Recapitalization Term Sheet
This
Recapitalization Term Sheet (this “Term Sheet”), dated February
9, 2010, between the special committee of Crown’s Board of Directors and H C
Crown Corp., represents the non-binding terms of a recapitalization transaction
(the “Recapitalization”) in respect
of Crown Media Holdings, Inc. (“Crown”). This Term
Sheet is subject to completion of financial, legal, tax and business due
diligence, the execution of definitive documentation, and the procurement of all
requisite consents and approvals relating to the transactions contemplated by
the Recapitalization. Final documentation of such transactions may
contain terms and provisions that are different from, or in addition to, the
terms and provisions set forth herein.
In the
Recapitalization:
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$315
million principal amount of the HCC Debt (as defined below) would be
restructured into new debt instruments on the terms set forth in Schedule
A of this Term Sheet (the “New Debt”), $185 million
principal amount of the HCC Debt would be converted into an equal amount
of convertible preferred stock of Crown on the terms set forth in Schedule
B of this Term Sheet (the “Convertible Preferred
Stock”), and the balance of the HCC Debt as of the closing of the
Recapitalization (the “Closing Date”) would be
converted into shares of common stock of Crown (“Common Stock”), pari passu with the
existing Common Stock, at the Conversion Price (as defined below). As a
result of the Recapitalization, all of the HCC Debt, except to the extent
converted and continued as New Debt, shall be extinguished and
discharged.
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“HCC Debt” shall mean
(i) the aggregate principal amount of all indebtedness (including accounts
payable and open intercompany accounts) of Crown owed to Hallmark Cards,
Incorporated and its other subsidiaries and affiliates (“Hallmark”), (ii) all
accrued and unpaid interest thereon through the Closing Date (excluding
accrued but unpaid interest on the 2001 Note, the 2005 Note and the 2006
Note) and (iii) any amounts accruing under the Tax Sharing Agreement (as
defined below) through December 31, 2009. For the avoidance of
doubt, any interest accrued on the 2001 Note, the 2005 Note and the 2006
Note through the Closing Date will be paid in cash, and any amounts
accruing under the Tax Sharing Agreement from and after January 1, 2010
will be paid as provided for in the Tax Sharing Agreement. For
purposes of this Term Sheet, “2001 Note” shall mean
the Promissory Note, dated as of December 14, 2001, of Crown in the
original principal amount of $75 million payable to Hallmark; “2005 Note” shall mean
the Promissory Note, dated as of October 1, 2005, of a wholly-owned
subsidiary of Crown in the original principal amount of $132,785,424
payable to Hallmark; and “2006 Note” shall mean
the Promissory Note, dated as of March 21, 2006, of Crown in the original
principal amount of $70,414,087.87 payable to
Hallmark.
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“Conversion Price” shall
mean the rate equal to (x) the quantity of (i) the total HCC Debt as of
the Date of Determination, less (ii) $500 million, divided by (y) the
Conversion Price Shares. “Conversion Price
Shares” means a notional number of shares of Common Stock which,
when combined with the number of shares of Common Stock beneficially owned
by Hallmark as of the Date of Determination (for purposes of such
calculation (x) including with respect to Hallmark Entertainment
Investments Co. ("HEIC") only Xxxxxxxx’s pro rata portion of the Common
Stock owned by HEIC, and (y) excluding the shares of Common Stock that
will be receivable by Hallmark upon conversion of the Convertible
Preferred Stock), will equal 90.1% of the sum of (i) all outstanding
shares of Common Stock on the Date of Determination prior to the Closing,
(ii) the Conversion Price Shares and (iii) all shares potentially issuable
upon exercise of all Outstanding Options as of the Date of
Determination.
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“Date of Determination” shall
mean the Closing Date, provided that if the Closing Date occurs on or after
March 31, 2010, the “Date of Determination” shall be deemed to be March 31,
2010.
Schedule
E to this Term Sheet sets forth a sample calculation of the number of
shares of Common Stock to be issued in the Recapitalization.
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The
terms of the New Debt would include the
following:
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Maturity: December
31, 2013.
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Tranches:
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Tranche
1 of $200 million would be cash-pay and would bear interest at the rate of
9.5% per annum through December 31, 2011, increasing to 12% on and after
January 1, 2012 through December 31,
2013.
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Tranche
2 of $115 million would be payable-in-kind (“PIK”) through December
31, 2010 and would become cash-pay for the quarterly period beginning on
January 1, 2011 and for all quarterly periods thereafter. The interest
rate would be 11.5% through December 31, 2011, increasing to 14% on and
after January 1, 2012 and continuing through December 31,
2013.
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PIK Toggle: Crown would
have the option to PIK up to three quarterly cash payments in the
aggregate for Tranche 1 and Tranche 2. For the avoidance of
doubt, contractual PIK payments under Tranche 2 shall not reduce the
number of optional PIK payments available to Crown, and if Crown opts to
PIK both Tranche 1 and Tranche 2 cash payments in a single quarter then
that shall count as two of Crown’s three quarterly PIK
options.
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Pre-payment:
Pre-payable at any time at par plus accrued
interest.
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The
terms of the Convertible Preferred Stock would include the
following:
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Liquidation preference:
$1,000 per share plus accrued but unpaid dividends thereon, which
as of the Closing Date will equal $185 million and as provided in Schedule
B.
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Dividends: No dividends
shall accrue or be payable from the date of issue of the Convertible
Preferred Stock through December 31, 2010; cumulative PIK dividends shall
accrue from and after January 1, 2011 through December 31, 2011 at the
rate of 14%; cumulative PIK dividends shall accrue from and after January
1, 2012 through December 31, 2014 at the rate of 16%; and cumulative
cash-pay dividends shall accrue for all periods thereafter at the rate of
16%, in each case payable solely out of lawfully available
surplus. The Convertible Preferred Stock shall participate with
the Common Stock as to dividends on an “as converted”
basis. Crown may elect to pay accumulated XXX dividends in cash
at any time, subject to lawfully available
surplus.
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Preferred conversion price:
Each share of Convertible Preferred Stock is convertible into
Common Stock at a rate equal to the Conversion Price, with full-ratchet
anti-dilution protection.
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Tax Sharing Agreement:
The existing Federal Income Tax Sharing Agreement between Hallmark and
Crown (the “Existing
Federal Income Tax Sharing Agreement”) would be amended effective
as of January 1, 2010 as set forth in Schedule C of this Term Sheet (the
“Amended Federal Income
Tax Sharing Agreement” and, together with the Existing Federal
Income Tax Sharing Agreement, the “Tax Sharing
Agreement”). The first payment by Crown pursuant to the
Tax Sharing Agreement shall occur after the first full quarter following
the Closing Date and shall be made in respect of the period commencing
from January 1, 2010 through the last day of the first full quarter
following the Closing Date.
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Registration Rights
Agreement: Crown and Hallmark would enter into a Registration
Rights Agreement as set forth in Schedule D of this Term
Sheet.
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Mergers: Two
intermediate holding companies would be merged with and into Crown, and
the stockholders of those companies would receive their pro rata
direct
ownership of Common Stock in connection therewith (the “Mergers”); one of the
Mergers would effect an amendment to Crown’s certificate of incorporation
to eliminate the dual-class nature of the Common Stock. Such
amendment would include any other provisions that may be necessary or
advisable to effect the Recapitalization, including an increase in the
authorized number of shares of capital stock of
Crown.
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Revolver: Crown
will use its commercially reasonable efforts to secure a revolving line of
credit from a third party lender of up to $30 million (the “Revolver”) until the
earlier of (i) a refinancing of the New Debt or (ii) December 31, 2013
(the “Revolver Outside
Date”). Xxxxxxxx will agree to guarantee $30 million of
the Revolver (a “Revolver Guarantee”)
through the Revolver Outside Date and will reasonably cooperate with any
prospective provider of a Revolver. The Revolver Guarantee
shall have terms and conditions no less favorable to Crown than those
provided under the existing XX Xxxxxx Facility, including guarantee fees
equal to 12.5bps on any undrawn portion of the Revolver and 75bps on any
drawn portion of the Revolver (it being understood that Hallmark is not
guaranteeing that Crown will be able to obtain a Revolver on any
particular terms). The definitive documents will provide that
the availability of a Revolver (with a term of not less than one year and
on other terms reasonably acceptable to Crown) shall be a condition to
closing of the Recapitalization.
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Waiver
Agreement: The Amended and Restated Waiver and Standby
Purchase Agreement, which was entered into on March 10, 2008 and most
recently amended in May 2009 (the “Waiver Agreement”),
shall be further amended to provide that the waiver thereunder shall
terminate automatically on August 31, 2010. Additionally,
Hallmark will use its best efforts to ensure that Crown will have
continued access to up to $30 million under the existing XX Xxxxxx
Facility while the Waiver Agreement is in effect. No amounts
shall be due and payable for the year ended December 31, 2009 pursuant to
Section 7(e) of the Waiver Agreement; provided, that such amounts shall
become due and payable on August 31, 2010 if the Closing Date shall not
have occurred by such date.
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Standstill
Agreement: Hallmark would
enter into a standstill agreement (the “Standstill Agreement”)
pursuant to which it would agree that Hallmark will not acquire any
additional shares of capital stock of Crown (including pursuant to a
short-form merger) through December 31, 2013,
except:
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additional
shares of Common Stock resulting from the conversion of the Convertible
Preferred Stock;
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in
the event that Crown issues additional shares of capital stock, such
additional shares as shall be necessary to ensure that Hallmark continues
to hold at least the same percentage of the shares of all classes of Crown
capital stock as Hallmark owned immediately prior to such issuance (and
Hallmark shall be granted preemptive
rights);
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from
the Closing Date through December 31, 2011, with the prior approval of a
special committee of Crown’s Board of Directors comprised solely of
independent, disinterested directors;
and
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from
January 1, 2012 through December 31, 2013, either (i) with the prior
approval of a special committee of Crown’s Board of Directors comprised
solely of independent, disinterested directors, (ii) pursuant to a tender
offer for all of Crown’s shares of Common Stock, which tender offer is
subject to a majority-of-a-minority tender condition, or (iii) pursuant to
a “Premium Transaction” as described below under “Co-Sale
Rights.”
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Co-Sale
Rights: The Standstill Agreement would also provide
that:
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Until
December 31, 2013, Hallmark may not sell or transfer its Common Stock to a
third party, except:
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from
the Closing Date through December 31, 2013, with the prior approval of a
special committee of Crown’s Board of Directors comprised solely of
independent, disinterested directors;
and
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after
December 31, 2011, (i) in a Premium Transaction or (ii) pursuant to a
public offering or block trade in which to the knowledge of Hallmark, no
purchaser (together with its affiliates and associates) acquires
beneficial ownership of a block of shares of Crown in excess of 5% (in the
case of a public offering) or 2% (in the case of any block trade) of the
outstanding Common Stock.
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A
“Premium Transaction” is a transaction involving the sale or transfer by
Hallmark of its shares of Common Stock to a third party (by merger or otherwise)
in which all stockholders unaffiliated with Hallmark shall be entitled to
participate and shall be entitled to receive both (x) consideration equivalent
in value to the highest consideration per share of Common Stock received by
Hallmark in connection with such transaction, and (y) a premium of $0.50 per
share of Common Stock (subject to adjustment for any stock splits, combinations,
reclassifications, adjustments, sale of Common Stock by Crown, or sale of Common
Stock by Hallmark pursuant to the preceding bullet, or any similar
transaction). For the avoidance of doubt, Hallmark may effectuate a
Premium Transaction pursuant to a short-form merger (or other merger) between
Crown and Hallmark or the purchaser of its shares, so long as the holders of
Common Stock not affiliated with Hallmark receive the consideration provided for
in this paragraph in connection with such merger; it being understood that,
prior to December 31, 2011, any such Premium Transaction must first be approved
by a special committee of Crown’s Board of Directors comprised solely of
independent, disinterested directors.
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from
and after January 1, 2014 until the earlier of December 31, 2020 and such
time as Hallmark no longer beneficially owns a majority of the Common
Stock, Hallmark may not sell or transfer, in one or a series of related
transactions, a majority of the outstanding shares of Common Stock to a
third party, unless all stockholders unaffiliated with Hallmark shall at
Hallmark’s option be entitled to either (i) participate in such
transaction on the same terms as Hallmark or (ii) shall receive cash
consideration equivalent in value to the highest consideration per share
of Common Stock received by Hallmark in connection with such
transaction.
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Termination of Standstill
Agreement. The Standstill Agreement will terminate upon
a payment default on the New Debt, subject to a 60-day grace/cure
period.
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Listing
Requirements: Crown will use its commercially reasonable
efforts to maintain the listing of the Common Stock on NASDAQ through
December 31, 2013. Hallmark will (i) in connection with the
Recapitalization (and thereafter at the request of a special committee),
vote in favor of a reverse stock split with respect to the Common Stock if
the Special Committee of the Crown Board of Directors determines that such
reverse stock split is reasonably likely to prevent the delisting of the
Common Stock from NASDAQ and (ii) reasonably cooperate with Crown in
meeting with representatives of NASDAQ in support of a
listing. Through December 31, 2013, Hallmark will not cause
Crown to voluntarily delist from NASDAQ or deregister the shares of Common
Stock under the Securities and Exchange Act of 1934, as amended (except in
connection with a Premium
Transaction).
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The
parties understand that this Term Sheet does not create any legally binding
obligations on the parties hereto, and is subject to the execution of definitive
agreements with respect to the Recapitalization, which definitive agreements may
contain provisions which are different from the provisions of this Term Sheet,
and may contain additional terms and conditions. This Term Sheet
represents the parties’ entire understanding of the non-binding terms of the
proposed Recapitalization. The parties hereto acknowledge that the
terms hereof shall not be supplemented by, nor subject to interpretation as a
result of, any prior agreement or understanding, whether written and oral, among
the parties, or by the delivery of draft documents in connection
herewith. It is anticipated that such definitive agreements will
provide that Hallmark and Crown shall have the right to terminate such
definitive agreements at any time after June 30, 2010 if the Recapitalization
has not been consummated prior to such date (the “Termination Date”); provided,
however, that the obligation of Hallmark to amend the Waiver Agreement to
provide that the waiver thereunder shall terminate on August 31, 2010 and to use
its best efforts to ensure Crown's continued access to the JPMorgan Facility
through such date shall survive such Termination Date. Further, the
definitive agreements will provide, as a condition to Hallmark’s obligation to
close the Recapitalization, that Hallmark Cards, Incorporated, in its sole
discretion (but only after consultation with outside legal counsel), shall not
have determined that the status of any pending or threatened litigation or
regulatory proceedings involving Crown or its subsidiaries in connection with
the Recapitalization is unsatisfactory to Hallmark.
IN
WITNESS WHEREOF, the parties hereto have executed and delivered this Term Sheet
as of the day and year first written above.
SPECIAL
COMMITTEE OF THE BOARD OF DIRECTORS OF CROWN MEDIA HOLDINGS, INC.
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By:
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Name:
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Title:
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H C CROWN
CORP.
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By:
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Name:
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Title:
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SCHEDULE
A
Restructured Debt Terms
(“New
Debt”)
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Borrower:
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Crown
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Lender:
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Hallmark
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Guarantors:
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Guarantees
from all subsidiaries (subordinate to any Revolver
guarantees).
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Amount
of Facilities:
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Senior
secured term loan facilities to consist of:
● Tranche 1 Term Loan Facility: $200 million
senior secured term loan facility.
● Tranche 2 Term Loan Facility: $115 million
senior secured term loan facility
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Issue
Date:
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Closing
Date
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Maturity
Date:
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The
New Debt shall mature on December 31, 2013.
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Amortization:
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None.
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Security:
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All
tangible and intangible assets of Crown and the Guarantors (subordinated
to the Revolver), including for the avoidance of doubt the NICC Reserve
Account (as defined below).
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Interest
Rate & Payments:
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Tranche 1 Term Loan Facility: 9.50% cash
interest through December 31, 2011, increasing to 12% cash interest
beginning on and after January 1, 2012 and through December 31,
2013.
● Interest
payable at the end of each quarter; first payment due at the end of such
calendar quarter in which the Closing Date occurs, unless the Closing Date
occurs on the last day of a calendar quarter, in which case the first
payment would be due at the end of the next calendar quarter.
Tranche 2 Term Loan
Facility: Payable-in-kind (“PIK”) through December
31, 2010; cash-pay beginning on January 1, 2011 and for all quarterly
periods thereafter; 11.5% interest beginning as of January 1, 2010 and
continuing through December 31, 2011, increasing to 14% interest on and
after January 1, 2012 through December 31, 2013.
● Interest
payable at the end of each quarter; first cash payment due March 31,
2011.
PIK Toggle: Crown would
have the option to PIK up to three quarterly payments in the aggregate for
Tranche 1 and Tranche 2. For the avoidance of doubt, if Crown
opts to PIK both Tranche 1 and Tranche 2 cash payments in a single
quarter, then that shall count as two of Crown’s three quarterly PIK
options.
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Optional
Pre-payment
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Each
of Tranche 1 and Tranche 2 is pre-payable at par plus accrued interest, at
any time.
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Mandatory
Repayments & Excess Cash Flow Sweep:
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100%
of net cash proceeds from asset sales or other dispositions; 100% of net
cash proceeds from equity issuances; 100% of net cash proceeds from debt
issuances (exclusive of the Revolver); and 75% of Excess Cash
Flow, in each case to be applied in the following order (subject to
compliance with other loan documents, including the
Revolver).
(1)
PIK interest, if any, on Tranche 1 Term Loan; (2) principal on Tranche 1
Term Loan; (3) PIK interest on Tranche 2 Term Loan; and (4) principal on
Tranche 2 Term Loan.
“Excess
Cash Flow” will be calculated at the end of each calendar year for the
most recent twelve months and defined as an amount equal to the
greater of zero or the sum of: (a) the amount of “Cash Flow
from Operating Activities”, as shown in Borrower’s Consolidated Statement
of Cash Flows reported in its filing on form 10-K for such period, minus; (b) all cash outflows shown in the
“Cash Flow from Investing Activities” section of Borrower’s Consolidated
Statement of Cash Flows reported in its filing on form 10-K for such
period, minus; (c) any principal
payments made on capital lease obligations, as shown in the “Cash Flow
from Financing Activities” section of Borrower’s Consolidated Statement of
Cash Flows reported in its filing on form 10-K for such period, minus; (d) any net reduction to the balance
of the Revolver during such period, minus; (e) any voluntary repayment of the
Tranche 1 Loan or the Tranche 2 Loan, minus; (f) the aggregate amount of cash
transferred during such period to the NICC Reserve Account, minus; (g) any cash dividend on the
Convertible Preferred Stock during such period, minus; (h) any cash payments made pursuant
to the Tax Sharing Agreement.
· For
the calendar year ending December 31, 2010, Excess Cash Flow shall be
calculated for the period commencing on the Closing Date and ending on
December 31, 2010.
· “NICC
Reserve Account” shall be a segregated bank account held by Crown for the
sole purpose of paying the NICC Preferred Interest no later than
12/31/2010. Such account shall not exceed $25 million,
including interest.
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Negative
Covenants:
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Negative
covenants to include limitations on debt incurrence; dividends; liens;
capital expenditures; investments; restricted payments; sale/leaseback
transactions; creation of subsidiaries; changes in business conducted;
execution or amendment of material agreements; and dispositions of
property.
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Financial
Covenants:
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Minimum
EBITDA/Cash Interest Coverage Ratio of 2.0:1.0.
● “EBITDA/Cash
Interest Coverage Ratio” defined as the ratio of (a) EBITDA, for the four
consecutive fiscal quarters immediately prior to such fiscal quarter end;
to (b) Tranche 1 and Tranche 2 interest expense (excluding PIK interest)
for the four consecutive fiscal quarters immediately prior to such fiscal
quarter end.
● “EBITDA”
will be calculated for the four consecutive fiscal quarters immediately
prior to such fiscal quarter end and defined as: (x) Consolidated Net
Income PLUS (y) to the extent Consolidated Net Income was reduced by such
items: (i) provision for income taxes during such period; (ii) interest
expense deducted in computing Consolidated Net Income; (iii) total
depreciation expense and total amortization expense (other than
amortization of capitalized film costs); (iv) any extraordinary, unusual
or non-recurring expenses or losses, whether or not includable as a
separate item in the statement of such Consolidated Net Income for such
period (including, but not limited to losses on sales of assets outside of
the ordinary course of business, impairment of assets, restructuring
charges, transactions costs required for deal and write-offs of deferred
costs for such period); (v) any other non-cash charges (other than
write-offs or write-downs during such period of inventory, accounts
receivable or any other current assets or liabilities in the ordinary
course of business); MINUS (z) any extraordinary, unusual or non-recurring
income or gains (including, whether or not otherwise includable as a
separate item in the statement of such Consolidated Net Income for such
period, gains on sale of assets outside of the ordinary course of
business) for such period; any other non-cash income items increasing
Consolidated Net Income for such period, all as determined for such period
in conformity with GAAP.
● Covenant
tested at the end of each quarter, beginning with the first full quarter
ending after Closing Date.
● For
EBITDA/Cash Interest Coverage Ratio test prior to the first date on which
Tranche 1 Interest has been payable for the prior four quarters, Tranche 1
Interest expense assumed to be pro forma for four quarters.
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Other:
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Delivery
of financial statements and compliance certificate no later than 45 days
after the end of each fiscal quarter and 90 days after the fiscal year
end.
● If
Crown is in violation of EBITDA/Cash Interest Coverage Ratio covenant at
the end of a fiscal quarter, Crown must give notice to Hallmark concurrent
with the delivery of the compliance certificate.
● Provisions
of Tranche 1 and Tranche 2 Term Loans must be in compliance with other
loan documents (including the Revolver); failure to comply with terms of
other loan documents will cause a cross default.
● Default
interest rate: 2.0% in excess of the applicable rate.
● Upon
change of control arising from a Premium Transaction or a transaction
approved by a special committee of Crown's Board of Directors comprised
solely of independent, disinterested directors, principal and accrued
interest on Tranche 1 and Tranche 2 Term Loans shall become due and
payable at par.
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SCHEDULE
B
Terms of Convertible
Preferred Stock
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Issuer:
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Crown
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Holder:
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Hallmark
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Number
of Shares:
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$185
million divided by $1,000.
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Issue
Date:
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Closing
Date
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Liquidation
Preference:
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In
the event of any liquidation or winding up of Crown, the holders of the
Preferred Stock will be entitled to receive, in preference to the holders
of the Common Stock, an amount equal to the greater of (x) $1,000 per
share plus accrued but unpaid dividends thereon, or (y) that amount that
would be received by such holders on an “as converted” basis. A
consolidation, merger, reorganization or other form of acquisition of
Crown or a sale of all or substantially all of its assets will be deemed
to be a liquidation or winding up for purposes of the liquidation
preference.
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Dividends:
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No
dividends shall accrue or be payable from the Issue Date through December
31, 2010; cumulative PIK dividends shall accrue from January 1, 2011
through December 31, 2011 at the rate of 14%; cumulative PIK dividends
shall accrue from January 1, 2012 through December 31, 2014 at the rate of
16%; and cumulative cash-pay dividends shall accrue for all periods
thereafter at the rate of 16%, payable as, when and if declared solely out
of lawfully available surplus.
The
Convertible Preferred Stock shall participate with the Common Stock as to
dividends on an “as converted” basis.
Crown
may elect to pay accumulated XXX dividends in cash at any time, subject to
lawfully available surplus.
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Optional
Conversion:
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Each
share of Preferred Stock becomes and remains convertible at the earlier of
December 31, 2013, or upon a refinancing of all or substantially all of
the New Debt (a “Refinancing”) at the option of
the holder into a share of Common Stock at the rate equal to the
Liquidation Preference divided by the Preferred Conversion Price. The
“Preferred Conversion Price” will be equal to the Conversion Price,
subject to adjustments for stock splits, combinations, dividends,
recapitalizations and the like and other adjustments as provided below
under “Anti-Dilution Protection.”
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Anti-Dilution
Protection:
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The
Preferred Conversion Price will be subject to adjustment to reflect
dilution in the event that Crown issues additional shares (other than
approved employee options) at a purchase price less than the prevailing
Preferred Conversion Price. The Preferred Conversion Price will
be subject to adjustment on a full-ratchet basis.
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Mandatory
Redemption:
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Crown
must redeem, to the extent of lawfully available funds, with Excess
Refinancing Proceeds (to be defined).
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Optional
Redemption:
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By
Crown at any time, upon 10-days’ written notice, at the Liquidation
Preference. From the date of a redemption notice until the
effectiveness of the redemption, the holder of Preferred Stock shall be
entitled to convert all or any portion of its shares of Preferred Stock
into Common Stock.
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Voting
Rights:
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The
Preferred Stock will vote together with the Common Stock as a single
class, with the Preferred Stock voting on an “as converted”
basis.
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Negative
Covenants:
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The
consent of holders of more than 50% of the Preferred Stock, voting as a
separate class, will be required to approve:
● Any
offer, sale, or issuance of any debt or equity securities pari passu or
senior in right of liquidation to the Preferred Stock.
● Repurchase
or redemption of equity securities (other than from an employee following
termination), or declaration or payment of any dividend on Crown’s common
stock (other than the redemption of the Preferred Stock).
● Any
sale, merger, recapitalization, reorganization, liquidation or dissolution
of Crown.
● Any
significant acquisitions.
● Any
action that adversely alters or changes the rights, preferences or
privileges of the Preferred Stock.
● The
issuance of any additional shares of Common Stock (other than pursuant to
options outstanding on the Closing Date) or options or rights to acquire
Common Stock.
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Transferability:
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Preferred
Stock will be freely transferable subject only to those restrictions
imposed by applicable securities
laws.
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SCHEDULE
C
Terms of Amended Federal
Income Tax Sharing Agreement
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Parties:
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Hallmark
and Crown
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Current
Agreement:
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The
Federal Income Tax Sharing Agreement
(the “Agreement”) effective
March 11, 2003 shall remain in effect, subject to the following amendments
described herein, which shall be effective as of January 1,
2010.
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Eliminate
Amendment No. 1:
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Amendment
No. 1 dated August 5, 2003, shall be eliminated. Therefore, Crown shall be
allowed to deduct both cash-pay and PIK interest due to Hallmark in
calculating tax-sharing payments on a prospective
basis.
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Conversion
of HCC Debt Not a Payment of Interest:
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The
conversion of the HCC Debt into new debt or convertible preferred stock
shall not be deemed the payment of interest expense in cash to Hallmark
pursuant Amendment No. 1 dated August 5, 2003.
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Allocation
and Payment of Crown Tax Benefit or Liability:
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Sections
1(b) and 2(a)(ii) of the Agreement shall be amended such that Hallmark
shall not pay a Crown Tax Benefit (as defined in the Agreement) in
cash. Any Crown Tax Benefit may be carried forward to offset a
future Crown Tax Liability (as defined in the Agreement) pursuant to
Section 1(a), thus reducing the payment of the Crown Tax Liability in
Section 2(a)(i).
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Cancellation
of Indebtedness Income:
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The
Agreement will be amended to exclude the tax attributable to the
cancellation of indebtedness income in calculating tax sharing
payments.
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Inclusion
of Tax in HCC Debt:
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Any
amounts related to taxes owed to Hallmark prior to December 31, 2009 will
be included in the HCC Debt, which shall be converted into Common Stock
(and not paid in cash). Any amounts accruing under the Tax
Sharing Agreement from and after January 1, 2010 will be paid as provided
for in the Tax Sharing Agreement.
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SCHEDULE
D
Terms of Registration Rights
Agreement
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Parties:
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Hallmark
and Crown
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Registrable
Securities:
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The
shares of Common Stock (i) issued to the former holders of Hallmark
Entertainment Investments Co. (“HEIC”) in connection
with the Merger of HEIC with and into Crown and (ii) issuable to Hallmark
upon the conversion of the HCC Debt and upon conversion of the Convertible
Preferred Stock.
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Registration
Rights:
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Three
demand registration rights exercisable by the holders of a majority of the
Registrable Securities, three resale shelf demand rights exercisable by
the holders of a majority of the Registrable Securities, and unlimited
piggyback rights.
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Terms
and Conditions:
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Customary
for an agreement of this type, including that expense for these
registrations shall be borne by
Crown.
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SCHEDULE
E
Sample
Calculation
This
sample calculation is being provided solely for purposes of illustrating the
formula through which the number of shares of Common Stock to be issued in the
Recapitalization would be calculated. The figures set forth herein
are being used for illustrative purposes only and do not represent the parties’
views as to the final figures. The final figures used to determine
the number of shares of Common Stock to be issued in the Recapitalization are
subject to the assumptions contained herein, as well as to further due
diligence, and, accordingly, may be different from the sample figures set forth
herein.
Assumptions:
Closing
Date: April 30, 2010
HCC
DebtDetermination
is the HCC Debt as of the Determination Date: $1,142,468,389.
HCC
DebtClosing is
the HCC Debt as of the Closing Date: $1,149,011,446.
Step One: Calculate
the Conversion Price Shares:
Conversion
Price Shares + HCC SharesDetermination=
90.1% (Shares OutstandingDetermination
+ Conversion Price Shares + Option SharesDetermination)
Where:
HCC
SharesDetermination
are the shares owned directly or indirectly by Hallmark Cards, Incorporated, H C
Crown Corp., and Hallmark Entertainment Holdings, Inc. on the Date of
Determination calculated pursuant to the definition of Conversion Price Shares =
69,997,656.
Shares
OutstandingDetermination
are the shares outstanding on the Date of Determination prior to the Closing =
104,788,076.
Option
SharesDetermination
= shares issuable upon exercise of all Outstanding Options on the Date of
Determination = 85,813.
Solving
that formula yields Conversion Price Shares of 247,411,294.
Step Two: Calculate
the Conversion Price = (HCC DebtDetermination
– 500,000,000)/Conversion Price Shares
Solving
the formula yields a Conversion Price of $2.5968.
Step
Three: Calculate the number of shares of Common Stock to be
issued in the Recapitalization
= (HCC
DebtClosing
-500,000,000)/Conversion Price
Solving
the formula yields 249,927,390 shares of Common Stock to be issued in the
Recapitalization.
