures, which determination shall be final and binding on all parties. The
Company reserves the absolute right to reject any and all tenders determined by
either of them not to be in proper form or the acceptance of which, or exchange
for which, may, in the view of counsel to the Company, be unlawful. The Company
also reserves the absolute right, subject to applicable law, to waive any of
the conditions of the Exchange Offer set forth in the Prospectus under "The
Exchange Offer--Conditions" or any conditions or irregularity in any tender of
Old Debentures of any particular holder whether or not similar conditions or
irregularities are waived in the case of other holders. The Company's
interpretation of the terms and conditions of the Exchange Offer (including
this Letter of Transmittal and the instructions hereto) will be final and
binding. No tender of Old Debentures will be deemed to have been validly made
until all irregularities with respect to such tender have been cured or waived.
The Company, any affiliates or assigns of the Company, the Exchange Agent, or
any other person shall not be under any duty to give notification of any
irregularities in tenders or incur any liability for failure to give such
notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES.
Questions and requests for assistance may be directed to the Exchange Agent at
its address and telephone number set forth on the front of this Letter of
Transmittal. Additional copies of the Prospectus, the Notice of Guaranteed
Delivery and the Letter of Transmittal may be obtained from the Exchange Agent
or from your broker, dealer, commercial bank, trust company or other nominee.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9. Under U.S. Federal
income tax law, a holder whose tendered Old Debentures are accepted for
exchange is required to provide the Exchange Agent with such holder's correct
taxpayer identification number ("TIN") on Substitute Form W-9 below. If the
Exchange Agent is not provided with the correct TIN, the Internal Revenue
Service (the "IRS") may subject the holder or other payee to a $50 penalty. In
addition, payments to such holders or other payees with respect to Old
Debentures exchanged pursuant to the Exchange Offer may be subject to 31%
backup withholding.
The box in Part 2 of the Substitute Form W-9 may be checked if the
tendering holder has not been issued a TIN and has applied for a TIN or intends
to apply for a TIN in the near future. If the box in Part 2 is checked, the
holder or other payee must also complete the Certificate of Awaiting Taxpayer
Identification Number below in order to avoid backup withholding.
Notwithstanding that the box in Part 2 is checked and the Certificate of
Awaiting Taxpayer Identification Number is completed, the Exchange Agent will
withhold 31% of all payments made prior to the time a properly certified TIN is
provided to the Exchange Agent. The Exchange Agent will retain such amounts
withheld during the 60 day period following the date of the Substitute Form
W-9. If the holder furnishes the Exchange Agent with its TIN within 60 days
after the date of the Substitute Form W-9, the amounts retained during the 60
day period will be remitted to the
15
<PAGE>
holder and no further amounts shall be retained or withheld from payments made
to the holder thereafter. If, however, the holder has not provided the Exchange
Agent with its TIN within such 60 day period, amounts withheld will be remitted
to the IRS as backup withholding. In addition, 31% of all payments made
thereafter will be withheld and remitted to the IRS until a correct TIN is
provided.
The holder is required to give the Exchange Agent the TIN (e.g.,
social security number or employer identification number) of the registered
owner of the Old Debentures or of the last transferee appearing on the
transfers attached to, or endorsed on, the Old Debentures. If the Old
Debentures are registered in more than one name or are not in the name of the
actual owner, consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
number to report.
Certain holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to these backup
withholding and reporting requirements. Such holders should nevertheless
complete the attached Substitute Form W-9 below, and write "exempt" on the face
thereof, to avoid possible erroneous backup withholding. A foreign person may
qualify as an exempt recipient by submitting a properly completed IRS Form W-8,
signed under penalties of perjury, attesting to that holder's exempt status.
Please consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
holders are exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income tax.
Rather, the U.S. Federal income tax liability of a person subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be obtained.
10. WAIVER OF CONDITIONS. The Company reserves the absolute right
to waive satisfaction of any or all conditions enumerated in the Prospectus.
11. NO CONDITIONAL TENDERS. No alternative, conditional, irregular
or contingent tenders will be accepted. All tendering holders of Old
Debentures, by execution of this Letter of Transmittal, shall waive any right
to receive notice of the acceptance of their Old Debentures for exchange.
Neither the Company, the Exchange Agent nor any other person is
obligated to give notice of any defect or irregularity with respect to any
tender of Old Debentures nor shall any of them incur any liability for failure
to give any such notice.
12. LOST, DESTROYED OR STOLEN CERTIFICATES. If any Certificate(s)
representing Old Debentures have been lost, destroyed or stolen, the holder
should promptly notify the Exchange Agent. The holder will then be instructed
as to the steps that must be taken in order to replace the Certificate(s). This
Letter of Transmittal and related documents cannot be processed until the
procedures for replacing lost, destroyed or stolen Certificate(s) have been
followed.
13. SECURITY TRANSFER TAXES. Holders who tender their Old
Debentures for exchange will not be obligated to pay any transfer taxes in
connection therewith. If, however, New Debentures are to be delivered to, or
are to be issued in the name of, any person other than the registered holder of
the Old Debentures tendered, or if a transfer tax is imposed for any reason
other than the exchange of Old
16<PAGE>
Debentures in connection with the Exchange Offer, then the amount of any such
transfer tax (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
17
<PAGE>
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF)
AND ALL OTHER REQUIRED DOCUMENTS MUST BE RECEIVED BY THE
EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
TO BE COMPLETED BY ALL TENDERING SECURITY HOLDERS
(See Instruction 9)
PAYER'S NAME: STATE STREET BANK & TRUST COMPANY
<TABLE>
<CAPTION>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
SUBSTITUTE PART 1-PLEASE PROVIDE YOUR TIN ON THE TIN:______________________________
FORM W-9 LINE AT RIGHT AND CERTIFY BY SIGNING Social Security Number or
AND DATING BELOW Employer Identification Number
DEPARTMENT OF
THE TREASURY
INTERNAL REVENUE
SERVICE
---------------------------------------------------------------------------------------------------
PART 2 - TIN Applied for [ ]
---------------------------------------------------------------------------------------------------
PAYOR'S REQUEST CERTIFICATION - UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
FOR TAXPAYER
IDENTIFICATION (1) the number shown on this form is my correct taxpayer identification number (or I am
NUMBER waiting for a number to be issued to me),
("TIN") AND
CERTIFICATION (2) I am not subject to backup withholding either because (i) I am exempt from backup
withholding, (ii) I have not been notified by the Internal Revenue Service ("IRS")
that I am subject to backup withholding as a result of a failure to report all interest
or dividends, or (iii) the IRS has notified me that I am no longer subject to
backup withholding, and
(3) any other information provided on this form is true and correct.
Signature ________________________________ Date _______________, 1998
- -----------------------------------------------------------------------------------------------------------------------
You must cross out item (iii) in Part (2) above if you have been notified by the IRS that you are subject to backup
withholding because of underreporting interest or dividends on your tax return and you have not been notified by the
IRS that you are no longer subject to backup withholding.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY IN CERTAIN CIRCUMSTANCES
RESULT IN BACKUP WITHHOLDING OF 31% OF ANY AMOUNTS PAID TO YOU PURSUANT TO THE
EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
18
<PAGE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 2 OF SUBSTITUTE FORM W-9
- -------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (2) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of all
payments made to me on account of the New Debentures shall be retained until I
provide a taxpayer identification number to the Exchange Agent and that, if I
do not provide my taxpayer identification number within 60 days, such retained
amounts shall be remitted to the Internal Revenue Service as backup withholding
and 31% of all reportable payments made to me thereafter will be withheld and
remitted to the Internal Revenue Service until I provide a taxpayer
identification number.
Signature Date , 1998
----------------------------------- -------------------
- ---------------------------------------------
Name (Please Print)
- -------------------------------------------------------------------------------
19
<PAGE>
NOTICE OF GUARANTEED DELIVERY
WITH RESPECT TO
AKI HOLDING CORP.
13 1/2 % SENIOR DISCOUNT DEBENTURES DUE 2009
This Notice of Guaranteed Delivery, or one substantially equivalent to this
form, must be used by a holder of the 13 1/2% Senior Discount Debentures due
2009 (the "Old Debentures") of AKI Holding Corp. who wishes to tender Old
Debentures to the Exchange Agent pursuant to the guaranteed delivery procedures
described in The "Exchange Offer--Guaranteed Delivery Procedures" of the
Prospectus dated October __, 1998 (as the same may be amended or supplemented
from time to time, the "Prospectus") and in Instruction 1 to the Letter of
Transmittal. In addition, in order to utilize the guaranteed delivery procedure
to tender Old Debentures pursuant to the Exchange Offer, a completed, signed
and dated Letter of Transmittal relating to the Old Debentures (or facsimile
thereof) must also be received by the Exchange Agent prior to the Expiration
Date. Capitalized terms not defined herein have the meanings assigned to them
in the Prospectus or the Letter of Transmittal.
<TABLE>
<CAPTION>
The Exchange Agent For The Exchange Offer Is:
STATE STREET BANK AND TRUST COMPANY
<S> <C> <C>
BY REGISTERED OR CERTIFIED MAIL FACSIMILE TRANSMISSIONS: BY HAND OR OVERNIGHT DELIVERY
(Eligible Institutions Only)
State Street Bank and Trust Company (617) 664-5371 State Street Bank and Trust Company
P.O. Box 778 Two International Plaza,
Boston, Massachusetts 02102 Fourth Floor
Attn.: Corporate Trust Department Boston, Massachusetts 02110
Attn.: Corporate Trust Department
For Information Call: By Hand Or Overnight Delivery in
(617) 664-5587 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
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER
THAN AS SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY
VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
<PAGE>
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLLY.
Ladies and Gentlemen:
The undersigned hereby tenders to AKI Holding Corp., upon the terms
and subject to the conditions set forth in the Prospectus and the related
Letter of Transmittal (which together constitute the "Exchange Offer"), receipt
of which is hereby acknowledged, the principal amount of Old Debentures set
forth below pursuant to the guaranteed delivery procedures set forth in the
Prospectus under the caption "The Exchange Offer--Procedure for Tendering" and
in Instruction 1 of the Letter of Transmittal.
Aggregate Principal Name(s) of Registered Holder(s):
Amount Tendered: $ ___________________ ________________________________
Certificate No(s)
(if known): __________________________
(Total Principal Amount Represented by
Old Debentures Certificate(s))
$_______________________________
[ ] The Depositary Trust Company ("DTC")
(Check if Old Debentures will be tendered by book-entry transfer and provide
the following information):
DTC Account Number: ____________________
Date: __________________________________
All authority herein conferred or agreed to be conferred shall
survive the death or incapacity of the undersigned and every obligation of the
undersigned hereunder shall be binding upon the heirs personal representatives,
successors and assigns of the undersigned.
PLEASE SIGN HERE
X ________________________________ ________________________
X ________________________________ _________________________
Signature(s) of Owner(s) Date
or Authorized Signatory
Area Code and Telephone Number: ___________________________
<PAGE>
Please print name(s) and address(es)
Name(s): ________________________________________________________________
________________________________________________________________
________________________________________________________________
Capacity: ________________________________________________________________
Address(es): ________________________________________________________________
<PAGE>
- -------------------------------------------------------------------------------
THE GUARANTEE ON THE REVERSE SIDE MUST BE COMPLETED
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., or is a commercial bank or trust company having an office or
correspondent in the United States, or is otherwise an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, hereby guarantees deposit
with the Exchange Agent, at one of its addresses set forth above, either
the Old Debentures tendered hereby in proper form for transfer, or
confirmation of the book-entry transfer of such Old Debentures to the
Exchange Agent's account at DTC, pursuant to the procedures for
book-entry transfer set forth in the Prospectus, in either case together
with one or more properly completed and duly executed Letter(s) of
Transmittal (or facsimile thereof) and any other required documents
within three business days after the date of execution of this Notice of
Guaranteed Delivery.
The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal and the Old Debentures tendered hereby to the Exchange Agent
within the time period set forth above and that failure to do so could
result in a financial loss to the undersigned.
--------------------------- ------------------------------------
Name of Firm Authorized Signature
--------------------------- ------------------------------------
Address Title
--------------------------- ------------------------------------
Zip Code (Please Type or Print)
Area Code and Telephone No. Dated:
---------- -----------------------------
- -------------------------------------------------------------------------------
NOTE: DO NOT SEND CERTIFICATES FOR OLD DEBENTURES WITH THIS FORM. ACTUAL
SURRENDER OF OLD DEBENTURES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, AN
EXECUTED LETTER OF TRANSMITTAL.
<PAGE>
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly
completed and duly executed copy of this Notice of Guaranteed Delivery and any
other documents required by this Notice of Guaranteed Delivery must be received
by the Exchange Agent at its address set forth herein prior to the Expiration
Date. The method of delivery of this Notice of Guaranteed Delivery and any
other required documents to the Exchange Agent is at the election and risk of
the holder, and the delivery will be deemed made only when actually received by
the Exchange Agent. If delivery is by mail, registered mail with return receipt
requested, properly insured, is recommended. Instead of delivery by mail, it is
recommended that the holder use an overnight or hand delivery service. In all
cases sufficient time should be allowed to assure timely delivery. For a
description of the guaranteed delivery procedure, see Instruction 1 of the
Letter of Transmittal.
2. SIGNATURES ON THIS NOTICE OF GUARANTEED DELIVERY. If this Notice
of Guaranteed Delivery is signed by the registered holder(s) of the Old
Debentures referred to herein, the signature must correspond with the name(s)
written on the face of the Old Debentures without alteration, enlargement, or
any change whatsoever.
If this Notice of Guaranteed Delivery is signed by a person other
than the registered holder(s) of any Old Debentures listed, this Notice of
Guaranteed Delivery must be accompanied by appropriate bond powers, signed as
the name of the registered holder(s) appears on the Old Debentures.
If this Notice of Guaranteed Delivery is signed by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation,
or other person acting in a fiduciary or representative capacity, such person
should so indicate when signing.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and
requests for assistance and requests for additional copies of the Prospectus
may be directed to the Exchange Agent at the address specified in the
Prospectus. Holders may also contact their broker, dealer, commercial bank,
trust company, or other nominee for assistance concerning the Exchange Offer.
