PARTY CITY CORPORATION
$10,000,000
12.5% Secured Notes due 2003
("A Notes")
$5,000,000
13.0% Secured Notes due 2003
("B Notes")
$5,000,000
13.0% Secured Notes due 2002
("C Notes")
$10,000,000
14.0% Secured Notes due 2004
("D Notes")
Warrants to Purchase Common Stock
------------------
SECURITIES PURCHASE AGREEMENT
------------------
Dated as of August 16, 1999
TABLE OF CONTENTS
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Page
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1. Authorization of Securities.................................................1
2. Sale and Purchase of Securities.............................................2
2.1 Purchase Price........................................................2
2.2 Issue Price...........................................................2
2.3 Detachable Warrants...................................................2
2.4 Security Interest.....................................................2
3. Closing; Fees..............................................................2
3.1 Closing...............................................................2
3.2 Funding Fees..........................................................3
3.3 Legal and Accounting Fees.............................................3
3.4 Obligation of Purchaser...............................................3
4. Conditions to Closing......................................................3
4.1 Representations and Warranties........................................3
4.2 Performance; No Default...............................................3
4.3 Compliance Certificate................................................4
4.4 Investor Rights Agreement.............................................4
4.5 Collateral and Security Agreements....................................4
4.6 Intercreditor Agreement...............................................4
4.7 Standstill Agreements.................................................5
4.8 Guaranty Agreement....................................................5
4.9 Opinions of Counsel...................................................5
4.10 Projections...........................................................5
4.11 Consents, Agreements..................................................5
4.12 Compliance with Securities Laws.......................................5
4.13 Purchase Permitted By Applicable Law, etc.............................5
4.14 No Adverse U.S. Legislation, Action or Decision, etc..................5
4.15 No Actions Pending....................................................6
4.16 Proceedings and Documents.............................................6
4.17 Sale of Other Securities..............................................6
4.18 Fees..................................................................6
4.19 Perfected Security Interest...........................................6
5. Representations and Warranties.............................................6
5.1 Corporate Organization and Authority; Xxxxx and Binding Effect........6
5.2 Subsidiaries..........................................................6
5.3 Qualification.........................................................7
5.4 Financial Information.................................................7
5.5 Absence of Changes, etc...............................................7
5.6 Tax Returns and Payments..............................................7
5.7 Debt..................................................................8
5.8 Liens.................................................................8
5.9 Capital Stock and Related Matters.....................................8
5.10 Title to Properties; Liens............................................8
5.11 Insurance.............................................................8
5.12 Litigation............................................................8
5.13 Compliance with Other Instruments, etc................................9
5.14 Governmental Consent..................................................9
5.15 Patents, Trademarks, Authorizations, etc..............................9
5.16 Principal Corporate Office...........................................10
5.17 Corporate and Trade or Fictitious Names..............................10
5.18 Environmental Matters................................................11
5.19 Status Under Certain Federal Statutes................................11
5.20 Compliance with ERISA................................................12
5.21 Employee Matters.....................................................12
5.22 Withholding and Other Taxes..........................................13
5.23 Certain Fees.........................................................13
5.24 Year 2000 Compliance.................................................13
5.25 Payments Under Leases................................................13
5.26 Disclosure...........................................................13
6. Purchaser Representations.................................................14
6.1 Purchase Intent......................................................14
6.2 Status of Purchaser..................................................14
6.3 Source of Funds......................................................14
7. Prepayment and Defeasance of A Notes......................................14
7.1 Optional Prepayments of A Notes and B Notes..........................14
7.2 Defeasance of C Notes and D Notes....................................15
7.3 Contingent Prepayments Upon Change of Control........................18
7.4 Acquisition of Notes.................................................18
7.5 No Fraudulent Conveyance.............................................19
8. Inspection; Confidentiality...............................................19
8.1 Inspection...........................................................19
8.2 Confidentiality......................................................19
9. Covenants.................................................................19
9.1 Reporting Requirements...............................................19
9.2 Debt.................................................................21
9.3 Financial Covenants..................................................21
9.4 Liens, etc...........................................................23
9.5 Investments, Guaranties, etc.........................................23
9.6 Restricted Payments..................................................25
9.7 Transactions with Affiliates.........................................25
9.8 Consolidation, Merger, Sale of Assets, etc...........................25
9.9 Subsidiary Stock and Indebtedness....................................26
9.10 Corporate Existence, Business and Franchise Relations................27
9.11 Payment of Taxes and Claims..........................................27
9.12 Compliance with ERISA................................................27
9.13 Maintenance of Properties; Insurance.................................28
9.14 Additional Guaranties................................................28
9.15 Other Loan Agreements................................................28
ii
9.16 Restrictions Affecting Subsidiaries..................................29
9.17 Insurance............................................................29
9.18 Use of Proceeds......................................................29
9.19 Relocation; Use of Name..............................................30
9.20 Seasonal Orders......................................................30
9.21 Option Grants........................................................30
9.22 Note Ratings.........................................................30
9.23 Governance...........................................................30
9.24 Audited Financial Statements.........................................30
9.25 Payments to Vendors..................................................30
9.26 Perfection of Security Interest......................................30
9.27 Year 2000 Compliance.................................................30
10. Events of Default; Acceleration...........................................30
11. Remedies on Default, etc..................................................33
12. Security Interest and Intercreditor Arrangements..........................33
12.1 Security Agreement...................................................33
12.2 Intercreditor Agreement..............................................33
13. Definitions...............................................................33
13.1 Certain Definitions..................................................33
13.2 Table of Definitions.................................................39
14. Registration, Transfer and Substitution of Notes; Action by Noteholders...40
14.1 Note Register; Ownership of Notes....................................40
14.2 Transfer and Exchange of Notes.......................................40
14.3 Replacement of Notes.................................................40
14.4 Notes held by Company Deemed Not Outstanding.........................41
15. Payments on Notes.........................................................41
16. Expenses, etc.............................................................41
17. Survival of Representations and Warranties................................41
18. Amendments and Waivers....................................................41
19. Notices, etc..............................................................42
20. Indemnification...........................................................42
21. Miscellaneous.............................................................43
iii
Exhibits, Annexes and Schedules
EXHIBIT A Form of A Note
EXHIBIT B Form of B Note
EXHIBIT C Form of C Note
EXHIBIT D Form of D Note
EXHIBIT E Form of Warrant
EXHIBIT F-1 Form of Security Agreement (Parent)
EXHIBIT F-2 Form of Security Agreement (Subsidiary)
EXHIBIT F-3 Form of Patent, Trademark and Copyright Assignment (Parent)
EXHIBIT F-4 Form of Patent, Trademark and Copyright Assignment (Subsidiary)
EXHIBIT F-5 Form of Collateral Assignment of Contract Rights (Franchise)
EXHIBIT F-6 Form of Collateral Assignment of Contract Rights (Tomax)
EXHIBIT F-7 Form of Guaranty and Suretyship Agreement
EXHIBIT F-8 Form of Intercompany Subordination Agreement
EXHIBIT F-9 Form of Stock Pledge Agreement
EXHIBIT G Form of Investor Rights Agreement
EXHIBIT H Form of Intercreditor Agreement
EXHIBIT I Form of Bank Standstill Agreement
EXHIBIT J Form of Vendor Standstill Agreement
EXHIBIT K Form of Guaranty Agreement
EXHIBIT L-1 Form of Opinion of Counsel to Company (Xxxxxxx Xxxx & Xxxxxxxxx)
EXHIBIT L-2 Form of Opinion of Counsel to Company (St. Xxxx & Xxxxx, LLC)
ANNEX I Schedule of Purchasers
ANNEX II Schedule of Vendors (parties to the Vendor Standstill Agreement)
SCHEDULE 5.2 Schedule of Subsidiaries
SCHEDULE 5.4(a) Schedule of Financial Statements
SCHEDULE 5.4(b) Schedule of Financial Projections
SCHEDULE 5.5 Schedule of Changes, etc.
SCHEDULE 5.6 Schedule of Federal Tax Identification Numbers
SCHEDULE 5.7(a) Schedule of Debt
SCHEDULE 5.7(b) Schedule of Post-Closing Debt
SCHEDULE 5.7(c) Schedule of Defaults on Debt
SCHEDULE 5.8 Schedule of Liens
SCHEDULE 5.9 Schedule of Outstanding Stock Options
SCHEDULE 5.10 Schedule of Title to Properties
SCHEDULE 5.11 Schedule of Insurance
SCHEDULE 5.12 Schedule of Litigation
SCHEDULE 5.13 Schedule of Compliance with Instruments
SCHEDULE 5.15 Schedule of Proprietary Rights
SCHEDULE 5.16 Schedule of Principal Corporate Offices
SCHEDULE 5.17 Schedule of Tradenames
SCHEDULE 5.21 Schedule of Employment Agreements
SCHEDULE 5.23 Schedule of Fees
SCHEDULE 5.24 Schedule of Year 2000 Compliance
SCHEDULE 5.25 Schedule of Lease Payments
SCHEDULE 9.8 Schedule of Contemplated Store Sales
iv
SCHEDULE 9.18 Schedule of Halloween Inventory
v
PARTY CITY CORPORATION
000 XXXXXXX XXX
XXXXXXXX, XXX XXXXXX 00000
$10,000,000
12.5% Secured Notes due 2003
("A Notes")
$5,000,000
13.0% Secured Notes due 2003
("B Notes")
$5,000,000
13.0% Secured Notes due 2002
("C Notes")
$10,000,000
14.0% Secured Notes due 2004
("D Notes")
Warrants to Purchase Common Stock
Dated as of August 16, 1999
TO EACH OF THE PURCHASERS LISTED IN
.........THE ATTACHED SCHEDULE A
Ladies and Gentlemen:
Party City Corporation, a Delaware corporation (the "Company"), agrees with
you as follows:
1. Authorization of Securities. The Company will authorize the issue and sale
of:
(a) $10,000,000 aggregate principal amount of its 12.5% Secured Notes
due 2003 ("A Notes"), to be substantially in the form of note attached hereto as
Exhibit A, with such changes therefrom, if any, as may be approved by you and
the Company;
(b) $5,000,000 aggregate principal amount of its 13.0% Secured Notes
due 2003 ("B Notes"), to be substantially in the form of note attached hereto as
Exhibit B, with such changes therefrom, if any, as may be approved by you and
the Company;
(c) $5,000,000 aggregate principal amount of its 13.0% Secured Notes
due 2002 ("C Notes"), to be substantially in the form of note attached hereto as
Exhibit C, with such changes therefrom, if any, as may be approved by you and
the Company;
1
(d) $10,000,000 aggregate principal amount of its 14.0% Secured Notes
due 2004 ("D Notes"), to be substantially in the form of note attached hereto as
Exhibit D, with such changes therefrom, if any, as may be approved by you and
the Company;
(e) Warrants to purchase 6,880,000 shares of Common Stock at an
initial exercise price of $3.00 per share ("Warrants"), to be substantially in
the form of warrant attached hereto as Exhibit E, with such changes therefrom,
if any, as may be approved by you and the Company.
Collectively, (i) the A Notes, the B Notes, the C Notes and the D
Notes are referred to herein as the "Notes," and (ii) the Notes and the Warrants
are referred to herein as the "Securities." Each of the A Notes, the B Notes,
the C Notes and the D Notes is considered a separate "tranche" of Notes for
purposes of this Agreement. Certain other capitalized terms used in this
Agreement are defined in Section 13.
2. Sale and Purchase of Securities.
2.1 Purchase Price(a) . The Company will issue and sell to you and, subject
to the terms and conditions of this Agreement, you will purchase from the
Company, at the Closing provided for in Section 3, the Securities in the
principal amount (in the case of the Notes) or exercisable for the number of
shares of Common Stock (in the case of the Warrants) specified opposite your
name in Annex I at the purchase price of 100% of the principal amount of the
Notes specified opposite your name in Annex I.
Contemporaneously with entering into this Agreement, the Company is
entering into a separate Securities Purchase Agreement identical with this
Agreement with the other purchasers named in Annex I (the "Other Purchasers"),
providing for the sale to the Other Purchasers, at such Closing, of Securities
in the principal amount (in the case of the Notes) or exercisable for the number
of shares of Common Stock (in the case of the Warrants) specified opposite their
names in Annex I.
2.2 Issue Price. Promptly after the Closing, the Company and you shall
agree for U.S. federal income tax purposes (i) the present value as of the
Closing Date of all payments under the C Notes and D Notes, using a discount
rate which shall be based on a yield which the Company and you shall agree is
the original yield of comparable debt instruments not issued as part of an
investment unit (which rate shall not be less than the applicable federal rate
on the date the C Notes and D Notes are issued), (ii) the aggregate "issue
price" under Section 1273(b) of the Code of the C Notes and D Notes and (iii)
the aggregate purchase price of the Warrants. All federal, state and local
income tax returns shall be filed by the Company and you in a manner consistent
in all material respects with the agreement reached to pursuant to this Section
2.2.
2.3 Detachable Warrants. The Warrants are being sold with the C Notes and D
Notes and shall be fully detachable from each of the other Securities, may be
transferred separately from each of the other Securities and need not be
transferred with the other Securities.
2.4 Security Interest. Each of the Notes shall be secured obligations of
the Company with the relative priorities as further set forth in that certain
Security Agreement (Parent) between the Company and Enhanced Retail Funding,
LLC, a Delaware limited liability company ("ERF"), as agent for you and the
Other Purchasers attached hereto as Exhibit F-1 (the "Security Agreement
(Parent)") and the related documents described in Section 4.5.
3. Closing; Fees.
2
3.1 Closing. The sales of the Securities to be purchased by you shall take
place at the offices of Xxxxxx & Xxxxxxx, 000 Xxxxx Xxxxxx, Xxxxx 0000, Xxx
Xxxx, Xxx Xxxx, at 10:00 a.m., New York City time, at a closing (the "Closing")
on August 16, 1999 (the "Closing Date") or on such other Business Day thereafter
as may be agreed upon by the Company and you. At the Closing the Company will
deliver to you the Securities indicated opposite your name on Annex I hereto
subject to the following:
(a) the Notes to be issued to you shall be issued in the form of
single notes (or such greater number of notes in denominations of at least
$100,000 as shall be set forth in Annex I or as you may request) dated the date
of the Closing and registered in your name (or in the name of your nominee); and
(b) the Warrants to be issued to you, if applicable, shall be in the
form of a single warrant certificate (or such greater number of warrant
certificates as shall be set forth in Annex I or as you may request) dated the
date of the Closing and registered in your name (or in the name of your
nominee);
against delivery by you to the Company or its order of immediately available
funds in the amount of the purchase price therefor. If at the Closing the
Company shall fail to tender such Securities to you as provided above in this
Section 3, or any of the conditions specified in Section 4 shall not have been
fulfilled to your satisfaction, you shall, at your election, be relieved of all
further obligations under this Agreement, without thereby waiving any other
rights you may have by reason of such failure or such nonfulfillment.
3.2 Funding Fees. On the date of the Closing, the Company will pay to you
(or to the Person designated by you for payment in Annex I), in immediately
available funds, a funding fee equal to 1.5% of the aggregate purchase price for
the Securities purchased by you on the Closing Date, by crediting the account
specified below your name in Annex I for the payment of funding fees.
3.3 Legal and Accounting Fees.
Subject to the limitations of Section 16, whether or not the
Securities are sold, on the date of the Closing, the Company will pay to you the
reasonable fees and disbursements of your legal counsel and accountants and such
other expenses including search fees, documentation fees and filing fees
incurred by you and them in connection with the transactions contemplated by
this Agreement and set forth in a statement delivered to the Company on or prior
to the date of the Closing, and thereafter the Company will pay, promptly upon
receipt of a supplemental statement therefor, additional reasonable fees and
disbursements, if any, related to the foregoing and incurred in connection with
such transactions.
3.4 Obligation of Purchaser. The Company hereby acknowledges and agrees
that you shall have no obligation to purchase the Securities or otherwise
consummate the transactions contemplated by this Agreement if any of the
conditions to closing described in Section 4 have not been satisfied to your
approval prior to the Closing.
4. Conditions to Closing. Your obligation to purchase and pay for the Securities
to be sold to you at the Closing is subject to the fulfillment to your
satisfaction, prior to or at the Closing, of the following conditions:
4.1 Representations and Warranties. The representations and warranties of
the Company contained in this Agreement and those otherwise made in writing by
or on behalf of the Company in connection with the transactions contemplated by
this Agreement shall be correct in all material respects when made and at the
time of the Closing, except as affected by the consummation of such
transactions.
3
4.2 Performance; No Default. The Company shall have performed and complied
in all material respects with all agreements and conditions contained in this
Agreement required to be performed or complied with by it prior to or at the
Closing and at the time of the Closing no Event of Default or Potential Event of
Default shall have occurred and be continuing.
4.3 Compliance Certificate. The Company shall have delivered to you an
Officers' Certificate, dated the date of the Closing, certifying that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled and
demonstrating that, after giving effect to the issuance of all of the
Securities, the Company will be in compliance in all material respects with the
most stringent limitations on the incurrence or maintenance of Debt contained in
any instrument or agreement applicable to or binding on the Company.
4.4 Investor Rights Agreement. That certain Investor Rights Agreement by
and among the Company, you and the Other Purchasers shall have been executed in
substantially the form attached hereto as Exhibit G (the "Investor Rights
Agreement").
4.5 Collateral and Security Agreements.
(a) That certain Security Agreement (Parent) by and between the
Company and ERF as agent for you and the Other Purchasers shall have been
executed in substantially the form attached hereto as Exhibit F-1.
(b) That certain Security Agreement (Subsidiary) by and between Party
City Michigan, Inc., a Delaware corporation ("Party City Michigan"), and ERF as
agent for you and the Other Purchasers shall have been executed in substantially
the form attached hereto as Exhibit F-2 (the "Security Agreement (Subsidiary)").
(c) That certain Patent, Trademark and Copyright Assignment (Parent)
by and between the Company and ERF as assignee for you and the Other Purchasers
shall have been executed in substantially the form attached hereto as Exhibit
F-3.
(d) That certain Patent, Trademark and Copyright Assignment
(Subsidiary) by and between Party City Michigan and ERF as assignee for you and
the Other Purchasers shall have been executed in substantially the form attached
hereto as Exhibit F-4.
(e) That certain Collateral Assignment of Contract Rights (Franchise)
by and between the Company and ERF as assignee for you and the Other Purchasers
shall have been executed in substantially the form attached hereto as Exhibit
F-5.
(f) That certain Collateral Assignment of Contract Rights (Tomax) by
and between Party City Michigan and ERF as assignee for you and the Other
Purchasers shall have been executed in substantially the form attached hereto as
Exhibit F-6.
(g) That certain Guaranty Agreement by Party City Michigan in favor of
ERF as agent for you and the Other Purchasers shall have been executed in
substantially the form attached hereto as Exhibit F-7.
(h) That certain Intercompany Subordination Agreement by and among the
Company, Party City Michigan and ERF as agent for you and the Other Purchasers
shall have been executed in substantially the form attached hereto as Exhibit
F-8.
4
(i) That certain Stock Pledge Agreement by and between the Company and
ERF as agent for you and the Other Purchasers shall have been executed in
substantially the form attached hereto as Exhibit F-9.
4.6 Intercreditor Agreement. That certain Intercreditor Agreement by and
among you, the Other Purchasers, PNC Bank, National Association, as agent under
the Credit Agreement, and the other lenders named therein, and certain of the
Company's vendors named in the Vendor Standstill Agreement (defined below) shall
have been executed in substantially the form attached hereto as Exhibit H (the
"Intercreditor Agreement"). The vendors who are parties to the Intercreditor
Agreement shall include the entities listed on Annex II.
4.7 Standstill Agreements.
(a) That certain Standstill and Forbearance Agreement by and among the
Company, PNC Bank, National Association, as agent, and the lenders named therein
shall have been executed in substantially the form attached hereto as Exhibit I
(the "Bank Standstill Agreement").
(b) That certain Vendor Forbearance and Standstill Agreement by and
among the Company and certain of its vendors named therein shall have been
executed in substantially the form attached hereto as Exhibit J (the "Vendor
Standstill Agreement").
4.8 Guaranty Agreement. Each of the Company's Subsidiaries shall have
entered into the Guaranty Agreement in substantially the form attached hereto as
Exhibit K (the "Guaranty Agreement").
4.9 Opinions of Counsel. You shall have received from each of Xxxxxxx Xxxx
& Xxxxxxxxx, special counsel for the Company, and St. Xxxx & Xxxxx, L.L.C.,
counsel for the Company, in connection with the transactions contemplated by
this Agreement, a favorable opinion substantially in the form set forth in
Exhibit L-1 and Exhibit L-2, respectively, addressed to you, dated the date of
the Closing and otherwise satisfactory in substance and form to you.
4.10 Projections. Immediately prior to the Closing Date, the inventories,
accounts payable, cash balances, trade debt and bank debt shall be at levels
materially similar to those set forth in the Projections (as defined in Section
5.4(b)).
4.11 Consents, Agreements. The Company shall have obtained all consents and
waivers, under any term of any material agreement or instrument to which it is a
party or by which it or any of its properties is bound, or any term of any
applicable law, ordinance, rule or regulation of any governmental authority, or
any term of any applicable order, judgment or decree of any court, arbitrator or
governmental authority, necessary or appropriate in connection with the
transactions contemplated by this Agreement, and such consents and waivers shall
be in full force and effect on the Closing Date. A complete and correct copy of
each of such consents and waivers shall have been delivered to you.
4.12 Compliance with Securities Laws. Subject to the accuracy of the
representations in Section 6, the offering and sale of the Securities to you and
the Other Purchasers shall have complied with all applicable requirements of
federal and state securities laws.
4.13 Purchase Permitted By Applicable Law, etc. On the date of the Closing
your purchase of Securities (a) shall be permitted by the laws and regulations
of each jurisdiction to which you are subject and (b) shall not subject you to
any additional tax, penalty or, in your reasonable judgment, other onerous
5
condition by reason of any change after the date of this Agreement in any
applicable law or governmental regulation. If requested by you, you shall have
received, at least five (5) Business Days prior to the Closing, an Officers'
Certificate certifying as to such matters of fact as you may reasonably specify
to enable you to determine whether such purchase is so permitted.
4.14 No Adverse U.S. Legislation, Action or Decision, etc. No legislation
shall have been enacted by either house of Congress or favorably reported by any
committee thereof, no other action shall have been taken by any governmental
authority, whether by order, regulation, rule, ruling or otherwise, and no
decision shall have been rendered by any court of competent jurisdiction, which
would materially and adversely affect the Notes or the Warrants being purchased
by you hereunder.
4.15 No Actions Pending. There shall be no suit, action, investigation,
inquiry or other proceeding by any governmental body or any other Person or any
other legal or administrative proceeding pending or, to the Company's knowledge,
threatened which questions the validity or legality of the transactions
contemplated by this Agreement or the other Operative Agreements or which seeks
damages or injunctive or other equitable relief in connection therewith.
4.16 Proceedings and Documents. All corporate and other proceedings in
connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions shall be reasonably
satisfactory to you and your special counsel, and you and your special counsel
shall have received all such counterpart originals or certified or other copies
of such documents as you or they may reasonably request.
4.17 Sale of Other Securities. Contemporaneously with the Closing, the
Other Purchasers shall purchase from, and the Company shall sell to the Other
Purchasers, the Securities identified opposite the Other Purchasers' in Annex I.
4.18 Fees. The fees required to be paid by Sections 3.2 and 3.3 shall have
been paid as therein provided.
4.19 Perfected Security Interest. The UCC-1 Financing Statements for the
jurisdictions listed on the attached Schedule 4.19 shall have been duly executed
by authorized official(s) of the Company.
5. Representations and Warranties. The Company represents and warrants that:
5.1 Corporate Organization and Authority; Xxxxx and Binding Effect. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has all requisite corporate power
and authority to own and operate its properties, to carry on its business as now
conducted and as proposed to be conducted, to enter into the Operative
Agreements to which the Company is a party, to issue and sell the Securities and
to carry out the terms of the Operative Agreements to which the Company is a
party. This Agreement and the other Operative Agreements to which the Company or
any of its Subsidiaries is a party constitute the valid and legally binding
obligations of each such party, enforceable against them in accordance with
their respective terms, except that enforceability may be limited by bankruptcy,
insolvency and other laws affecting creditor's rights generally and except that
the availability of certain remedies may be limited by general principles of
equity.
5.2 Subsidiaries. Schedule 5.2 correctly lists as to each Subsidiary on the
date of this Agreement (a) its name, (b) the jurisdiction of its incorporation
and (c) the percentage of its issued and outstanding shares owned by the Company
or another Subsidiary (specifying such other Subsidiary). Each Subsidiary
6
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has all requisite corporate
power and authority to own and operate its properties, to carry on its business
as now conducted and as proposed to be conducted, to enter into the Guaranty
Agreement and to carry out the terms of the Guaranty Agreement. All the
outstanding shares of capital stock of each Subsidiary are validly issued, fully
paid and non assessable, and all such shares indicated in Schedule 5.2 as owned
by the Company or by any other Subsidiary are so owned beneficially and of
record by the Company or by such other Subsidiary free and clear of any Lien
except as otherwise specified on Schedule 5.2.
5.3 Qualification. Each of the Company and its Subsidiaries is duly
qualified and in good standing as a foreign corporation authorized to do
business in each jurisdiction (other than the jurisdiction of its incorporation)
in which the nature of its activities or the character of the properties it owns
or leases makes such qualification necessary and in which the failure so to
qualify would have a Material Adverse Effect.
5.4 Financial Information.
(a) As of the date hereof, the Company has provided you with the
unaudited consolidated financial statements of the Company and its consolidated
Subsidiaries for the fiscal period from January 1, 1998 to July 3, 1999
including consolidated balance sheets, consolidated income statements and
consolidated statements of cash flow, a copy of which is attached hereto as
Schedule 5.4(a). Such financial statements have been prepared in accordance with
GAAP and fairly present, as of the date thereof and for the periods covered
thereby, the financial position and results of operations of the Company and its
Subsidiaries. The Company agrees to promptly (and in no event later than
September 30, 1999) provide you with audited consolidated financial statements
of the Company and its consolidated Subsidiaries for the fiscal period from
January 1, 1998 to July 3, 1999, which statements shall be prepared in
accordance with GAAP and fairly present, as of the date thereof and for the
periods covered thereby the financial position and results of operations of the
Company and its Subsidiaries.
(b) As of the date hereof, the forecasted financial statements of the
Company and its Subsidiaries, consisting of balance sheets, income statements
and cash flow statements for the Company and its Subsidiaries, and the projected
schedules of excess availability, giving effect to the consummation of the
transactions contemplated by this Agreement and the issuance of the Securities
hereunder, dated August 12, 1999, and attached hereto as Schedule 5.4(b) (the
"Projections"): (i) are based on reasonable estimates and assumptions and (ii)
reflected, as of the date prepared, and continue to reflect, as of the date of
this Agreement and the Closing Date, the reasonable estimate of the Company of
the results of operations and other matters projected therein for the periods
covered thereby, it being understood that the projections are subject to the
uncertainty inherent in all financial forecasts, and do not constitute a
representation or warranty that the results and other matters projected therein
will in fact be achieved.
5.5 Absence of Changes, etc. Other than as specifically described in
Schedule 5.5, since July 31, 1999, (a) there has been no change in the assets,
liabilities or financial condition of the Company or any of its Subsidiaries,
other than changes in the ordinary course of business which have not been,
either in any case or in the aggregate, materially adverse to the Company or any
of its Subsidiaries, (b) neither the business, operations or affairs nor any of
the properties or assets of the Company or its Subsidiaries have been affected
by any occurrence or development (whether or not insured against) which has
been, either in any case or in the aggregate, materially adverse to the Company
or any of its Subsidiaries and (c) the Company has not as of the date of this
Agreement directly or indirectly declared, ordered, paid, made or set apart any
sum or property for any Restricted Payment or agreed to do so.
7
5.6 Tax Returns and Payments. The Company and each of its Subsidiaries have
filed all federal, state, local and foreign tax returns, reports and estimates
which are required to be filed by it and all taxes (including penalties and
interest, if any) shown on such returns, reports and estimates as being due and
payable or which are otherwise due and payable have been fully paid (other than
taxes contested in good faith by appropriate proceedings diligently pursued and
as to which appropriate reserves have been established and maintained in
conformity with GAAP). Such tax returns properly and correctly reflect, in all
material respects, the income and taxes of the Company or such Subsidiary for
the periods covered thereby. The federal tax identification number of the
Company and each of its Subsidiaries is set forth on Schedule 5.6 attached
hereto.
5.7 Debt. Schedule 5.7(a) correctly describes all secured and unsecured
Debt of the Company and its Subsidiaries as of the date of this Agreement
outstanding in a principal amount greater than $100,000, or for which the
Company or any of its Subsidiaries has commitments, and identifies the
collateral securing any secured Debt. Except as set forth on Schedule 5.7(a),
the Company has outstanding not more than an aggregate of $1,000,000 of
unsecured Debt in individual amounts less than $100,000. Schedule 5.7(b)
correctly describes all such Debt that, on the Closing Date and after giving
effect to the transactions contemplated by this Agreement, will remain
outstanding. Other than as described on Schedule 5.7(c), neither the Company nor
any of its Subsidiaries is in default with respect to any Debt or any instrument
or agreement relating thereto.
5.8 Liens. There are no Liens on the Company's properties, assets or rights
of any kind (whether tangible or intangible, real or personal), other than the
Liens individually identified on Schedule 5.8 and Liens not described on said
Schedule but which in the aggregate do not exceed the amount of $100,000.
5.9 Capital Stock and Related Matters. The authorized capital stock of the
Company consists of 25,000,000 shares of Common Stock of which 12,455,538 shares
of Common Stock are issued and outstanding. The shares of Common Stock issuable
upon exercise of the Warrants have been duly authorized and validly reserved for
issuance upon such exercise and, when so issued, will be validly issued, fully
paid and non assessable. As of the Closing Date, the Company will not have
outstanding securities convertible into or exchangeable for any shares of its
capital stock, nor will it have outstanding any rights to subscribe for or to
purchase, or any options for the purchase of, or any agreements providing for
the issuance (contingent or otherwise) of, or any calls, commitments or claims
of any character relating to, any shares of its capital stock or any securities
convertible into or exchangeable for any shares of its capital stock, other than
those listed on Schedule 5.9.
5.10 Title to Properties; Liens. Except as set forth on Schedule 5.10, each
of the Company and its Subsidiaries has good and sufficient title to its
properties and assets, including the properties and assets reflected in the
financial statements referred to in Section 5.4 (except properties and assets
disposed of since such date in the ordinary course of business and properties
and assets held under Capital Leases referred to in Schedule 5.7(a)), and none
of such properties or assets is subject to any Liens except such as are of the
character permitted by Section 9.4, the Company and its Subsidiaries enjoy
peaceful and undisturbed possession under all leases necessary in any material
respect for the operation of their respective properties and assets, and all
such leases are valid and subsisting and are in full force and effect. Except to
perfect and protect security interests of the character permitted by Section 9.4
and except as set forth on Schedule 5.10, no presently effective financing
statement under the Uniform Commercial Code which names the Company or any
Subsidiary as debtor is on file in any jurisdiction and neither the Company nor
any Subsidiary has signed any presently effective financing statement or any
presently effective security agreement authorizing any secured party thereunder
to file any such financing statement.
8
5.11 Insurance. The physical properties, assets and business of the Company
and its Subsidiaries are insured to the extent disclosed on Schedule 5.11 hereto
and all such insurance policies and arrangements are disclosed on said Schedule.
Said insurance policies and arrangements are in full force and effect, all
premiums with respect thereto are currently paid, and the Company and its
Subsidiaries are in compliance in all material respects with the terms thereof.
To the knowledge of the Company, said insurance is adequate and customary for
the business engaged in by the Company and its Subsidiaries and is sufficient
for compliance by the Company and its Subsidiaries with all requirements of law
and all agreements and leases to which the Company or its Subsidiaries is a
party.
5.12 Litigation. Except as set forth on Schedule 5.12 hereto or as would
not have a Material Adverse Effect, as of the Closing Date there are no actions,
proceedings or investigations pending or, to the knowledge of the Company,
threatened against the Company or any of its Subsidiaries before or by any court
or administrative agency (or any basis therefor known to the Company).
5.13 Compliance with Other Instruments, etc. Except as set forth on
Schedule 5.13, neither the Company nor any of its Subsidiaries is in violation
of any term of its certificate or articles of incorporation or by-laws, and
neither the Company nor any of its Subsidiaries is in violation of any term of
any agreement or instrument to which it is a party or by which it is bound or,
to the best of the Company's knowledge, any term of any applicable law,
ordinance, rule or regulation of any governmental authority or any term of any
applicable order, judgment or decree of any court, arbitrator or governmental
authority, the consequences of which violation would have a Material Adverse
Effect. Except as set forth on Schedule 5.13, the execution, delivery and
performance of this Agreement and the issuance of the Securities to you and the
other Purchasers will not result in any violation of or be in conflict with or
constitute a default under any term of any agreement or instrument to which it
is a party or by which it is bound (including, without limitation, the Company's
agreements with its vendors) or, to the best of the Company's knowledge, any
term of any applicable law, ordinance, rule or regulation of any governmental
authority or any term of any applicable order, judgment or decree of any court,
arbitrator or governmental authority or result in the creation of (or impose any
obligation on the Company or any of its Subsidiaries to create) any Lien upon
any of the properties or assets of the Company or any of its Subsidiaries
pursuant to any such term; and there is no such term which would have a Material
Adverse Effect. The Company has not received any inquiries from the Securities
and Exchange Commission including, without limitation, inquiries related to any
failure to file the reports described on Schedule 5.13.
5.14 Governmental Consent. No consent, approval or authorization of, or
declaration or filing with, any governmental authority on the part of the
Company or any of its Subsidiaries is required for the valid execution and
delivery of this Agreement or the valid offer, issue, sale and delivery of the
Securities pursuant to this Agreement.
5.15 Patents, Trademarks, Authorizations, etc.
(a) Except as described on Schedule 5.15, each of the Company and its
Subsidiaries has ownership of, or license to use, all Proprietary Rights used or
to be used in its business as presently conducted or contemplated by the
Company. There are no claims or demands of any other person pertaining to any of
such Proprietary Rights and no proceedings have been instituted, or are pending
or, to the knowledge of the Company, threatened, which challenge the rights of
the Company or its Subsidiaries in respect thereof. Each of the Company and its
Subsidiaries has the right to use, free and clear of claims or rights of other
persons, all customer lists, designs, manufacturing or other processes, computer
software, systems, data compilations, research results and other information
required for or incident to its products or its business as presently conducted
or contemplated.
9
(b) All patents, patent applications, trademarks, trademark
applications and registrations and registered copyrights which are owned by or
licensed to the Company or used or to be used by the Company or its Subsidiaries
in their business as presently conducted or contemplated by the Company, and all
other Proprietary Rights which are material to the business or operations of the
Company or its Subsidiaries, are listed on Schedule 5.15. Except as set forth on
Schedule 5.15, all of such patents, patent applications, trademark
registrations, trademark applications and registered copyrights have been duly
registered in, filed in or issued by the United States Patent and Trademark
Office, the United States Register of Copyrights, or the corresponding offices
of other jurisdictions as identified on said Schedule, and have been properly
maintained and renewed in accordance with all applicable provisions of law and
administrative regulations of the United States and each such jurisdiction.
(c) All licenses or other agreements under which the Company or its
Subsidiaries are granted Proprietary Rights which are material to the business
or operations of the Company or its Subsidiaries are listed on Schedule 5.15,
other than generally commercially available third party software that has not
been materially modified by the Company, for which the Company can freely assign
its rights to a successor of the Company that is either: (i) only subject to a
shrink wrap license agreement, or (ii) is immaterial to the Company's business.
All said licenses or other agreements are in full force and effect, there is no
material default by the Company or its Subsidiaries or, to the knowledge of the
Company, any other party thereto. To the knowledge of the Company, the licensors
under said licenses and other agreements have and had all requisite power and
authority to grant the rights purported to be conferred thereby. True and
complete copies of all such licenses or other agreements, and any amendments
thereto, have been provided to you or your counsel.
(d) All material licenses or other material agreements under which the
Company or its Subsidiaries have granted to others Proprietary Rights owned or
licensed by the Company or its Subsidiaries are listed on Schedule 5.15. All of
said licenses or other agreements are in full force and effect, there is no
material default by the Company or its Subsidiaries or, to the knowledge of the
Company, any other party thereto. True and complete copies of all such licenses
or other agreements, and any amendments thereto, have been provided to you or
your counsel.
(e) The Company and its Subsidiaries have taken all steps required in
accordance with sound business practice to establish and preserve their
ownership of all Proprietary Rights with respect to their products, services and
technology except where failure to take such steps would not have a Material
Adverse Effect. The Company has no knowledge of any infringement by others of
any Proprietary Rights of the Company or its Subsidiaries.
(f) To the knowledge of the Company, the business, activities and
products of the Company and its Subsidiaries do not infringe any Proprietary
Rights of any other person. To the knowledge of the Company, no proceeding
charging the Company or its Subsidiaries with infringement of any adversely held
Proprietary Rights has been filed or is threatened to be filed. To the knowledge
of the Company, there exists no unexpired patent or patent application which
includes claims that would be infringed by or otherwise adversely affect the
activities or business of the Company or its Subsidiaries. To the knowledge of
the Company, neither the Company nor any of its Subsidiaries is making
unauthorized use of any confidential information or trade secrets of any person,
including without limitation, any former employer of any past or present
employee of the Company. Neither the Company, any of its Subsidiaries nor, to
the knowledge of Company, any of their employees have any agreements or
arrangements with any persons other than the Company or its Subsidiaries related
to confidential information or trade secrets of such persons or restricting any
such employee's ability to engage in business activities of any nature. The
10
activities of the employees of the Company and its Subsidiaries on behalf of the
Company or its Subsidiaries do not violate any such agreements or arrangements
known to the Company.
5.16 Principal Corporate Office. As of the date hereof the Company's and
each of its Subsidiaries' principal place of business, chief executive office
and location of its books and records is set forth on Schedule 5.16 attached
hereto and neither the Company, any of its Subsidiaries nor any of their
respective predecessors has had any other chief executive office or principal
place of business except as set forth on Schedule 5.16 during the five (5) years
immediately preceding the date hereof.
5.17 Corporate and Trade or Fictitious Names. As of the Closing Date,
except as set forth on Schedule 5.17 hereof, during the five (5) years
immediately preceding the date of this Agreement, neither the Company, any of
its Subsidiaries, nor any of their respective predecessors has been known as or
used any corporate, trade or fictitious name other than its current corporate or
individual name as such name is set forth in this Agreement.
5.18 Environmental Matters.
(a) Each of the Company and its Subsidiaries has complied and is in
compliance with all Environmental Laws in all material respects.
(b) Each of the Company and its Subsidiaries has obtained and complied
in all material respects with, and is in compliance in all material respects
with, all permits, licenses and other authorizations that are required pursuant
to Environmental Laws for the occupation of its facilities and the operation of
its business, without transfer, reissuance, or other governmental approval or
action.
(c) Neither the Company nor any of its Subsidiaries has received any
written claim, complaint, citation, report or other written or oral notice
regarding any liabilities or potential liabilities, including any investigatory,
remedial or corrective obligations, arising under Environmental Laws.
(d) No underground storage tanks or surface impoundments or
asbestos-containing material in any form or condition exists at any property
owned or occupied by the Company or any of its Subsidiaries.
(e) Neither the Company nor any of its Subsidiaries has treated,
stored, disposed of, arranged for or permitted the disposal of, transported,
handled, or released any substance, including without limitation any hazardous
substance, or owned or operated any facility or property, in a manner that would
reasonably be expected to give rise to liabilities of the Company or any of its
Subsidiaries for response costs, natural resource damages or attorneys' fees
pursuant to CERCLA or other Environmental Laws.
(f) No facts, events or conditions relating to the past or present
facilities, properties or operations of the Company or its Subsidiaries will
prevent, hinder or limit continued compliance with Environmental Laws, give rise
to any investigatory, remedial or corrective obligations pursuant to
Environmental Laws, or give rise to any other material liabilities pursuant to
Environmental Laws, including without limitation any relating to onsite or
offsite Releases (as defined in CERCLA) or threatened Releases of hazardous or
otherwise regulated materials, substances or wastes, personal injury, property
damage or natural resources damage.
11
(g) Neither the Company nor any of its Subsidiaries has, either
expressly or by operation of law, assumed or undertaken any liability or
corrective or remedial obligation of any other Person relating to Environmental
Laws.
5.19 Status Under Certain Federal Statutes. The Company is not (a) an
"investment company," or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940, as amended; (b) a
"holding company" or a "subsidiary company" of a "holding company," or an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company," as such terms are defined in the Public Utility Holding Company Act of
1935, as amended; (c) a "public utility" as such term is defined in the Federal
Power Act, as amended; or (d) a "rail carrier or a person controlled by or
affiliated with a rail carrier," within the meaning of Title 49, U.S.C., or a
"carrier" to which 49 U.S.C. Section 11301(b)(1) is applicable.
5.20 Compliance with ERISA.
(a) Neither the Company nor any of its Subsidiaries has breached the
fiduciary rules of ERISA or engaged in any non-exempt prohibited transaction in
connection with which the Company or any of its Subsidiaries could be subjected
to (in the case of any such breach) a suit for damages or (in the case of any
such prohibited transaction) either a civil penalty assessed under Section
502(i) of ERISA or a tax imposed by Section 4975 of the Code, which suit,
penalty or tax, in any case, could have a Material Adverse Effect.
(b) No Plan (other than a Multiemployer Plan) or any trust created
under any such Plan has been terminated since September 2, 1974. Neither the
Company nor any Related Person has within the past six (6) years contributed to
a single employer plan which has at least two (2) contributing sponsors who are
not Related Persons, or ceased operations at a facility in a manner which could
result in liability under Section 4062(e) of ERISA. No liability to the PBGC has
been or is expected by the Company to be incurred with respect to any Plan
(other than a Multiemployer Plan) by the Company or any Subsidiary which could
have a Material Adverse Effect. There has been no reportable event (within the
meaning of Section 4043(c) of ERISA) or any other event or condition with
respect to any Plan (other than a Multiemployer Plan) which presents a risk of
termination of any such Plan by the PBGC under circumstances which in any case
could result in liability which could have a Material Adverse Effect.
(c) Full payment has been made of all amounts which the Company or any
Related Person is required under the terms of each Plan to have paid as
contributions to such Plan as of the last day of the most recent fiscal year of
such Plan ended prior to the date hereof, and no accumulated funding deficiency
(as defined in Section 302 of ERISA and Section 412 of the Code), whether or not
waived, exists with respect to any Plan (other than a Multiemployer Plan).
(d) The present value of all vested accrued benefits under all Plans
(other than Multiemployer Plans), determined as of the end of the Company's most
recently ended fiscal year on the basis of reasonable actuarial assumptions, did
not exceed the current value of the assets of such Plans allocable to such
vested accrued benefits. The terms "present value," "current value," and
"accrued benefit" have the meanings specified in Section 3 of ERISA.
(e) The Company is not and has never been obligated to contribute to
any "multiemployer plan" (as such term is defined in Section 4001(a)(3) of
ERISA).
12
(f) The execution and delivery of this Agreement and the issue and
sale of the Securities hereunder will not involve any transaction which is
subject to the prohibitions of Section 406 of ERISA or in connection with which
a tax could be imposed pursuant to Section 4975 of the Code. The representation
by the Company in the preceding sentence is made in reliance upon and subject to
the accuracy of your representation in Section 6.3 of this Agreement as to the
source of the funds used to pay the purchase price of the Securities purchased
by you. The Company has delivered to you, if requested by you, a complete and
correct list of all employee benefit plans with respect to which the Company is
a party in interest and with respect to which its securities are employer
securities. As used in this Section 5.18(f), the terms "employee benefit plans"
and "party in interest" have the respective meanings specified in Section 3 of
ERISA and the term "employer securities" has the meaning specified in Section
407(d)(1) of ERISA.
5.21 Employee Matters. As of the date hereof, there is no strike or work
stoppage in existence or threatened against or by any employees of the Company
or its Subsidiaries. As of each subsequent date, there is no strike or work
stoppage in existence involving five percent (5.0%) or more of the total
workforce of the Company and its Subsidiaries. Except as set forth on Schedule
5.21, the Company is not a party to any employment agreement.
5.22 Withholding and Other Taxes. The Company and its Subsidiaries have
properly withheld and currently paid all applicable federal and state
unemployment taxes and other federal and state taxes payable with respect to the
income of their employees (including without limitation, all taxes and other
amounts withheld pursuant to their employees' Internal Revenue Service form W-4,
all social security, all Federal Insurance Contribution Act ("FICA")
contributions and all Federal Unemployment Tax Act contributions), and have
currently paid all workers compensation insurance, disability and insurance
benefits properly payable with respect to their employees, other than immaterial
amounts not paid through oversight and promptly corrected.
5.23 Certain Fees. Except as set forth on Schedule 5.23 and for the fees
referred to in Sections 3.2 and 3.3, no broker's or finder's fee or commission
has been paid or will be payable by the Company with respect to the offer, issue
and sale of the Securities.
5.24 Year 2000 Compliance. Except as set forth on Schedule 5.24 or as would
not have a Material Adverse Effect, the Company and its Subsidiaries have all
systems and software solutions necessary or appropriate to address and
accommodate Year 2000 computer systems issues, and their software programs,
systems and applications used in the operation of its business have been tested
and are fully capable of providing accurate results using data having date
ranges spanning the twentieth and twenty-first centuries. Without limiting the
generality of the foregoing, except as set forth on Schedule 5.24 or as would
not have a Material Adverse Effect, all of the Company's software programs,
systems and applications are able to:
(a) Consistently handle date information before, during and after
January 1, 2000, including but not limited to accepting date input, providing
date output, and performing calculations on dates or portions of dates;
(b) Function accurately and without interruption before, during and
after January 1, 2000 (including leap year computations), without any change in
operations associated with the advent of the new century;
(c) Respond to two-digit date input in a way that resolves any
ambiguity as to century in a disclosed defined and predetermined manner; and
13
(d) Store and provide output of date information in ways that are
unambiguous as to century.
Notwithstanding any remaining steps to be taken to address the Year 2000
issues identified on Schedule 5.24, the Company in good faith believes that its
software programs, systems and applications will be capable of performing the
tasks identified in clauses (a) through (d) above.
5.25 Payments Under Leases. Except as to the arrangements for deferrals of
rent set forth on Schedule 5.25, the Company is not in material default under
any lease of real property and has paid all rent due under leases to which the
Company is a party (the "Company Leases").
5.26 Disclosure. Neither this Agreement nor any other document, certificate
or instrument delivered to you by or on behalf of the Company in connection with
the transactions contemplated by this Agreement contains (in each case, as of
its date) any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in this Agreement and
in such other documents, certificates or instruments not misleading. There is no
fact (other than matters of a general economic or political nature which do not
affect the Company uniquely) known to the Company which could result in a
Material Adverse Effect (or in the future may result in a Material Adverse
Effect) which has not been set forth in this Agreement or in the other
documents, certificates and instruments delivered to you by or on behalf of the
Company specifically for use in connection with the transactions contemplated by
this Agreement.
6. Purchaser Representations.
6.1 Purchase Intent. You represent that you are purchasing the Securities
hereunder for your own account, not with a view to the distribution thereof or
with any present intention of distributing or selling any of such Securities
except in compliance with the Securities Act and any applicable state securities
laws, provided that the disposition of your property shall at all times be
within your control.
6.2 Status of Purchaser. You represent that you are an "accredited
investor" within the meaning of Rule 501 of the Securities Act, with such
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of a prospective investment in the Securities
and that you are capable of bearing the economic risks of such investment. You
understand that no public market now exists for the Securities and there can be
no assurance that a public market will ever exist for such securities. You
represent that you have had an opportunity to discuss the Company's business,
management and financial affairs with the Company's management and an
opportunity to review the Company's facilities.
6.3 Source of Funds. You represent that all or a portion of the funds to be
used by you to pay the purchase price of the Securities consists of funds which
do not constitute assets of any employee benefit plan and the remaining portion,
if any, of such funds consists of funds which may be deemed to constitute assets
of one or more specific employee benefit plans, complete and accurate
information as to the identity of each of which you have delivered to the
Company. As used in this Section 6.3, the terms "employee benefit plan" and
"government plan" shall have the respective meanings assigned to such terms in
Section 3 of ERISA.
7. Prepayment and Defeasance of A Notes.
14
7.1 Optional Prepayments of A Notes and B Notes.
(a) General. Unless an Event of Default shall have occurred and be
continuing, the Company may, at its option, upon notice as provided in Section
7.1(c), prepay at any time, or from time to time, all or any part (in an amount
of at least $1,000,000 in the aggregate or an integral multiple of $1,000 in
excess thereof) of, the A Notes and/or the B Notes at the principal amount so
prepaid.
(b) Allocation of Partial Prepayments. In the case of each partial
prepayment paid or to be prepaid pursuant to this Section 7.1, the principal
amount of the tranche(s) of Notes selected to be prepaid shall be allocated pro
rata among all of the Notes of such series at the time outstanding in
proportion, as nearly as practicable, to the respective unpaid principal amounts
thereof not theretofore called for prepayment, with adjustments, to the extent
practicable, to compensate for any prior prepayments not made exactly in such
proportion.
(c) Notice. The Company will give each holder of any A Notes and/or B
Notes, as applicable, written notice of each optional prepayment under this
Section 7.1 not less than thirty (30) days and not more than sixty (60) days
prior to the date fixed for such prepayment, in each case specifying such date,
the aggregate principal amount of the Notes to be prepaid, the principal amount
of each Note held by such holder to be prepaid. Such notice shall be accompanied
by an Officers' Certificate certifying that the conditions of this Section 7
have been fulfilled and specifying the particulars of such fulfillment.
(d) Maturity, Surrender, etc. In the case of each prepayment pursuant
to this Section 7.1, the principal amount of each Note to be prepaid shall
mature and become due and payable on the date fixed for such prepayment,
together with interest on such principal amount accrued to such date and the
applicable premium, if any. From and after such date, unless the Company shall
fail to pay such principal amount when so due and payable, together with the
interest and premium, if any, as aforesaid, interest on such principal amount
shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to
the Company and canceled and shall not be reissued, and no Note shall be issued
in lieu of any prepaid principal amount of any Note.
7.2 Defeasance of C Notes and D Notes
(a) General. Unless an Event of Default shall have occurred and be
continuing, the Company may, at its option, at any time, elect to have either
Section 7.2(b) or 7.2(c) hereof be applied to all outstanding C Notes and/or D
Notes upon compliance with the conditions set forth below in this Section 7.2.
In the event the Company exercises its option under this Section 7.2, a majority
in interest of the holders of the C Notes and/or D Notes (based upon the
principal amount of the outstanding C Notes and/or D Notes, subject to Section
14.4), as applicable, shall select a trustee which is independent of the holders
and the Company to administer the trust to be established for the benefit of the
noteholders described below, which trustee shall be reasonably acceptable to the
Company (the "Trustee"). In the event of a defeasance hereunder with respect to
the C Notes and/or the D Notes, the Trustee shall maintain separate accounts for
the funds deposited with respect to the two tranches of notes and the Trustee's
other accounts and shall not commingle said funds.
(b) Legal Defeasance and Discharge. Upon the Company's exercise under
Section 7.2(a) hereof of the option applicable to this Section 7.2(b), the
Company shall, subject to the satisfaction of the conditions set forth in
Section 7.2(d) hereof, be deemed to have been discharged from its obligations
with respect to all outstanding C Notes and/or D Notes on the date the
conditions set forth below are satisfied ("Legal Defeasance"). For this purpose,
Legal Defeasance means that the Company shall be
15
deemed to have paid and discharged the entire Debt represented by the
outstanding C Notes and/or D Notes, as applicable, which shall thereafter be
deemed to be "outstanding" only for the purposes of 7.2(e) hereof and the other
Sections of this Indenture referred to in (i) and (ii) below, and to have
satisfied all its other obligations under such Notes and this Agreement, except
for the following provisions which shall survive until otherwise terminated or
discharged hereunder:
(i) the rights of holders of outstanding Notes to receive solely
from the trust fund described in Section 7.2(d) hereof, and as more fully set
forth in such Section, payments in respect of the principal of, premium, if any,
and interest on such Notes when such payments are due,
(ii) the Company's obligations with respect to such Notes under
Section 14 hereof, and
(iii) this Section 7.2.
Subject to compliance with this Section 7.2, the Company may exercise its option
under this Section 7.2(b) notwithstanding the prior exercise of its option under
Section 7.2(c) hereof.
(c) Covenant Defeasance. Upon the Company's exercise under Section
7.2(a) hereof of the option applicable to this Section 7.2(c), the Company
shall, subject to the satisfaction of the conditions set forth in Section 7.2(d)
hereof, be released from its obligations under the covenants contained in
Section 7.3 and Section 9 (other than Sections 9.1 and the first sentence of
Section 9.10) hereof with respect to the outstanding C Notes and/or D Notes
being defeased on and after the date the conditions set forth in Section 7.2(d)
are satisfied ("Covenant Defeasance"), and such Notes shall thereafter be deemed
not "outstanding" for the purposes of any direction, waiver, consent or
declaration or act of holders of the Notes (and the consequences of any thereof)
in connection with such covenants, but shall continue to be deemed "outstanding"
for all other purposes hereunder (it being understood that such Notes shall not
be deemed outstanding for accounting purposes). For this purpose, Covenant
Defeasance means that, with respect to the outstanding C Notes and/or D Notes
being defeased, the Company may omit to comply with and shall have no liability
in respect of any term, condition or limitation set forth in any such covenant,
whether directly or indirectly, by reason of any reference elsewhere herein to
any such covenant or by reason of any reference in any such covenant to any
other provision herein or in any other document and such omission to comply
shall not constitute an Event of Default under Section 10 hereof, but, except as
specified above, this Agreement and the C Notes and/or D Notes being defeased
shall be unaffected thereby. In addition, upon the Company's exercise under
Section 7.2(a) hereof of the option applicable to this Section 7.2(c) hereof,
subject to the satisfaction of the conditions set forth in Section 7.2(d)
hereof, Sections 10(c) through (h) and Section 10(k) through (l) hereof shall
not constitute Events of Default, and, promptly following the period ending on
the 91st day after the date of the deposit in respect of the Covenant Defeasance
you, and the Other Purchasers shall cause all Liens which secure the C Notes
and/or D Notes, as applicable, to be released.
(d) Conditions to Legal or Covenant Defeasance. The following shall be
the conditions to the application of either Section 7.2(b) or 7.2(c) hereof to
the outstanding C Notes and/or D Notes being defeased:
In order to exercise either Legal Defeasance or Covenant Defeasance:
(i) the Company must irrevocably deposit with the Trustee, in
trust, for the benefit of the holders C Notes and/or D Notes being defeased,
cash in United States dollars, non-callable
16
Government Securities, or a combination thereof, free and clear of any and all
Liens, claims or interests, 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, if any, and interest on the outstanding C Notes
and/or D Notes being defeased on the stated date for payment thereof;
(ii) in the case of an election under Section 7.2(b) hereof, the
Company shall have delivered to the Trustee an opinion of counsel reasonably
acceptable to the Trustee confirming that (i) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (ii) since
the date of this Agreement, 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, the holders of the outstanding C Notes
and/or D Notes being defeased 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 an election under Section 7.2(c) hereof, the
Company shall have delivered to the Trustee an opinion of counsel reasonably
acceptable to the Trustee confirming that the holders of the outstanding C Notes
and/or D Notes being defeased 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 Event of Default shall have occurred and be continuing on
the date of such deposit after giving effect thereto (other than an Event of
Default resulting from the incurrence of Debt all or a portion of the proceeds
of which will be used to defease the C Notes and/or D Notes, as applicable,
pursuant to this Section 7.2 concurrently with such incurrence) or in the case
of a Legal Defeasance insofar as Sections 10(i) or (j) hereof is concerned, at
any time in the period ending on the 91st day after the date of deposit;
(v) such Legal Defeasance or Covenant Defeasance shall not result
in a breach or violation of, or constitute a default under, any material
agreement or instrument to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries is bound;
(vi) the Company shall have delivered to the Trustee an opinion
of counsel (which may be subject to customary exceptions) and an Officers'
Certificate to the effect that on the 91st day following the deposit, the trust
funds will not be subject to recapture or avoidance of a preference under any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally;
(vii) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company with
the intent of preferring the holders of the C Notes and/or D Notes being
defeased over any other creditors of the Company or with the intent of
defeating, hindering, delaying or defrauding any other creditors of the Company;
and
(viii) the Company shall have delivered to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
17
(e) Deposited Money and Government Securities to be Held in Trust;
Other Miscellaneous Provisions. Subject to Section 7.2(f) hereof, all money and
non-callable Government Securities (including the proceeds thereof) deposited
with the Trustee pursuant to Section 7.2(d) hereof in respect of the outstanding
C Notes and/or D Notes being defeased shall be held in trust and applied by the
Trustee, in accordance with the provisions of such Notes and this Agreement, to
the payment to the holders of such Notes of all sums due and to become due
thereon in respect of principal, premium, if any, and interest, but such money
need not be segregated from other funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the cash or non-callable Government
Securities deposited pursuant to Section 7.2(d) hereof or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the holders of the outstanding C Notes
and/or D Notes being defeased.
Anything in this Section 7.2 to the contrary notwithstanding, the Trustee
shall deliver or pay to the Company from time to time upon the request of the
Company any money or non-callable Government Securities held by it as provided
in Section 7.2(d) hereof which, in the opinion of a nationally recognized firm
of independent public accountants expressed in a written certification thereof
delivered to the Trustee, are in excess of the amount thereof that would then be
required to be deposited to effect an equivalent Legal Defeasance or Covenant
Defeasance.
(f) Repayment to Company. Any money deposited with the Trustee in
trust for the payment of the principal of, premium, if any, or interest on any
Note and remaining unclaimed for two (2) years after such principal, and
premium, if any, or interest has become due and payable shall be paid to the
Company on its request or (if then held by the Company) shall be discharged from
such trust; and the holder of such Note shall thereafter look only to the
Company for payment thereof, and all liability of the Trustee with respect to
such trust money, and all liability of the Company as trustee thereof, shall
thereupon cease; provided, however, that the Trustee, before being required to
make any such repayment, may at the expense of the Company cause to be published
once, in the New York Times and The Wall Street Journal (national edition),
notice that such money remains unclaimed and that, after a date specified
therein, which shall not be less than thirty (30) days from the date of such
notification or publication, any unclaimed balance of such money then remaining
will be repaid to the Company.
(g) Reinstatement. If the Trustee is unable to apply any United States
dollars or non-callable Government Securities in accordance with Sections 7.2(b)
or 7.2(c) hereof, as the case may be, by reason of any order or judgment of any
court or governmental authority enjoining, restraining or otherwise prohibiting
such application, then the Company's obligations under this Agreement and the C
Notes and/or D Notes intended to be defeased shall be revived and reinstated as
though no deposit had occurred pursuant to Sections 7.2(b) or 7.2(c) hereof
until such time as the Trustee is permitted to apply all such money in
accordance with Sections 7.2(b) or 7.2(c) hereof, as the case may be; provided,
however, that, if the Company makes any payment of principal of, premium, if
any, or interest on any C Note and/or D Note intended to be defeased following
the reinstatement of its obligations, the Company shall be subrogated to the
rights of the holders of such Notes to receive such payment from the money held
by the Trustee.
(h) Notice. The Company will give each holder of C Notes and/or D
Notes, as applicable, written notice of each optional defeasance under this
Section 7.2 not less than thirty (30) days and not more than sixty (60) days
prior to the date fixed for such defeasance.
18
7.3 Contingent Prepayments Upon Change of Control. In the event of the
occurrence of a Change of Control, the Company shall give prompt written notice
thereof to each holder of the Notes, by facsimile transmission or registered
mail (and shall confirm such notice by prompt telephonic advice to an investment
officer of each such holder), which notice shall contain a written, irrevocable
offer by the Company to prepay, on a date specified in such notice (which date
shall be not less than thirty (30) days and not more than sixty (60) days after
the date of such notice), the Notes held by such holder in full (and not in
part).
Upon the acceptance of such offer by such holder mailed to the Company
at least ten (10) days prior to the date of prepayment specified in the
Company's offer, such prepayment shall be made at the principal amount of the
Notes so prepaid, plus a premium equal to 1.0% of the principal amount of the
Notes so prepaid.
Any offer by the Company to prepay the Notes pursuant to this Section
7.3 shall be accompanied by an Officers' Certificate certifying that the
conditions of this Section 7.3 have been fulfilled and specifying the
particulars of such fulfillment. If the holder of any Note shall accept such
offer, the principal amount of such Note shall become due and payable on the
date specified in such offer. In the event that there shall have been a
prepayment of any Note under this Section 7.3, the Company shall promptly give
notice to the holders of all of the Notes, accompanied by an Officers'
Certificate setting forth the principal amount of each of the Notes that was
prepaid.
7.4 Acquisition of Notes. The Company will not, and will not permit any
Subsidiary or Affiliate to, purchase, redeem or otherwise acquire, directly or
indirectly, any Note except upon the payment, prepayment or defeasance thereof
in accordance with the terms of this Section 7 and such Note or pursuant to a
purchase offer made pro rata to all of the holders of the Notes.
7.5 No Fraudulent Conveyance. The Company may not make any prepayment or
defeasance under this Section 7 unless the Company's capital and financial
resources shall be sufficient to effect such prepayment. The Company further
agrees that any such prepayment or defeasance may not (a) diminish the Company's
capital and financial resources to an unreasonable level, (b) hinder, delay or
defraud creditors of the Company or (c) otherwise amount to a "fraudulent
conveyance" as such term is defined in the Uniform Fraudulent Conveyance Act or
similar statute or act. At the written request of any holder of any Note being
prepaid or defeased, the Company agrees to provide an Officers' Certificate to
such holder to the effect of the foregoing in this Section 7.5.
8. Inspection; Confidentiality
8.1 Inspection. The Company will permit any authorized representatives
designated by you, so long as you or your nominee shall be the holder of any
Securities, or by any other holder of at least $500,000 of the original
principal amount of any tranche of the Notes, to visit and inspect any of the
properties of the Company or any of its Subsidiaries, including its and their
books of account, and to make copies and take extracts therefrom, and to discuss
its and their affairs, finances and accounts with its and their officers and
independent public accountants, all at such reasonable times and as often as may
be reasonably requested.
8.2 Confidentiality. You agree that you will not disclose without the prior
consent of the Company (other than to your employees, officers, directors,
advisors, auditors or counsel or to another holder of the Securities) any
information with respect to the Company or any Subsidiary which is furnished
pursuant to this Section 8 or Section 9 and which is designated by the Company
to you in writing as
19
confidential, provided that you may disclose any such information (a) as has
become generally available to the public, (b) as may be required in any report,
statement or testimony submitted to any municipal, state or federal regulatory
body having or claiming to have jurisdiction over you or to the National
Association of Insurance Commissioners or similar organizations or their
successors, (c) as may be required in response to any summons or subpoena or in
connection with any litigation, (d) in order to comply with any law, order,
regulation or ruling applicable to you or (e) to any prospective transferee in
connection with any contemplated transfer of any of the Notes by you who has,
prior to your disclosure of information to such transferee, agreed to be bound
by the terms of this Section 8.2 as if such transferee were a party to this
Agreement.
9. Covenants. The Company covenants that from the date of this Agreement through
the Closing and thereafter so long as any of the Notes are outstanding:
9.1 Reporting Requirements. The Company will maintain, and will cause each
of its Subsidiaries to maintain, a system of accounting established and
administered in accordance with GAAP, and will accrue, and will cause each of
its Subsidiaries to accrue, all such liabilities as shall be required by GAAP.
The Company will deliver (in duplicate) to you, so long as you or your nominee
shall be the holder of any Securities, and to each other holder of any
Securities:
(a) Weekly Sales Reports. On each Monday, the Company shall provide
unaudited reports of sales for the week ending on the immediately prior Saturday
for the current year week, the prior year week and the percentage of comparable
store sales in the current year week compared to the prior year week.
(b) Monthly Financial Reports. As soon as practicable, and in any
event within thirty (30) days after the end of each month (except that such
period shall be forty (40) days following any fiscal quarter), interim unaudited
consolidated and consolidating financial statements of the Company and its
Subsidiaries, for the Company and its consolidated Subsidiaries, including a
balance sheet, income statements and statements of cash flow, for the month- and
year-to-date period then ended, prepared in accordance with GAAP (subject to the
absence of footnotes and year end adjustments allowed by XXXX) and certified by
the chief financial officer of the Company, together with a comparison of such
financial statements to budget and the financial statements for the prior year,
together with a narrative management discussion and analysis of such financial
results;
(c) Annual Financial Reports. As soon as available, and in any event
within ninety (90) days after the end of each subsequent fiscal year, audited
consolidated annual financial statements of the Company and its consolidated
Subsidiaries, including consolidated balance sheets, consolidated income
statements and consolidated statements of cash flow for the fiscal year then
ended, prepared in accordance with GAAP, in comparative form and accompanied by
the unqualified opinion of a nationally recognized firm of independent certified
public accountants retained by the Company and its Subsidiaries;
(d) Compliance Certificate. Together with each delivery of financial
statements pursuant to subdivisions (b) and (c) of this Section 9.1, an
Officers' Certificate (i) stating that the signers have reviewed the terms of
this Agreement and have made, or caused to be made under their supervision, a
review in reasonable detail of the transactions and condition of the Company and
its Subsidiaries during the accounting period covered by such financial
statements and that such review has not disclosed the existence during or at the
end of such accounting period, and that the signers do not have knowledge of the
existence as at the date of the Officers' Certificate, of any condition or event
which constitutes an Event of Default or Potential Event of Default, or, if any
such condition or event existed or exists, specifying the nature and
20
period of existence thereof and what action the Company has taken or is taking
or proposes to take with respect thereto, and (ii) demonstrating in reasonable
detail compliance during and at the end of such accounting period with the
restrictions contained in Sections 9.2, 9.3 and 9.4;
(e) SEC Reports. If applicable, simultaneously with the sending or
filing thereof, as the case may be, copies of any definitive proxy statements,
financial statements or reports which the Company sends to its shareholders and
copies of any regular periodic and special reports or registration statements
which the Company files with the Securities and Exchange Commission (or any
Governmental Authority substituted therefor), including, but not limited to, all
Form 10-K and Form 10-Q reports, if any, or any report or registration statement
which the Company files with any national securities exchange;
(f) Accountants' Reports. Promptly upon receipt thereof, copies of all
final reports submitted to the Company by independent public accountants in
connection with each annual, interim or special audit of the books of the
Company or any Subsidiary made by such accountants, including, without
limitation, the comment letter submitted by such accountants to management in
connection with their annual audit;
(g) Notice of Event of Default. Within two (2) business days following
any principal officer of the Company or any other officer of the Company
involved in its financial administration obtaining knowledge of any condition or
event which constitutes an Event of Default or Potential Event of Default, or
that the holder of any Note has given any notice or taken any other action with
respect to a claimed Event of Default or Potential Event of Default under this
Agreement or that any Person has given any notice to the Company or any
Subsidiary or taken any other action with respect to a claimed default or event
or condition of the type referred to in Section 10(f), an Officers' Certificate
describing the same and the period of existence thereof and what action the
Company has taken, is taking and proposes to take with respect thereto;
(h) Other Notices. Within two (2) business days following any
principal officer of the Company or any other officer of the Company involved in
its financial administration obtaining knowledge of the occurrence of any (i)
"reportable event," as such term is defined in Section 4043 of ERISA, or (ii)
non-exempt "prohibited transaction," as such term is defined in Section 4975 of
the Code, in connection with any Plan or any trust created thereunder, a written
notice specifying the nature thereof, what action the Company has taken, is
taking and proposes to take with respect thereto, and, when known, any action
taken or threatened by the Internal Revenue Service or the PBGC with respect
thereto, provided that, with respect to the occurrence of any "reportable event"
as to which the PBGC has waived the thirty-day reporting requirement, such
written notice need be given only at the time notice is given to the PBGC; and
(i) Other Reports and Information. With reasonable promptness, such
other financial reports and information and data with respect to the Company or
any of its Subsidiaries as from time to time may be reasonably requested.
9.2 Debt. The Company will not, and will not permit any Subsidiary to,
directly or indirectly, create, incur, assume, guarantee, or otherwise become or
remain directly or indirectly liable with respect to, any Debt, except that the
Company and any Subsidiary may become and remain liable with respect to Debt if,
on the date the Company or such Subsidiary becomes liable with respect to such
Debt and immediately after giving effect thereto and to the concurrent
retirement of any other Debt, the Company would be in compliance with all of the
terms of Section 9.3 as if compliance with the terms of Section 9.3 were
determined as of such date.
21
For the purposes of this Section 9.2, any Person becoming a Subsidiary
after the date of this Agreement shall be deemed to have incurred all of its
then outstanding Debt at the time it becomes a Subsidiary, and any Person
extending, renewing or refunding any Debt shall be deemed to have incurred such
Debt at the time of such extension, renewal or refunding.
9.3 Financial Covenants.
(a) Limitation on Net Debt. The Company will not have outstanding Net
Debt in excess of (i) $47,000,000 for the time period commencing on the Closing
Date through October 31, 1999, (ii) $35,000,000 for the time period commencing
November 1, 1999 through December 31, 1999 or (iii) $20,000,000 at any time
thereafter.
(b) Limitation on Senior Secured Funded Debt. The Company will not
permit the ratio of (i) Senior Secured Funded Debt as of each date listed in the
table below, to (ii) Consolidated EBITDA for the period of four consecutive
fiscal quarters of the Company ending on such date, to be greater than the ratio
set forth opposite such date in the table below:
Quarter End Date Ratio
---------------- -----
September 30, 1999 10.0 to 1.0
December 31, 1999 1.80 to 1.0
March 31, 2000 1.80 to 1.0
June 30, 2000 1.80 to 1.0
September 30, 2000 2.80 to 1.0
December 31, 2000 1.80 to 1.0
March 31, 2001 1.80 to 1.0
June 30, 2001 1.80 to 1.0
September 30, 2001 2.80 to 1.0
December 31, 2001 1.80 to 1.0
March 31, 2002 1.80 to 1.0
and thereafter.
(c) Limitation on Funded Debt. The Company will not permit the ratio
of (i) Funded Debt as of each date listed in the table below, to (ii)
Consolidated EBITDA for the period of four consecutive fiscal quarters of the
Company ending on such date, to be greater than the ratio set forth opposite
such date in the table below:
Quarter End Date Ratio
---------------- -----
September 30, 1999 11.00 to 1.0
December 31, 1999 1.80 to 1.0
March 31, 2000 1.80 to 1.0
June 30, 2000 1.80 to 1.0
September 30, 2000 2.80 to 1.0
December 31, 2000 1.80 to 1.0
March 31, 2001 1.80 to 1.0
June 30, 2001 1.80 to 1.0
September 30, 2001 2.80 to 1.0
December 31, 2001 1.80 to 1.0
March 31, 2002 1.80 to 1.0
June 30, 2002 1.80 to 1.0
September 30, 2002 2.80 to 1.0
December 31, 2002 1.80 to 1.0
March 31, 2003 1.80 to 1.0
22
June 30, 2003 1.80 to 1.0
and thereafter.
(d) Minimum Interest Coverage. The Company will not permit the ratio
of (i) Consolidated EBITDA for the period of four consecutive fiscal quarters of
the Company ending on each date listed in the table below, to (ii) Interest
Expense for such period, to be less than the ratio set forth opposite such date
in the table below:
Quarter End Date Ratio
---------------- -----
September 30, 1999 1.70 to 1.0
December 31, 1999 2.75 to 1.0
March 31, 2000 3.00 to 1.0
June 30, 2000 3.50 to 1.0
September 30, 2000 3.50 to 1.0
December 31, 2000 3.50 to 1.0
March 31, 2001 3.50 to 1.0
June 30, 2001 3.50 to 1.0
September 30, 2001 3.50 to 1.0
and thereafter.
(e) Limitation on Capital Expenditures. The Company will not make or
commit to make any Capital Expenditure if the amount thereof, taken together
with all other Capital Expenditures made by the Company during the then fiscal
year, would exceed $10,000,000 without obtaining the prior written consent of a
Supermajority in Interest of the Notes, provided that:
(i) for the remainder of the 1999 calendar year, the Company may
not make Capital Expenditures in respect of any newly opened, acquired or
relocated stores, provided that the Company may open one (1) store in Novato,
California if it closes its existing store in Whiterock, Texas during calendar
year 1999;
(ii) in the 2000 calendar year, the Company may not make Capital
Expenditures in respect of any newly opened, acquired or relocated stores in
excess of $1,000,000;
(iii) in the 2001 calendar year and thereafter, the Company may
not, on an annual basis, make Capital Expenditures in respect of any newly
opened, acquired or relocated stores in excess of (A) $1,000,000 plus (B) up to
$3,000,000 in proceeds (after fees, expenses and capital gains taxes but
excluding the book value of inventory sold) from the sale or disposition of
existing stores of the Company during the applicable year.
(f) Capital Leases. The Company's obligations under Capital Leases for
any calendar year shall not exceed $1,000,000.
(g) Minimum EBITDA. The Company's Consolidated EBITDA shall be no less
than $21,500,000 in calendar year 1999 and $31,500,000 in calendar year 2000.
9.4 Liens, etc. The Company will not, and will not permit any Subsidiary
to, directly or indirectly create, incur, assume or permit to exist any Lien on
or with respect to any property or asset (including any document or instrument
in respect of goods or accounts receivable) of the Company or any Subsidiary,
whether now owned or held or hereafter acquired, or any income or profits
therefrom, except:
23
(a) Liens for taxes, assessments or other governmental charges the
payment of which is not at the time required by Section 9.11;
(b) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics and materialmen incurred in the ordinary course of business for sums
not yet due or the payment of which is not at the time required by Section 9.11;
(c) Liens (other than any Lien imposed by ERISA or the Code in
connection with a Plan) incurred or deposits made (i) in connection with
workers' compensation, unemployment insurance and other types of social
security, or (ii) to secure (or to obtain letters of credit that secure) the
performance of tenders, statutory obligations, surety and appeal bonds, bids,
leases, performance bonds, purchase, construction or sales contracts and other
similar obligations, in each case not incurred or made in connection with the
borrowing of money, the obtaining of advances or credit or the payment of the
deferred purchase price of property;
(d) any attachment or judgment Lien, unless the judgment it secures
shall not, within sixty (60) days after the entry thereof, have been discharged
or execution thereof stayed pending appeal, or shall not have been discharged
within sixty (60) days after the expiration of any such stay;
(e) leases or subleases granted to others, easements, rights-of-way,
restrictions and other similar charges or encumbrances, in each case incidental
to, and not interfering with, the ordinary conduct of the business of the
Company or any Subsidiary; and
(f) Liens incurred to secure the Debt (other than subordinated Debt)
of the Company outstanding in compliance with Section 9.2.
For the purposes of this Section 9.4, any Person becoming a Subsidiary after the
date of this Agreement shall be deemed to have incurred all of its then
outstanding Liens at the time it becomes a Subsidiary, and any Person extending,
renewing or refunding any Debt secured by any Lien shall be deemed to have
incurred such Lien at the time of such extension, renewal or refunding.
9.5 Investments, Guaranties, etc. The Company will not, and will not permit
any Subsidiary to, directly or indirectly make or own any Investment in any
Person, or create or become or be liable with respect to any Guaranty, except:
(a) the Company and its Subsidiaries may make and own Investments in
(i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or issued by any agency thereof
maturing within one year from the date of acquisition thereof,
(ii) marketable direct obligations issued by any state of the
United States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one year from the date of
acquisition thereof and having as at any date of determination the highest
rating obtainable from either Standard & Poor's Corporation or Xxxxx'x Investors
Service, Inc.,
24
(iii) commercial paper maturing no more than 270 days from the
date of creation thereof and having as at any date of determination the highest
rating obtainable from either Standard & Poor's Corporation or Xxxxx'x Investors
Service, Inc.,
(iv) certificates of deposit maturing within one year from the
date of acquisition thereof issued by commercial banks incorporated under the
laws of the United States of America or any state thereof or the District of
Columbia, each having as at any date of determination combined capital and
surplus of not less than $300,000,000 ("Permitted Banks") or a foreign branch
thereof,
(v) bankers' acceptances eligible for rediscount under
requirements of The Board of Governors of the Federal Reserve System and
accepted by Permitted Banks,
(vi) obligations of the type described in clauses (i) through
(iv) above purchased from a securities dealer designated as a "primary dealer"
by the Federal Reserve Bank of New York or a Permitted Bank as counterparty
pursuant to a repurchase agreement obligating such counterparty to repurchase
such obligations not later than fourteen (14) days after the purchase thereof
and which provides that the obligations which are the subject thereof are held
for the benefit of the Company and its Subsidiaries by a custodian which is a
Permitted Bank and which is not the counterparty to the repurchase agreement in
question, and
(vii) the securities of any investment company registered under
the Investment Company Act of 1940 which is a "money market fund" within the
meaning of regulations of the Securities and Exchange Commission, or an interest
in a pooled fund maintained by a Permitted Bank having comparable investment
restrictions;
(b) the Company and its Wholly-Owned Subsidiaries may make and own
Investments in any Wholly-Owned Subsidiary or any Person which simultaneously
therewith becomes a Wholly-Owned Subsidiary, if such Wholly-Owned Subsidiary or
such Person is a corporation organized under the laws of the United States or
any state thereof or the District of Columbia or Canada or Mexico and
substantially all of whose assets are located and substantially all of whose
business is conducted within the United States;
(c) the Company's Subsidiaries may become and remain liable with
respect to Guaranties of the Notes set forth in the Guaranty Agreement; and
(d) the Company's Subsidiaries may become and remain liable with
respect to Guaranties of the obligations of the Company under the Credit
Agreement.
Notwithstanding the foregoing, no Guaranty (other than those guaranties
described in clauses (c) and (d) above) shall be permitted by this Section 9.5
unless either the maximum dollar amount of the obligation being guaranteed is
readily ascertainable by the terms of such obligation or the agreement or
instrument evidencing such Guaranty specifically limits the dollar amount of the
maximum exposure of the guarantor thereunder.
9.6 Restricted Payments. The Company will not, and will not permit any
Subsidiary to, directly or indirectly declare, order, pay, make or set apart any
sum or property for any Restricted Payment.
9.7 Transactions with Affiliates. The Company will not, and will not permit
any Subsidiary to, directly or indirectly, engage in any transaction (or series
of related transactions) material to the Company
25
or any of its Subsidiaries (including, without limitation, the purchase, sale or
exchange of assets or the rendering of any service) with any Affiliate of the
Company, except upon fair and reasonable terms that are no less favorable to the
Company or such Subsidiary, as the case may be, than those which might be
obtained, in the good faith judgment of the Company, in an arm's length
transaction at the time from Persons which are not such an Affiliate.
9.8 Consolidation, Merger, Sale of Assets, etc. The Company will not, and
will not permit any Subsidiary to, directly or indirectly,
(a) acquire any Person or all or substantially all of the assets of
any Person whether by purchase, consolidation, merger or otherwise, or
consolidate with or merge into any other Person or permit any other Person to
consolidate with or merge into the Company, except that if no Event of Default
shall have occurred and be continuing:
(i) any Subsidiary may consolidate with or merge into the Company
or a Wholly-Owned Subsidiary if the Company or such Wholly-Owned Subsidiary, as
the case may be, shall be the surviving corporation and if, immediately after
giving effect to such transaction, no condition or event shall exist which
constitutes an Event of Default or Potential Event of Default;
(ii) any corporation (other than a Subsidiary) may consolidate
with or merge into the Company if the Company shall be the surviving corporation
and if, immediately after giving effect to such transaction, (x) no condition or
event shall exist which constitutes an Event of Default or Potential Event of
Default, (y) substantially all of the assets of the Company shall be located and
substantially all of its business shall be conducted within the United States,
and (z) the Company could incur at least $1.00 of additional Debt in compliance
with Section 9.2;
(iii) any corporation may consolidate with or merge into any
Subsidiary, or any Subsidiary may consolidate with or merge into another
corporation, if the surviving corporation shall be a Wholly-Owned Subsidiary
following the consolidation or merger, and if, immediately after giving effect
to the transaction, (x) no condition or event shall exist which constitutes an
Event of Default or Potential Event of Default, (y) substantially all of the
assets of such Wholly Owned Subsidiary shall be located and substantially all of
its business shall be conducted within the United States, and (z) the Company
could incur at least $1.00 of additional Debt in compliance with Section 9.2;
and
(iv) the Company may consolidate with or merge into any other
corporation if (x) the surviving corporation is a corporation organized and
existing under the laws of the United States of America or a state thereof, with
substantially all of its assets located and substantially all of its business
conducted within the United States, (y) such corporation expressly assumes, by
an agreement satisfactory in substance and form to the holders of a
Supermajority in Interest of the Notes (which agreement may require the delivery
in connection with such assumption of such opinions of counsel as such holders
may reasonably require), the obligations of the Company under this Agreement and
under the Notes, (z) immediately after giving effect to such transaction (and
such assumption) (A) such corporation shall not be liable with respect to any
Debt or allow its property to be subject to any Lien which it could not become
liable with respect to or allow its property to become subject to under this
Agreement on the date of such transaction, (B) such corporation could incur at
least $1.00 of additional Debt in compliance with Section 9.2 and (C) no
condition or event shall exist which constitutes an Event of Default or a
Potential Event of Default; and
26
(v) with the prior written consent of a Supermajority in Interest
of the Notes, the Company or any Subsidiary of the Company may acquire any
Person or all or substantially all of the assets of any Person whether by
purchase, consolidation, merger or otherwise; or
(b) sell, lease, abandon or otherwise dispose of all or substantially
all its assets, except that:
(i) any Subsidiary may sell, lease or otherwise dispose of all or
substantially all its assets to the Company or a Wholly-Owned Subsidiary;
(ii) the Company may sell, lease or otherwise dispose of all or
substantially all its assets to any corporation into which the Company could be
consolidated or merged in compliance with subdivision (a)(iv) of this Section
9.8, provided that (x) each of the conditions set forth in such subdivision
(a)(iv) shall have been fulfilled, and (y) no such disposition shall relieve the
Company from its obligations under this Agreement or the Notes; or
(c) sell, lease, abandon or otherwise dispose of any of its assets
(except in a transaction permitted by subdivision (b) or (d) of this Section
9.8), except that (i) the Company and its Subsidiaries may sell their inventory
in the ordinary course of business, (ii) the Company and its Subsidiaries may
dispose of obsolete equipment in the ordinary course of business and (iii) the
Company may sell up to twenty (20) stores (including the seventeen (17) stores
currently under contract or negotiation) as more particularly described on
Schedule 9.8 hereto, and the holders of the Notes shall release without payment
any Lien securing the Notes against such stores at the time of any such sale; or
(d) enter into, or permit any of its Subsidiaries to enter into, any
sale and leaseback transaction; provided that the Company may enter into a sale
and leaseback transaction if (i) the Company could have (a) incurred Debt
pursuant to Section 9.2 in an amount equal to the capitalized amount in respect
of such transaction that would appear on the balance sheet of the Company in
accordance with GAAP relating to such sale and leaseback transaction and (b)
incurred a Lien to secure such Debt pursuant to the provisions of Section 9.4
hereof, and (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
holders of the Notes) of the property that is the subject of such sale and
leaseback transaction.
9.9 Subsidiary Stock and Indebtedness. Except for the pledge of shares of
stock of any Subsidiary of the Company pursuant to the Credit Agreement, the
Company will not, and will not permit any Subsidiary to:
(a) directly or indirectly sell, assign, pledge or otherwise dispose
of any shares of stock of (or warrants, rights or options to acquire stock of)
any Subsidiary except to a Wholly-Owned Subsidiary or a corporation that becomes
a Wholly-Owned Subsidiary upon consummation of the transaction, or as directors'
qualifying shares if required by applicable law;
(b) permit any Subsidiary directly or indirectly to sell, assign,
pledge or otherwise dispose of any shares of stock of (or warrants, rights or
options to acquire stock of) any other Subsidiary, except to the Company or a
Wholly-Owned Subsidiary or as directors' qualifying shares if required by
applicable law;
27
(c) permit any Subsidiary to have outstanding any shares of Preferred
Stock other than shares of Preferred Stock which are owned by the Company or a
Wholly-Owned Subsidiary; or
(d) permit any Subsidiary directly or indirectly to issue or sell
(including, without limitation, in connection with a merger or consolidation of
a Subsidiary otherwise permitted-by Section 9.8(a)) any shares of its stock (or
warrants, rights or options to acquire its stock) except to the Company, a
Wholly-Owned Subsidiary or a corporation that becomes a Wholly-Owned Subsidiary
upon consummation of the transaction, or as directors' qualifying shares if
required by applicable law.
9.10 Corporate Existence, Business and Franchise Relations. The Company
will at all times preserve and keep in full force and effect its corporate
existence, and rights and franchises deemed material to its business (including,
without limitation, the operations of the Company's franchisees), and those of
each of its Subsidiaries, except as otherwise specifically permitted by Section
9.8 and except that the corporate existence of any Subsidiary may be terminated
if, in the good faith judgment of the Board, such termination is in the best
interest of the Company and is not disadvantageous to the holders of the Notes.
The Company will not, and will not permit any Subsidiary to, engage in any
business other than the business of (a) selling party goods and supplies and
rendering related services and (b) conducting its franchise operations for the
purposes described in the foregoing clause (a). The Company shall use
commercially reasonable efforts to maintain good business relationships with its
franchisees. Without limiting the generality of the foregoing, the Company shall
at all times conduct itself in a manner consistent with the terms of its
franchise agreements.
9.11 Payment of Taxes and Claims. The Company will, and will cause each
Subsidiary to, pay all material taxes, assessments and other governmental
charges imposed upon it or any of its properties or assets or in respect of any
of its franchises, business, income or profits before any penalty or interest
accrues thereon, and all claims (including, without limitation, claims for
labor, services, materials and supplies) for sums which have become due and
payable and which by law have or might become a Lien upon any of its properties
or assets, provided that no such charge or claim need be paid if being contested
in good faith by appropriate proceedings promptly initiated and diligently
conducted and if such reserves or other appropriate provision, if any, as shall
be required by GAAP shall have been made therefor.
9.12 Compliance with ERISA. The Company will not, and will not permit any
Subsidiary to,
(a) engage in any transaction in connection with which the Company or
any Subsidiary could be subject to either a civil penalty assessed pursuant to
Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, terminate
or withdraw from any Plan (other than a Multiemployer Plan) in a manner, or take
any other action with respect to any such Plan (including, without limitation, a
substantial cessation of operations within the meaning of Section 4062(e) of
ERISA), which could result in any liability of the Company or any Subsidiary to
the PBGC or to a trustee appointed under Section 4042(b) or (c) of ERISA, incur
any liability on account of a termination of a Plan under Section 4064 of ERISA,
fail to make full payment when due of all amounts which, under the provisions of
any Plan, the Company or any Subsidiary is required to pay as contributions
thereto, or permit to exist any accumulated funding deficiency, whether or not
waived, with respect to any Plan (other than a Multiemployer Plan), if, in any
such case, such penalty or tax or such liability, or the failure to make such
payment, or the existence of such deficiency, as the case may be, could have a
Material Adverse Effect;
(b) permit the present value of all vested accrued benefits under all
Plans maintained at such time by the Company and any Subsidiary (other than
Multiemployer Plans) guaranteed under Title IV
28
of ERISA to exceed the current value of the assets of such Plans allocable to
such vested accrued benefits by more than $1,000,000;
(c) permit the aggregate complete or partial withdrawal liability
under Title IV of ERISA with respect to Multiemployer Plans incurred by the
Company and its Subsidiaries to exceed $1,000,000; or
(d) permit the sum of (i) the amount by which the current value of all
vested accrued benefits referred to in subdivision (b) of this Section 9.12
exceeds the current value of the assets referred to in such subdivision (b) and
(ii) the amount of the aggregate incurred withdrawal liability referred to in
subdivision (c) of this Section 9.12 to exceed $1,000,000.
For the purposes of subdivisions (c) and (d) of this Section 9.12, the amount of
the withdrawal liability of the Company and its Subsidiaries at any date shall
be the aggregate present value of the amount claimed to have been incurred less
any portion thereof as to which the Company reasonably believes, after
appropriate consideration of possible adjustments arising under Sections 4219
and 4221 of ERISA, it and its Subsidiaries will have no liability, provided that
the Company shall obtain prompt written advice from independent actuarial
consultants supporting such determination.
9.13 Maintenance of Properties; Insurance. The Company will maintain or
cause to be maintained in good repair, working order and condition all
properties used or useful in the business of the Company and its Subsidiaries
and from time to time will make or cause to be made all appropriate repairs,
renewals and replacements thereof, except where the failure to make any repairs,
renewals, or replacements would not have a Material Adverse Effect. The Company
will maintain or cause to be maintained, with financially sound and reputable
insurers, insurance with respect to its properties and business and the
properties and business of its Subsidiaries against loss or damage of the kinds
customarily insured against by corporations of established reputation engaged in
the same or similar business and similarly situated, of such types and in such
amounts as are customarily carried under similar circumstances by such other
corporations. Such insurance may be subject to co-insurance, deductibility or
similar clauses which, in effect, result in self-insurance of certain losses,
provided that such self-insurance is in accord with the approved practices of
corporations similarly situated and adequate insurance reserves are maintained
in connection with such self-insurance.
9.14 Additional Guaranties. The Company shall cause any Person that
hereafter becomes a Subsidiary of the Company to execute and deliver to the
holders of the Notes a Guaranty Agreement with respect to the obligations of the
Company hereunder and under the Notes, substantially in the form of Exhibit K,
with such changes to such form as may be appropriate to reflect the identity and
circumstances of the guarantor.
9.15 Other Loan Agreements. The Company will not enter into any amendment
or modification of the Credit Agreement that would:
(a) accelerate the amount or the time of any prepayment or payment of
the principal amount of Debt outstanding under the Credit Agreement, the Bank
Standstill Agreement or the Vendor Standstill Agreement; or
(b) provide for per annum interest rates payable on the Debt
outstanding under the Credit Agreement at any time in excess of 1.0% over the
per annum interest rates that would otherwise be payable
29
on such Debt at such time in accordance with the applicable provisions of the
Credit Agreement as in effect on the Closing Date; or
(c) reduce the commitment of the lenders under the Credit Agreement
(other than the Bank Standstill Agreement) to provide revolving credit loans to
the Company or it Subsidiaries (excluding a voluntary reduction by the Company
of the revolving credit commitment pursuant to the terms of the Credit
Agreement); without, in each case, obtaining the prior written consent to such
amendment or change of a Supermajority in Interest of the Notes.
9.16 Restrictions Affecting Subsidiaries. The Company will not, and will
not permit any Subsidiary to, create or otherwise permit to exist any
restriction on the ability of any Subsidiary to pay dividends or make any other
distributions on its capital stock or any other interest in its profits owned by
the Company or any other Subsidiary, or pay any Debt owed to the Company or any
other Subsidiary, other than restrictions contained in the Credit Agreement as
in effect on the date of this Agreement.
9.17 Insurance. The Company will:
(a) Keep all of its property insured by insurance companies having
A.M. best ratings of not less than A- which are licensed to do business in all
jurisdictions in which assets of the Company and its Subsidiaries are located
against loss or damage by fire or other risk usually insured against under
extended coverage endorsement and theft, burglary, and pilferage, together with
such other hazards as a Supermajority in Interest of the Notes may reasonably
from time to time request, in amounts satisfactory to a Supermajority in
Interest of the Notes and naming the holders of the Notes as loss payee thereon
pursuant to a loss payee clause satisfactory to the holders of the Notes;
(b) Maintain at all times liability insurance coverage against such
risks and in such amounts as are customarily maintained by others in similar
businesses, such insurance to be carried by insurance companies having A.M. best
ratings of not less than A- which are licensed to do business in the states in
which the Company and its Subsidiaries conduct business, including without
limitation statutory limits of worker's compensation insurance including
employer's liability to the extent required by means all provisions of statutes,
rules, regulations and orders of any the government of the United States of
America, any other nation or any political subdivision thereof, whether state or
local, and any agency, authority, instrumentality, regulatory body, court,
central bank or other entity exercising executive, legislative, judicial,
taxing, regulatory or administrative powers or functions of or pertaining to
government, applicable to the Company, and all orders and decrees of all courts
and arbitrators in proceedings or actions in which the Company in question is a
party; and
(c) Deliver certificates of insurance for such policy or policies to
the holders of the Notes, containing endorsements, in form satisfactory to such
holders, providing that the insurance shall not be cancelable, except upon
thirty (30) days' prior written notice to such holders. In the event of any
termination or notice of nonpayment by any insurer with respect to any policy or
any lapse in the coverage thereunder, the Company shall cause such insurer to
give prompt written notice to the holders of the Notes of the occurrence of such
termination, nonpayment or lapse.
9.18 Use of Proceeds. The Company will apply the proceeds of the sale of
the Securities, promptly following the Closing, (a) to acquire seasonal
inventory for "Halloween" in the aggregate amount of approximately $20,000,000
as set forth on Schedule 9.18, (b) to the repayment of outstanding debt under
the Credit Agreement/Bank Standstill Agreement in the aggregate amount of
approximately $4,000,000, (c) to the payment of fees and expenses incurred in
connection with the offering and sale of the
30
Securities in the aggregate amount of approximately $450,000 and (d) the balance
of approximately $5,550,000 to working capital needs.
9.19 Relocation; Use of Name. The Company will not relocate its executive
offices, open new places of business or relocate existing places of business,
maintain any of its assets or records with respect to its assets at any other
locations than those locations presently kept or maintained, as set forth on
Schedule 5.16 hereto, or use any corporate name (other than its own) or any
fictitious name, except, in each case, upon thirty (30) days prior written
notice to the holders of the Notes and after the delivery to the holders of
financing statements in form satisfactory to a Supermajority in Interest of the
Notes.
9.20 Seasonal Orders. The Company shall employ the manual oversight
inventory ordering and inventory management processes for the "Halloween" season
as the Company used in previous years, including, but not limited to, utilizing
materially the same degree of participation by the Company's executive
management.
9.21 Option Grants. The Company may not grant options to purchase more than
500,000 shares of Common Stock at an exercise price of less than $10.00 per
share (subject to adjustment for stock splits, stock dividends and similar
transactions).
9.22 Note Ratings. The Company shall use its best efforts to maintain
credit ratings or "shadow ratings" from a nationally recognized rating service
with respect to each tranche of the Notes and shall promptly advise the holders
of the Notes of the initial ratings and any changes in such ratings.
9.23 Governance. The Company shall comply with its obligations in Section 4
of the Investor Rights Agreement.
9.24 Audited Financial Statements. The Company agrees to provide to you,
not later than September 30, 1999, audited consolidated financial statements of
the Company and its consolidated Subsidiaries for the fiscal period from January
1, 1998 to July 3, 1999, which statements shall be prepared in accordance with
GAAP and fairly present, as of the date thereof and for the periods covered
thereby the financial position and results of operations of the Company and its
Subsidiaries.
9.25 Payments to Vendors. The Company shall not prior to January 15, 2000
make any payments to its vendors or trade creditors that are parties to the
Vendor Standstill Agreement in respect of the remaining amounts due to such
vendors or creditors as of the date hereof other than payments of the Trade
Notes (as such term is defined in the Vendor Standstill Agreement) in accordance
with their terms.
9.26 Perfection of Security Interest. Within five (5) Business Days of the
Closing, the Company and Party City Michigan shall have taken all actions
necessary to provide a perfected security interest in favor of you and the Other
Purchasers in the Collateral (as such term is defined in the Security Agreement
(Parent) and the Security Agreement (Subsidiary)), including, without
limitation, the execution of UCC-1 Financing Statements for all facilities of
the Company and Party City Michigan.
9.27 Year 2000 Compliance. The Company agrees to use its best efforts to
implement the tests and other steps identified on Schedule 5.24 in a timely
manner in order to comply with the requirements of clauses (a) through (d) of
Section 5.24.
10. Events of Default; Acceleration. If any of the following conditions or
events ("Events of Default") shall occur and be continuing:
31
(a) if the Company shall default in the payment of any principal of or
premium, if any, on any Note when the same becomes due and payable, whether at
maturity or at a date fixed for prepayment or by declaration or otherwise; or
(b) if the Company shall default in the payment of any interest on any
Note for more than five days after the same becomes due and payable; or
(c) if the Company shall default in the performance of or compliance
with any term contained in Sections 9.3, 9.6 and 9.8; or
(d) if the Company shall default in the performance of or compliance
with any term contained in this Agreement or the other Operative Agreements
other than Sections 9.3, 9.6 and 9.8 and such default shall not have been
remedied within thirty (30) days after such failure shall first have become
known to any officer of the Company or written notice thereof shall have been
received by the Company from any holder of any Note; or
(e) if any representation or warranty made in writing by or on behalf
of the Company in this Agreement or in any instrument furnished in compliance
with this Agreement shall prove to have been false or incorrect in any material
respect on the date as of which made; or
(f) if the Company or any Subsidiary shall default (as principal or
guarantor or other surety) in the payment of any principal of or premium or
interest on any Debt which is outstanding in a principal amount of at least
$500,000 (other than the Notes), or if any event shall occur or condition shall
exist in respect of any such Debt which is outstanding in a principal amount of
at least $500,000 or under any evidence of any such Debt or of any mortgage,
indenture or other agreement relating thereto, and as a result of such default,
event or condition the holder or holders of such Debt shall have caused the
acceleration of the payment of such Debt before its regularly scheduled dates of
payment; or
(g) if any Guaranty Agreement shall be unenforceable or shall cease to
be in full force and effect as to any Subsidiary; or
(h) if a final judgment or judgments shall be rendered against the
Company or any Subsidiary for the payment of money in excess of $500,000 (in
excess of insurance coverage) in the aggregate and any one of such judgments
shall not be discharged or execution thereon stayed pending appeal, within sixty
(60) days after entry thereof, or, in the event of such a stay, such judgment
shall not be discharged within sixty (60) days after such stay expires; or
(i) if the Company or any Subsidiary shall (i) be generally not paying
its debts as they become due, (ii) file, or consent by answer or otherwise to
the filing against it of, a petition for relief or reorganization or arrangement
or any other petition in bankruptcy, for liquidation or to take advantage of any
bankruptcy or insolvency law of any jurisdiction, (iii) make an assignment for
the benefit of its creditors, (iv) consent to the appointment of a custodian,
receiver, trustee or other officer with similar powers with respect to it or
with respect to any substantial part of its property, (v) be adjudicated
insolvent or (vi) take corporate action for the purpose of any of the foregoing;
or
(j) if a court or governmental authority of competent jurisdiction
shall enter an order appointing, without consent by the Company or any
Subsidiary, a custodian, receiver, trustee or other officer with similar powers
with respect to it or with respect to any substantial part of its property, or
if an order for relief shall be entered in any case or proceeding for
liquidation or reorganization or otherwise to
32
take advantage of any bankruptcy or insolvency law of any jurisdiction, or
ordering the dissolution, winding-up or liquidation of the Company or any
Subsidiary, or if any petition for any such relief shall be filed against the
Company or a Subsidiary and such petition shall not be dismissed within sixty
(60) days; or
(k) if any default or "event of default" under the Credit Agreement,
the Bank Standstill Agreement or, the Vendor Standstill Agreement shall have
occurred and be continuing;
(l) if any restatement is made of the Company's financial statements
for periods prior to and including the 1997 fiscal year, including, without
limitation, its previously reported earnings, for any time periods prior to the
date thereof; and
(m) any breach of the provisions of paragraphs 2, 3 or 4 of the Letter
Agreement;
then, (x) upon the occurrence of any Event of Default described in subdivision
(i) or (j) of this Section 10 with respect to the Company (other than such an
Event of Default described in clause (i) of subdivision (i) or described in
clause (vi) of subdivision (i) by virtue of the reference in such clause (vi) to
such clause (i)), the unpaid principal amount of and accrued interest on the
Notes shall automatically become due and payable or (y) upon the occurrence of
any other Event of Default, a Supermajority in Interest of the Notes may at any
time (unless all defaults shall theretofore have been remedied) at its option,
by written notice or notices to the Company, declare all the Notes to be due and
payable, whereupon all of the Notes shall forthwith mature and become due and
payable, together with interest accrued thereon, all without presentment,
demand, protest or notice, which are hereby waived; provided that during the
existence of an Event of Default described in subdivision (a), (b) or (c) of
this Section 10, then, irrespective of whether a Supermajority in of the Notes
shall have declared all the Notes to be due and payable pursuant to this Section
10, any holder of the Notes may, at its option, by notice in writing to the
Company, declare the Notes then held by such holder to be due and payable,
whereupon the Notes then held by such holder shall forthwith mature and become
due and payable, together with interest accrued thereon, without presentment,
demand, protest or notice, all of which are hereby waived.
In the event the Notes become due and payable pursuant to the
preceding paragraph (an "Acceleration Event"), all amounts paid by the Company
to you and to the Other Purchasers on account of the Notes shall be allocated
pro rata among all of the Notes at the time outstanding in proportion to the
unpaid principal amounts thereof (the "Proportional Amount"). To the extent any
holder of Notes receives amounts from the Company following an Acceleration
Event in excess of such holder's Proportional Amount, such holder will hold in
trust for the benefit of the other holders of Notes such excess amounts.
Further, such holder may not dispose of such excess amounts other than to the
other holders of Notes or the Company for the benefit of such other holders so
as to provide for the pro rata distribution of all payments from the Company
upon the Notes following the Acceleration Event. Following any Acceleration
Event the holder of any Note may request an Officers' Certificate certifying
that the Company has made payments in compliance with this paragraph of this
Section 10.
At any time after the principal of, and interest accrued on, any or
all of the Notes are declared due and payable, a Supermajority in Interest of
the Notes by written notice to the Company may rescind and annul any such
declaration and its consequences if (x) the Company has paid all overdue
interest on the Notes, the principal of and premium, if any, on any Notes which
have become due otherwise than by reason of such declaration, and interest on
such overdue principal and premium and (to the extent permitted by applicable
law) any overdue interest in respect of the Notes at the rate of 450 basis
points above the rate of interest on the face of the Notes (or, if less than
such rate, the highest legal rate permitted
33
by applicable law), (y) all Events of Default, other than non-payment of amounts
which have become due solely by reason of such declaration, and all conditions
and events which constitute Events of Default or Potential Events of Default
have been cured or waived pursuant to Section 18, and (z) no judgment or decree
has been entered for the payment of any monies due pursuant to the Notes or this
Agreement; but no such rescission and annulment shall extend to or affect any
subsequent Event of Default or Potential Event of Default or impair any right
consequent thereon.
11. Remedies on Default, etc. In case any one or more Events of Default or
Potential Events of Default shall occur and be continuing, the holder of any
Note at the time outstanding may proceed to protect and enforce the rights of
such holder by an action at law, suit in equity or other appropriate proceeding,
whether for the specific performance of any agreement contained herein or in
such Note, or for an injunction against a violation of any of the terms hereof
or thereof, or in aid of the exercise of any power granted hereby or thereby or
by law or otherwise. The Company agrees to pay all reasonable costs and expenses
(including, without limitation, (a) the reasonable fees and out-of-pocket
expenses of, prior to an Event of Default, one (1) legal counsel for the agent
for the holders of the Notes and one (1) additional legal counsel for the holder
of the Notes and, following an Event of Default, one (1) legal counsel for the
agent for the holders of the Notes and one (1) additional legal counsel for each
of the holders of the Notes and (b) the fees and Administrative Expenses (as
such term is defined in the Collateral Agency Agreement) of the Collateral Agent
under the Collateral Agency Agreement and the other Operative Agreements))
incurred by the Collateral Agent or the holders of the Notes in connection with
interpreting, administering, preserving, enforcing or exercising any rights or
remedies under this Agreement, the Notes or any other Operative Agreement,
whether or not legal action is instituted. Any fees, expenses or other charges
which the Collateral Agent or the holders of the Notes are entitled to receive
from the Company hereunder shall constitute an obligation of the Company
pursuant to the Notes, and shall bear interest until paid at a rate per annum
equal to the maximum rate in effect and permitted hereunder.
In case of a default in the payment of any principal of or premium, if
any, or interest on any Note, the Company will pay to the holder thereof such
further amount as shall be sufficient to cover the cost and expenses of
collection, including, without limitation, reasonable attorneys' fees, expenses
and disbursements. No course of dealing and no delay on the part of any holder
of any Note in exercising any right, power or remedy shall operate as a waiver
thereof or otherwise prejudice such holder's rights, powers or remedies. No
right, power or remedy conferred by this Agreement or by any Note upon any
holder thereof shall be exclusive of any other right, power or remedy referred
to herein or therein or now or hereafter available at law, in equity, by statute
or otherwise.
12. Security Interest and Intercreditor Arrangements.
12.1 Security Agreement. The Notes and any obligation with respect to any
Guaranty of the Notes shall be secured by liens in substantially all of the
Company's assets as provided in the Security Agreement (Parent) and the Security
Agreement (Subsidiary) and the other agreements listed in Section 4.5 and shall
have the relative rights and priorities set forth in the Intercreditor
Agreement.
12.2 Intercreditor Agreement. The Notes have the relative rights and
priorities set forth in the Intercreditor Agreement.
34
13. Definitions.
13.1 Certain Definitions. As used herein the following terms have the
following respective meanings (refer to Section 13.2 for location of other
definitions):
Affiliate: any Person directly or indirectly controlling or controlled by
or under common control with the Company or any Subsidiary, including (without
limitation) any Person beneficially owning or holding ten percent (10.0%) or
more of any class of voting securities of the Company or any Subsidiary or any
other corporation of which the Company or any Subsidiary owns or holds ten
percent (10.0%) or more of any class of voting securities, provided that, for
purposes of this definition, "control" (including, with correlative meanings,,
the terms "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 and policies of such Person,
whether through the ownership of voting securities or by contract or otherwise,
and provided, further, that neither you nor any other Person which is an
institution shall be deemed to be an Affiliate of the Company or any of its
Subsidiaries solely by reason of ownership of the Notes or other securities
issued in exchange for the Notes or by reason of having the benefits of any
agreements or covenants of the Company contained in this Agreement.
Board: the Board of Directors of the Company or a committee of three or
more directors lawfully exercising the relevant powers of the Board.
Business Day: any day except a Saturday, a Sunday or other day on which
commercial banks in Cleveland, Los Angeles, or New York City are required or
authorized by law to be closed.
Capital Expenditure: any amount paid or incurred in connection with the
purchase of real estate, plant, machinery, equipment, computer hardware or
software or other similar expenditure (including all renewals, improvements and
replacements thereto, and all obligations under any lease of any of the
foregoing) which would be required to be capitalized and shown on the
consolidated balance sheet of the Company in accordance with GAAP.
Capital Lease: as applied to any Person, any lease of any property (whether
real, personal or mixed) by such Person as lessee which would, in accordance
with GAAP, be required to be classified and accounted for as a capital lease on
a balance sheet of such Person, other than, in the case of the Company or a
Subsidiary, any such lease under which the Company or a Wholly-Owned Subsidiary
is the lessor.
Capital Lease Obligation: with respect to any Capital Lease, the amount of
the obligation of the lessee thereunder which would, in accordance with GAAP,
appear on a balance sheet of such lessee in respect of such Capital Lease.
CERCLA: the Comprehensive Environmental Response Compensation and Liability
Act of 1980, as amended from time to time.
Change of Control: other than through the exercise of the Warrants by you
or the Other Purchasers, (a) the sale, lease or transfer of all or substantially
all of the Company's assets to any Person or "group" (within the meaning of
Section 13(d) of the Exchange Act (hereinafter a "Group")) together with any
Affiliates thereof, (b) the liquidation of the Company, (c) the acquisition by
any Person or Group, together with any Affiliates thereof, of in excess of fifty
percent (50%) of the Voting Stock of the
35
Company, or (d) the first day on which a majority of the members of the Board
are not Continuing Directors.
Code: the Internal Revenue Code of 1986, as amended from time to time.
Collateral Agency Agreement: that certain Collateral Agency Agreement dated
as of August 16, 1999 by and among you and the Other Purchasers.
Collateral Agent: the "Collateral Agent" as defined in and serving from
time to time under the Collateral Agency Agreement.
Consolidated EBITDA: for any period, without duplication, (i) Consolidated
Net Income, plus (ii) for such period, any Interest Expense deducted in the
determination of Consolidated Net Income; plus (iii) any income, ad valorem, and
franchise taxes paid in cash and deducted in the determination of Consolidated
Net Income; plus (iv) amortization and depreciation and other non-cash charges
deducted in the determination of Consolidated Net Income for such period; plus
(v) immaterial extraordinary losses, losses on sales of assets (other than sales
of inventory in the ordinary course of business) and unrealized gains from
changes in currency; plus (vi) non-recurring non-cash charges of the Company or
its Subsidiaries for Permitted Acquisitions; plus the additional reserves, if
any, established by the Company pursuant to Section 2 of the Letter Agreement;
plus (vii) restructuring costs including related professional fees in calendar
year 1999 only (which amount shall not exceed $10.4 million); minus (viii) the
sum for such period of interest income, extraordinary gains, gains from sales of
assets (other than sales of inventory in the ordinary course of business) and
unrealized losses from changes in currency; provided that, if the Company or any
of its Subsidiaries completes a Permitted Acquisition during any Reference
Period, EBITDA for such Reference Period shall be reasonably determined on a pro
forma basis, as if such Permitted Acquisition was completed on the first day
thereof.
Consolidated Net Income: for any period, the aggregate of the net income
(or net loss) of the Company and its Subsidiaries for such period, determined on
a consolidated basis without duplication in accordance with GAAP.
Continuing Director: as of any date of determination, any member of the
Board who (i) was a member of the Board on the date hereof or (ii) was nominated
for election or elected to the Board with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
Copyrights: registered copyrights, copyright applications and unregistered
copyrights.
Credit Agreement: that certain Credit Agreement, dated as of April 22,
1998, among the Company, PNC Bank, National Association, as Agent, and the
lenders named therein, and all related notes, guaranties, security documents,
instruments and agreements executed in connection therewith and all other Loan
Documents thereunder, as such loan agreement and related documents and Loan
Documents may be amended, restated, supplemented, extended, renewed, refinanced,
refunded, replaced or otherwise modified from time to time (subject to the
approval requirements of Section 9.15) whether or not with the same agent,
trustee, representative, lenders or holders, and, so long as the aggregate
principal amount of Debt at any time outstanding thereunder does not exceed the
amount of the $54 million, irrespective of any changes in the terms and
conditions thereof.
Debt: as applied to any Person (without duplication):
36
(a) any indebtedness for borrowed money which such Person has directly or
indirectly created, incurred or assumed; and
(b) any indebtedness secured by any Lien in respect of property owned by
such Person, whether or not such Person has assumed or become liable for the
payment of such indebtedness; and
(c) any indebtedness with respect to which such Person has become directly
or indirectly liable and which represents or has been incurred to finance the
purchase price (or a portion thereof) of any property or services or business
acquired by such Person, whether by purchase, consolidation, merger or
otherwise; and
(d) any indebtedness of any other Person of the character referred to in
subdivision (a), (b) or (c) of this definition with respect to which the Person
whose Debt is being determined has become liable by way of a Guaranty.
Environmental Laws: federal, state, provincial, local and foreign laws,
rules and regulations relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, chemicals or industrial, toxic or
hazardous substances or wastes into the environment (including, without
limitation, 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, chemicals or industrial,
toxic or hazardous substances or wastes.
ERISA: the Employee Retirement Income Security Act of 1974, as amended from
time to time.
Exchange Act: the Securities Exchange Act of 1934, as amended from time to
time.
Funded Debt: collectively, Senior Secured Funded Debt and all other Debt of
the Company or a Subsidiary, in excess of $1,000,000, that is or should be, in
accordance with GAAP, characterized as senior long-term Debt on a consolidated
balance sheet of the Company and its Subsidiaries, including, without
limitation, (a) Debt with a final maturity more than six (6) months after the
creation of thereof, (b) any portion thereof included in current liabilities,
(c) any Debt outstanding under the Notes, (d) any Debt outstanding under the
Seasonal Trade Debt, (e) any Debt outstanding under the Trade Notes (as such
term is defined in the Vendor Standstill Agreement), (f) any Debt outstanding
under the Credit Agreement and (g) Debt outstanding under another revolving
credit or similar agreement providing for borrowings (and renewals and
extensions thereof) over a period of more than one year, notwithstanding that
any such debt may be payable on demand or within one year after the creation
thereof; but excluding contingent reimbursement obligations with respect to any
letter of credit issued for the account of the Company or a Subsidiary (unless,
and to the extent, such reimbursement obligations mature as a result of any
payment by the issuer of such letter of credit).
GAAP: means generally accepted accounting principles consistently applied
and maintained throughout the period indicated
Government Securities means direct obligations of, or obligations
guaranteed by, the United States of America, and the payment for which the
United States pledges its full faith and credit.
Guaranty: as applied to any Person, any direct or indirect liability,
contingent or otherwise, of such Person with respect to any indebtedness, lease,
dividend or other obligation of another,
37
including, without limitation, any such obligation directly or indirectly
guaranteed, endorsed (otherwise than for collection or deposit in the ordinary
course of business) or discounted or sold with recourse by such Person, or in
respect of which such Person is otherwise directly or indirectly liable,
including, without limitation, any such obligation in effect guaranteed by such
Person through any agreement (contingent or otherwise) to purchase, repurchase
or otherwise acquire such obligation or any security therefor, or to provide
funds for the payment or discharge of such obligation (whether in the form of
loans, advances, stock purchases, capital contributions or otherwise), or to
maintain the solvency or any balance sheet or other financial condition of the
obligor of such obligation, or to make payment for any products, materials or
supplies or for any transportation or services regardless of the non-delivery or
nonfurnishing thereof, in any such case if the purpose or intent of such
agreement is to provide assurance that such obligation will be paid or
discharged, or that any agreements relating thereto will be complied with, or
that the holders of such obligation will be protected against loss in respect
thereof. The amount of any Guaranty shall be equal to the outstanding principal
amount of the obligation guaranteed.
Interest Expense: for any period, the total amount of all charges for the
use of funds (whether characterized as interest, debt service or otherwise)
payable during such period with respect to all Debt of the Company or a
Subsidiary for such period, including the amortization of debt discount and the
amortization of all fees payable in connection with the incurrence of such Debt,
provided that for the quarter ended September 30, 1999 Interest Expense shall be
the total of cash paid during such period.
Investment: as applied to any Person, any direct or indirect purchase or
other acquisition by such Person of stock or other securities of any other
Person, or any direct or indirect loan, advance (other than advances to
employees for moving and travel expenses, drawing accounts and similar
expenditures in the ordinary course of business) or capital contribution by such
Person to any other Person, including all Debt and accounts receivable from such
other Person which are not current assets or did not arise from sales to such
other Person in the ordinary course of business. In computing the amount
involved in any Investment at the time outstanding, (a) undistributed earnings
of, and interest accrued in respect of Debt owing by, such other Person accrued
after the date of such Investment shall not be included, (b) there shall not be
deducted from the amounts invested in such other Person any amounts received as
earnings (in the form of dividends, interest or otherwise) on such Investment or
as loans from such other Person, and (c) unrealized increases or decreases in
value, or write-ups, write-downs or write-offs, of Investments in such other
Person shall be disregarded.
Letter Agreement: means that certain letter, dated the date hereof, from
the Company to the Purchasers.
Lien: as to any Person, any mortgage, lien, pledge, adverse claim, charge,
security interest or other encumbrance in or on, or any interest or title of any
vendor, lessor, lender or other secured party to or of such Person under any
conditional sale or other title retention agreement or Capital Lease with
respect to, any property or asset owned or held by such Person, or the signing
or filing of a financing statement which names such Person as debtor, or the
signing of any security agreement authorizing any other party as the secured
party thereunder to file any financing statement.
Loan Documents: means the Credit Agreement and the documents identified
therein as the "Loan Documents" thereunder.
Material Adverse Effect: shall mean any material adverse effect or change
in the condition (financial or other), business, results of operations,
prospects, assets, liabilities or operations of the Company and its Subsidiaries
considered as a whole or on the ability of the Company to consummate the
38
transactions contemplated hereby, or any event or condition which would, with
the passage of time, constitute a material adverse effect or material adverse
change.
Multiemployer Plan: any Plan which is a "multiemployer plan" (as such term
is defined in Section 4001(a)(3) of ERISA).
Net Debt: the principal outstanding from time to time under the Credit
Agreement (including the Loan Documents) and the Seasonal Trade Debt, and any
obligation with respect to any Guaranty of any such amounts, and net of cash
balances of the Company.
Officers' Certificate: a certificate executed on behalf of the Company by
(a) the Chairman of the Board of Directors (if an officer) or its President or
one of its Vice Presidents and (b) its Treasurer, one of its Assistant
Treasurers or its Chief Financial Officer.
Operative Agreements: the Notes, the Warrants, the Intercreditor Agreement,
that certain Collateral Agency Agreement and the agreements listed in Section
4.5.
PBGC: the Pension Benefit Guaranty Corporation or any governmental
authority succeeding to any of its functions.
Permitted Acquisition: acquisitions which are approved in advance in
writing by a Supermajority in Interest of the Notes (including by way of merger,
consolidation or amalgamation) by the Company or a Subsidiary of the Company of
the capital stock or other ownership interest of, or all or substantially all of
the assets of, any Person (or, in the case of an acquisition of assets, (a)
substantially all of the assets within a reasonably identifiable business unit
of such Person or (b) Proprietary Rights of such person), but only to the extent
that (x) the Person whose capital stock has been acquired or (y) the assets
acquired reasonably relate to or are synergistic with, the business of (or a
business related to) selling party goods and supplies and rendering related
services and conducting franchise operations for such purposes.
Person: a corporation, an association, a partnership, an organization, a
business, an individual, a government or political subdivision thereof or a
governmental agency.
Plan: an "employee pension benefit plan" (as defined in Section 3 of ERISA)
which is or has been established or maintained, or to which contributions are or
have been made, by the Company or any of its Related Persons, or an employee
pension benefit plan as to which the Company or any of its Related Persons would
be treated as a contributory sponsor under Section 4069 of ERISA if it were to
be terminated.
Potential Event of Default: any condition or event which, with notice or
lapse of time or both, would become an Event of Default.
Preferred Stock: as applied to any corporation, shares of such corporation
which shall be entitled to preference or priority over any other shares of such
corporation in respect of either the payment of dividends or the distribution of
assets upon liquidation or both.
Proprietary Rights: all of the Company's Copyrights, Trademarks, patents,
technology rights and licenses, computer software (including without limitation
any source or object codes therefor or documentation relating thereto), trade
secrets, franchises, know-how, inventions, designs, specifications, plans,
drawings and intellectual property rights.
39
Reference Period: with respect to any date of computation under Section
9.3, the period of four consecutive calendar quarters ending on such date.
Related Person: any trade or business that, together with the Company as of
any relevant measuring date under ERISA, was or is required to be treated as a
single employer under Section 414 of the Code.
Restricted Payment: (a) any declaration or payment of any dividend or other
distribution, direct or indirect, on account of any shares of any class of
capital stock of the Company, now or hereafter outstanding, except a dividend
payable solely in shares of stock of the Company and (b) any redemption,
retirement, purchase or other acquisition, direct or indirect, of any shares of
any class of capital stock of the Company now or hereafter outstanding, or of
any warrants, rights or options to acquire any such shares, except to the extent
that the consideration therefor consists of shares of stock of the Company.
Securities Act: the Securities Act of 1933, as amended from time to time.
Senior Secured Funded Debt: Funded Debt of the Company which would, in
accordance with GAAP, constitute long-term debt and have a security interest in
any of the assets of the Company or any of its Subsidiaries, including, without
limitation, (a) any Debt with a maturity more than one year after the creation
of such Debt, (b) any portion thereof included in current liabilities, (c) any
Debt outstanding under the Notes, (d) any Debt outstanding under the Seasonal
Trade Debt, (e) any Debt outstanding under the Credit Agreement and (f) any Debt
outstanding under another revolving credit or similar agreement providing for
borrowings (and any renewals and extensions thereof) over a period of more than
one year, notwithstanding that any such indebtedness may be payable on demand or
within one year after the creation thereof, and excluding all Debt solely by and
between two or more of the Company or its Subsidiaries.
Subsidiary: any corporation at least fifty percent (50.0%) (by number of
votes) of the Voting Stock of which is at the time owned by the Company or by
one or more Subsidiaries or by the Company and one or more Subsidiaries.
A Supermajority in Interest of the Notes: at least eighty-one (81.0%) in
aggregate principal amount of the then outstanding Notes, considered together,
subject to Section 14.4.
Trademarks: registered trademarks, registered service marks, trademark and
service mark applications and unregistered trademarks and service marks.
Seasonal Trade Debt: the debt of the Company in an amount not to exceed
$15,000,000 in favor of any of its vendors which is secured by that certain
Seasonal Vendor Security Agreement dated as of August 16, 1999.
Voting Stock: with reference to any corporation, stock of any class or
classes (or equivalent interests), if the holders of the stock of such class or
classes (or equivalent interests) are ordinarily, in the absence of
contingencies, entitled to vote for the election of the directors (or Persons
performing similar functions) of such corporation, even though the right so to
vote has been suspended by the happening of such a contingency.
Wholly-Owned: as applied to any Subsidiary, a Subsidiary all the
outstanding shares (other than directors' qualifying shares, if required by law)
of every class of stock of which are at the time
40
owned by the Company or by one or more Wholly-Owned Subsidiaries or by the
Company and one or more Wholly-Owned Subsidiaries.
13.2 Table of Definitions. Certain terms are defined elsewhere in this
Agreement as set forth below.
Term Section
---- -------
"A Notes" 1(a)
-------
"B Notes" 1(b)
-------
"Bank Standstill Agreement" 4.7(a)
-------------------------
"C Notes" 1(c)
-------
"Closing" 3.1
-------
"Closing Date" 3.1
------------
"Common Stock" 1(e)
------------
"Company" Introduction
-------
"Company Leases" 5.26
--------------
"Covenant Defeasance" 7.2(c)
-------------------
"D Notes" 1(d)
-------
"ERF" 2.4
---
"Events of Default" 10
-----------------
"FICA" 5.22
----
"Guaranty Agreement" 4.8
------------------
"Indemnified Party" 20
-----------------
"Intercreditor Agreement" 4.6
-----------------------
"Investor Rights Agreement" 4.4
-------------------------
"Legal Defeasance" 7.2(b)
----------------
"Notes" 1
-----
"Other Purchasers" 2.1
----------------
"Party City Michigan" 4.5
-------------------
"Permitted Banks" 9.5(a)
---------------
"Projections" 5.4(b)
-----------
"Securities" 1
----------
"Security Agreement (Parent)" 2.4
---------------------------
"Security Agreement (Subsidiary)" 4.5(b)
-------------------------------
"Senior Debt Event of Default" 12.3(c)
----------------------------
"Senior Debt Event of Default Blockage Period" 12.3(c)
--------------------------------------------
"Senior Debt Event of Default Notice" 12.3(c)
-----------------------------------
"tranche" 1
-------
"Trustee" 7.2(a)
-------
"Vendor Standstill Agreement" 4.7(b)
---------------------------
"Warrants" 1(i)
--------
14. Registration, Transfer and Substitution of Notes; Action by Noteholders.
14.1 Note Register; Ownership of Notes. The Company will keep at its
principal office a register in which the Company will provide for the
registration of Notes and the registration of transfers of Notes. The Company
may treat the Person in whose name any Note is registered on such register as
the owner thereof for the purpose of receiving payment of the principal of and
the premium, if any, and interest on such Note and for all other purposes,
whether or not such Note shall be overdue, and the Company shall
41
not be affected by any notice to the contrary. All references in this Agreement
to a "holder" of any Note shall mean the Person in whose name such Note is at
the time registered on such register.
14.2 Transfer and Exchange of Notes. Any transfer of any Note or interest
therein may be effected only by the surrender of such Note to the Company at its
principal office. Upon surrender of any Note for registration of transfer or for
exchange to the Company at its principal office, the Company at its expense will
execute and deliver in exchange therefor a new Note or Notes in denominations of
at least $100,000 (except one Note may be issued in a lesser principal amount if
the unpaid principal amount of the surrendered Note is not evenly divisible by,
or is less than $100,000), as requested by the holder or transferee, which
aggregate the unpaid principal amount of such surrendered Note, registered as
such holder or transferee may request, dated so that there will be no loss of
interest on such surrendered Note and otherwise of like tenor. The Company will
not be required to register the transfer of any Note unless the transferee is an
insurance company, bank, investment company, investment partnership or other
vehicle, CLO, CBO or similar fund, or other type of financial institution, or a
registered broker-dealer and transferee agrees to make representations which are
substantially similar to those in Sections 6.1 and 6.2.
14.3 Replacement of Notes. Upon receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of any Note and, in
the case of any such loss, theft or destruction of any Note, upon delivery of an
indemnity bond in such reasonable amount as the Company may determine (or, in
the case of any Note held by you or another institutional holder or your or its
nominee, of an indemnity agreement from you or such other holder) or, in the
case of any such mutilation, upon the surrender of such Note for cancellation to
the Company at its principal office, the Company at its expense will execute and
deliver, in lieu thereof, a new Note in the unpaid principal amount of such
lost, stolen, destroyed or mutilated Note, dated so that there will be no loss
of interest on such Note and otherwise of like tenor. Any Note in lieu of which
any such new Note has been so executed and delivered by the Company shall not be
deemed to be an outstanding Note for any purpose of this Agreement.
14.4 Notes held by Company Deemed Not Outstanding. For the purposes of
determining whether the holders of the Notes of the requisite principal amount
at the time outstanding have taken any action authorized by this Agreement with
respect to the giving of consents or approvals or with respect to acceleration
upon an Event of Default, any Notes directly or indirectly owned by the Company
or any of its Subsidiaries or Affiliates shall be disregarded and deemed not to
be outstanding.
15. Payments on Notes. The Company will pay all sums becoming due on any Note
for principal, premium, if any, and interest by the method and at the address
specified for such purpose in Annex I, or by such other method or at such other
address as the holder of any such Note shall have from time to time specified to
the Company in writing for such purpose, without the presentation or surrender
of such Note or the making of any notation thereon, except that any Note paid or
prepaid in full shall be surrendered to the Company at its principal office.
Prior to any sale or other disposition of any Note held by you or your nominee
you will, at your election, either endorse thereon the amount of principal paid
thereon and the last date to which interest has been paid thereon or surrender
such Note to the Company in exchange for a new Note or Notes pursuant to Section
15. The Company will afford the benefits of this Section 15.2 to any
institutional investor which is the direct or indirect transferee of any Note
purchased by you under this Agreement and which has made the same agreement
relating to such Note as you have made in this Section 15.
16. Expenses, etc.. Whether or not the transactions contemplated by this
Agreement shall be consummated, the Company will pay all expenses described in
Section 3.2 hereof up to (a) a maximum of $200,000 should the Closing not occur
or (b) a maximum of $400,000 should the Closing occur. In
42
addition to the foregoing and not subject to the limitations of the preceding
sentence, the Company will (i) pay to you all reasonable legal and consultant
fees and expenses incurred by you in connection with the amendment or
enforcement of this Agreement or the Securities or in protecting your interests
in any bankruptcy, receivership, reorganization, insolvency or liquidation
proceeding by or affecting the Company and (ii) pay to the Collateral Agent its
fees and Administrative Expenses (as such term is defined in the Collateral
Agency Agreement) under the Collateral Agency Agreement and the other Operative
Agreements. The Company also will pay, and will save you and each holder of any
Notes harmless from, all claims in respect of the fees, if any, of brokers and
finders and any and all liabilities with respect to any taxes (including
interest and penalties) which may be payable in respect of the execution and
delivery of this Agreement, the issue of the Securities and any amendment or
waiver under or in respect of this Agreement or the Notes. The obligation of the
Company under this Section 16 shall survive any disposition or payment of the
Securities and the termination of this Agreement.
17. Survival of Representations and Warranties. All representations and
warranties contained in this Agreement or made in writing by or on behalf of the
Company in connection with the transactions contemplated by this Agreement shall
survive the execution and delivery of this Agreement, any investigation at any
time made by you or on your behalf, the purchase of the Securities by you under
this Agreement and any disposition or payment of the Securities. All statements
contained in any certificate or other instrument delivered by or on behalf of
the Company pursuant to this Agreement or in connection with the transactions
contemplated by this Agreement shall be deemed representations and warranties of
the Company under this Agreement.
18. Amendments and Waivers. Any term of this Agreement or of the Securities may
be amended and the observance of any term of this Agreement or of the Securities
may be waived (either generally or in a particular instance and either
retroactively or prospectively) only with the written consent of the Company and
a Supermajority in Interest of the Notes, provided that, without the prior
written consent of the holders of all the Notes at the time outstanding (subject
to Section 14.4), no such amendment or waiver shall (a) change the maturity or
the principal amount of, or reduce the rate or change the time of payment of
interest on, or change the amount or the time of payment of any principal or
premium payable on any prepayment of, any Note, or change the amount or the time
of payment of any fee payable hereunder, (b) reduce the aforesaid percentages of
the principal amount of the Notes the holders of which are required to consent
to any such amendment or waiver, (c) change the percentage of the principal
amount of the Notes the holders of which may declare the Notes to be due and
payable as provided in Section 10, (d) modify the proviso to the first sentence
of Section 10, or (e) decrease the percentage of the principal amount of the
Notes the holders of which may rescind and annul any such declaration as
provided in Section 10. Any amendment or waiver effected in accordance with this
Section 18 shall be binding upon each holder of any Note at the time
outstanding, each future holder of any Note and the Company.
19. Notices, etc. Except as otherwise provided in this Agreement, notices and
other communications under this Agreement shall be in writing and shall be
delivered by facsimile transmission, hand or courier service, or mailed by
registered or certified mail, return receipt requested, addressed, (a) if to
you, at the address set forth in Annex I or at such other address as you shall
have furnished to the Company in writing, except as otherwise provided in
Section 15.2 with respect to payments on Notes held by you or your nominee, or
(b) if to any other holder of any Note, at such address as such other holder
shall have furnished to the Company in writing, or, until any such other holder
so furnishes to the Company an address, then to and at the address of the last
holder of such Note who has furnished an address to the Company, or (c) if to
the Company, at its address set forth at the beginning of this Agreement, to the
attention of Corporate Secretary, or at such other address, or to the attention
of such other officer, as the Company shall have furnished to you and each such
other holder in writing. Any notice so addressed and delivered by facsimile
43
transmission, hand or courier shall be deemed to be given when received, and any
notice so addressed and mailed by registered or certified mail shall be deemed
to be given three (3) business days after being so mailed.
20. Indemnification. The Company will indemnify and hold harmless each of you
and each person who controls you within the meaning of the Securities Act or the
Exchange Act and each of your subsidiaries and each of your and their respective
directors, officers, employees, principals, members, agents, advisors and
partners (any and all of whom are referred to as the "Indemnified Party") from
and against any and all losses, claims, damages and liabilities, whether joint
or several (including all legal fees or other expenses reasonably incurred by
one counsel for any Indemnified Party in connection with the preparation for or
defense of any pending or threatened third party claim, action or proceeding,
whether or not resulting in any liability), to which such Indemnified Party may
become subject under any applicable federal or state law or otherwise, caused by
or arising out of, or allegedly caused by or arising out of, this Agreement or
any transaction contemplated hereby or thereby (including, without limitation,
any failure to purchase the Securities by reason of Section 3.4), other than,
with respect to any Indemnified Party, losses, claims, damages or liabilities
that are the result of any representation made by such Indemnified Party in
Section 6 or the result of the gross negligence or willful misconduct of such
Indemnified Party. This section is not intended to provide to any Indemnified
Party an additional means of enforcement against the Company of the Debt
evidenced by the Notes.
Promptly after receipt by an Indemnified Party of notice of any claim,
action or proceeding with respect to which an Indemnified Party is entitled to
indemnity hereunder, such Indemnified Party will notify the Company of such
claim or the commencement of such action or proceeding, provided that the
failure of an Indemnified Party to give notice as provided herein shall not
relieve the Company of its obligations under this Section 20 with respect to
such Indemnified Party, except to the extent that the Company is actually
prejudiced by such failure. The Company will assume the defense of such claim,
action or proceeding and will employ counsel satisfactory to the Indemnified
Party and will pay the fees and expenses of such counsel. Notwithstanding the
preceding sentence, the Indemnified Party will be entitled, at the expense of
the Company, to employ counsel separate from counsel for the Company and for any
other party in such action if the Indemnified Party reasonably determines upon
advice of counsel that a conflict of interest or other reasonable basis exists
which makes representation by counsel chosen by the Company not advisable, but
the Company will not be obligated to pay the fees and expenses of more than one
counsel for all Indemnified Parties.
21. Miscellaneous. This Agreement shall be binding upon and inure to the benefit
of and be enforceable by the respective successors and assigns of the parties
hereto, whether so expressed or not, and, in particular, shall inure to the
benefit of and be enforceable by any holder or holders at the time of the Notes
or any part thereof. Except as stated in Section 17, this Agreement embodies the
entire agreement and understanding between you and the Company and supersedes
all prior agreements and understandings relating to the subject matter hereof.
This Agreement and the Notes shall be construed and enforced in accordance with
and governed by the law of the State of New York. The headings in this Agreement
are for purposes of reference only and shall not limit or otherwise affect the
meaning hereof. This Agreement may be executed in any number of counterparts,
each of which shall be an original, but all of which together shall constitute
one instrument.
[SIGNATURES APPEAR ON THE FOLLOWING PAGE]
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