Subscription Agreement

SCHOLASTIC BRANDS, INC.


SUBSCRIPTION AGREEMENT


SUBSCRIPTION AGREEMENT, dated as of December 16, 1996, by and among Scholastic Brands, Inc., a Delaware corporation (the "Company"), Castle Harlan Partners II, L.P., a Delaware limited partnership ("CHP"), Dresdner Bank AG, Grand Cayman Branch ("Dresdner"), and Castle Harlan Offshore Partners, L.P., a Delaware limited partnership ("Offshore"), and each of the persons who shall, after the date hereof, acquire Warrants or shares of Common Stock or Preferred Stock (as hereinafter defined) and join in and become a party to this Agreement by executing and delivering to the Company an Instrument of Accession in the form of Exhibit A hereto (CHP, Dresdner, Offshore and each such person who executes and delivers an Instrument of Accession, as provided in Section 4(a) hereof, are hereinafter sometimes referred to collectively as the "Stockholders" and individually as a "Stockholder").


WHEREAS, the Company has been formed to acquire substantially all of the assets of the scholastic products and recognition and affinity products businesses of each of CJC Holdings, Inc., a Texas corporation ("CJC"), and L.G. Balfour Company ("Balfour"), a Delaware corporation;


WHEREAS, prior to the execution and delivery of this Agreement, (i) the Company, CJC and certain subsidiaries of CJC have entered into an Asset Purchase Agreement, dated as of May 20, 1996, and amended as of November 21, 1996 (the "CJC Purchase Agreement"), pursuant to which the Company will acquire the scholastic and recognition and affinity businesses of CJC, and (ii) the Company, Balfour and Balfour's sole stockholder have entered into an Asset Purchase Agreement, dated as of May 20, 1996, and amended and restated as of November 21, 1996 (the "Balfour Purchase Agreement"), pursuant to which the Company will acquire the scholastic and recognition and affinity businesses of Balfour;


WHEREAS, CHP, Dresdner and Offshore have funds available to them for the purpose of investing in the Company for the acquisition of the above-mentioned businesses; and


WHEREAS, the Stockholders wish to subscribe for Warrants, Common Stock and Preferred Stock as specified in Section 2 hereof, and for a purchase price consisting of cash;


NOW, THEREFORE, the parties hereto hereby agree as follows:


1. Capitalization. The capitalization of the Company currently consists of (i) 750,000 shares of preferred stock, par value $.01 per share, of which 100,000 shares have been designated Series A Preferred Stock (the "Series A Preferred Stock") and of which 375,000 shares have been designated Series B Preferred Stock (the "Series B Preferred Stock" and, together with the Series A Preferred Stock, the "Preferred Stock"), none of which have been issued, and (ii) 750,000 shares of Common Stock, par value $.01 per share (the "Common Stock"), 100 shares of which have been issued to CHP. The terms of the Common Stock and the


Preferred Stock are set forth in the Certificate of Incorporation, as amended (including, without limitation, by Certificates of Designations for the Series A Preferred Stock and the Series B Preferred Stock) of the Company, which has been furnished to each of the Stockholders.


2. Subscription.


(a) Each of the Stockholders, subject to the terms and conditions hereof, severally hereby subscribes for such number of Common Stock Purchase Warrants of the Company exercisable for shares of Common Stock and shares of Common Stock, Series A Preferred Stock and Series B Preferred Stock for such purchase price, as is set forth opposite such Stockholder's name on Exhibit B hereto. Payment for said Warrants and shares shall be made in full to the Company at the Closing (as defined in the Purchase Agreements) in cash, by certified check payable to the Company or by wire transfer, against receipt of a Warrant or Warrants and a certificate or certificates registered in the name or names indicated on Exhibit B hereto, representing the number of Warrants and shares of Common Stock and Preferred Stock so purchased by such Stockholder, and such shares shall be validly issued, fully paid and non-assessable. Concurrently with the issuance of such shares to the Stockholders, CHP shall return, and the Company shall cancel, the certificate representing 100 shares of Common Stock heretofore issued to CHP. The Common Stock, Preferred Stock and Warrants issued pursuant to this Agreement, and the shares of Common Stock issuable upon exercise of the Warrants ("Warrant Shares") are sometimes collectively referred to herein as the "Company Securities."


(b) At the time an Instrument of Accession is delivered to the Company, Exhibit B hereto shall be amended to reflect accurately either (i) the amount of capital contributed to the Company by each additional Stockholder, and the number of shares of Common Stock and Preferred Stock issued to such Stockholder or (ii) in the case of a transfer of Company Securities by a Stockholder, the number of Warrants and/or shares of Common and/or Preferred Stock owned by such Stockholder and its transferee. The representations set forth in Section 3 hereof shall be deemed reconfirmed and remade by each such Stockholder in connection with the issuance or transfer of any Warrants or shares of Common Stock or Preferred Stock to such Stockholder after the date hereof.


(c) References herein to Warrants and shares of Common Stock and Preferred Stock held or owned by the Stockholders shall include the Warrants and shares of Common Stock and Preferred Stock issued to or acquired by Stockholders after the date hereof, whether by exercise of any warrants or options, purchase or otherwise.


3. Stockholders' Representations.


(a) Each Stockholder severally represents and warrants that he, she or it has acquired the Company Securities for investment for his, her or its own account and not with a view to, or for resale in connection with, the distribution or other disposition thereof in violation of the Securities Act of 1933, as amended (the "Securities Act"). Each Stockholder severally agrees that he, she or it will not, directly or indirectly, offer, transfer, sell, pledge, hypothecate or otherwise dispose of any Company Securities (or solicit any offers to buy, purchase, or otherwise acquire or take a pledge of any Company Securities), except in


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compliance with the Securities Act of 1933, as amended (the "Securities Act"), the rules and regulations promulgated thereunder, applicable state securities laws and the provisions of this Agreement. Each Stockholder severally represents and warrants that no other person or entity has any interest, beneficial or otherwise, in the Company Securities subscribed for and to be held by him, her or it.


(b) Each Stockholder severally acknowledges that he, she or it has been advised that (i) the Company Securities are not registered under the Securities Act, and the Company has no obligation to effectuate any such registration, (ii) the Company Securities must be held indefinitely and the Stockholder must continue to bear the economic risk of the investment in the Company Securities unless it is subsequently registered under the Securities Act or an exemption from such registration is available, (iii) Rule 144 promulgated under the Securities Act is not presently available with respect to the sale of any securities of the Company, and the Company has no obligation nor any intention to make such Rule available, (iv) when and if any of the Company Securities may be disposed of without registration in reliance on Rule 144, the amounts that may be disposed of may be limited in accordance with the terms and conditions of such Rule, (v) if the Rule 144 exemption is not available, public sale without registration will require compliance with Regulation D or some other exemption under the Securities Act, (vi) restrictive legends will be placed on the certificates representing the Company Securities and (vii) a notation will be made in the appropriate records of the Company indicating that the Company Securities are subject to restrictions on transfer and, if the Company should at some time in the future engage the services of a stock transfer agent, appropriate stop-transfer restrictions will be issued to such transfer agent with respect to the Company Securities.


(c) Each Stockholder agrees with each other Stockholder and the Company that if any Company Securities are disposed of by him, her or it (i) in reliance upon Rule 144 under the Securities Act, he, she or it shall deliver to the Company at or prior to the time of such disposition an executed copy of Form 144 (if required by Rule 144) and such other documentation as the Company may reasonably require in connection with such disposition or (ii) in reliance on Rule 144 or pursuant to another exemption from registration under the Securities Act, he, she or it shall deliver to the Company a legal opinion, reasonably satisfactory to the Company, as to the availability of and compliance with such exemption.


(d) Each Stockholder severally represents and warrants that (i) he, she or it can afford to hold the Company Securities for an indefinite period and to suffer the complete loss of his, her or its investment in the Company Securities, (ii) he, she or it understands and has taken cognizance of all the risk factors related to his, her or its acquisition of the Company Securities and (iii) his, her or its knowledge and experience in financial and business matters is such that he, she or it is capable of evaluating the merits and risks of acquiring the Company Securities.


4. Restrictions on Transfer.


(a) Except as provided in Sections 4 and 5 hereof, the Stockholders shall not transfer or otherwise dispose of any Common Stock (other than Warrant Shares the


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transfer or other disposition of which shall be governed by paragraphs (e) and (f) below) or Series B Preferred Stock (collectively referred to herein as the "Limited Transfer Securities") owned by such Stockholders, or any interest therein, and any attempt by such Stockholders to effect a transfer or disposition in violation of this Section 4 or Section 5 hereof shall be void and ineffective for all purposes. The words "transfer" and "dispose" include the making of any sale, exchange, assignment, gift, security interest, pledge or other encumbrance, or any contract therefor, any voting trust or other agreement or arrangement with respect to the transfer of voting rights or any other beneficial interest in the Limited Transfer Securities, the creation of any other claim thereto or any other transfer or disposition whatsoever, whether voluntary or involuntary, affecting the right, title, interest or possession in or to the Limited Transfer Securities.


Subject to the last sentence of this paragraph, nothing in this Section 4 or in Section 5 hereof shall prevent the transfer or other disposition of the Limited Transfer Securities: (i) to a personal representative or to one or more members of any Stockholder's family or to trusts or similar entities for their benefit, (ii) to any other Stockholder or to any person or entity controlling, controlled by, or under common control with, any Stockholder, (iii) upon any liquidation or any other distribution to the partners or any other holders of a beneficial interest in any Stockholder or (iv) between or among CHP and/or any of its affiliates; provided, however, that such transferee(s) shall take such Limited Transfer Securities, subject to and be fully bound by this Agreement with the same effect as if he, she or it were a party hereto and shall execute and deliver to the Company an Instrument of Accession in the form of Exhibit A hereto and references herein to Common Stock or Preferred Stock held or owned by any Stockholder shall be deemed to include Common Stock or Preferred Stock held or owned by any such transferee(s) (and the transferee shall be deemed a Stockholder for purposes of this Agreement). As used in this Agreement, the term "personal representative" shall mean the executor or executors of the will or administrator or administrators of the estate, the heirs, legatees or other beneficiaries thereunder and all other legal representatives (by operation of law or otherwise) of a holder of Limited Transfer Securities. Notwithstanding the foregoing, however, no such transfer shall be made, unless consented to by the Company, to any person, group or entity that may be deemed to be a competitor of the Company (as reasonably determined by the Board of Directors).


(b) Whenever this Agreement shall terminate as to any Company Securities pursuant to Section 7(b) hereof, the Stockholders owning such shares shall be entitled to receive, promptly upon presentment to the Company of the certificate or certificates evidencing the same, a certificate or certificates not bearing the restrictive legend provided for in Section 4(c) hereof, provided, however, that if such termination occurs as a result of a transfer pursuant to Rule 144A as permitted by Section 7(b)(ii) hereof, only the first two sentences of such legend shall be removed.


(c) The parties hereto agree that each stock certificate representing Common Stock or Preferred Stock issued to any holder bound by the terms hereof shall bear the following legend:


SHARES OF THE COMPANY REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO A SUBSCRIPTION


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AGREEMENT DATED AS OF DECEMBER 16, 1996, WHICH CONTAINS
PROVISIONS REGARDING THE RESTRICTIONS ON THE TRANSFER OF SUCH
SHARES AND OTHER MATTERS. A COPY OF SUCH AGREEMENT IS
AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE
COMPANY. THE SHARES REPRESENTED BY THIS CERTIFICATE WERE NOT
REGISTERED UNDER, AND ARE SUBJECT TO, THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION UNDER THE SECURITIES ACT OR IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT.


(d) The parties hereto agree that each Warrant issued to any holder bound by the terms hereof shall bear the legend required by the terms of the Warrant.


(e) The Warrants, the Warrant Shares and the shares of Series A Preferred Stock may not be sold, assigned, pledged, hypothecated, encumbered or in any manner transferred or disposed of, in whole or in part, except pursuant to an effective registration under the Securities Act or in a transaction exempt from registration under the Securities Act and in compliance with the provisions of the state securities or Blue Sky laws and the terms and conditions hereof. The Company may require a legal opinion, reasonably satisfactory to the Company, as to the availability of and compliance with such exemptions and the state securities or Blue Sky laws.


(f) Pursuant to this Agreement, each initial Stockholder subscribed for and purchased an equal number of shares of Series A Preferred Stock and Warrant to purchase shares of Common Stock. Until the first anniversary of this Agreement (the "Exercise Date"), that portion of each Warrant representing the right to purchase one share of Common Stock shall attach to, and be transferable only in connection with, one share of Series A Preferred Stock purchased by each Stockholder pursuant hereto. Until the Exercise Date, any proposed transfer of shares of Series A Preferred Stock or Warrants must satisfy the transfer restrictions contained in paragraph (e) above and in the Warrants and such securities may only be transferred together such that an equal number of shares of Series A Preferred Stock and Warrants exercisable for such number of shares of Common Stock shall be transferred (subject to the adjustment provisions contained in the Warrant). On and after the Exercise Date, the Warrants and shares of Series A Preferred Stock shall be separately transferable, (i) in the case of the Warrants, subject to any transfer restrictions contained or referenced in the Warrant, and (ii) in the case of the Series A Preferred Stock, subje ...