NOTE AND WARRANT PURCHASE AGREEMENT
SPECIALTY ACQUISITION CORP.
$7,500,000 Principal Amount
14% Series A Senior Subordinated Notes
Due June 30, 2006
Warrants for
Common Stock
$.01 par value
______________, 2001
To the Purchasers (the "Purchasers")
named in Exhibit A hereto
Dear Sirs:
The undersigned, Specialty Acquisition Corp. ("SAC"), together
with its Subsidiaries SC Corporation (d/b/a SC Direct), SC Publishing, Inc. and
Daxbourne International Limited, propose to issue and sell to the Purchasers for
cash $7,500,000 principal amount of its 14% Series A Senior Subordinated Notes
due June 30, 2006 (the "Notes"), and SAC proposes to issue and sell to the
Purchasers Warrants to purchase shares of Common Stock which, if purchased in
their entirety, shall at all times, except as otherwise provided in the Warrant
Agreement (as defined in Section 1 below), equal not less than thirteen and
four-tenths percent (13.4%) of the Company's Fully-Diluted Common Stock (as
defined in the Warrant Agreement).
The Notes will be issued pursuant to and subject to the terms
and conditions of this Agreement; and the Warrants will be issued pursuant to
and subject to the terms and conditions of this Agreement and the Warrant
Agreement. The Warrants and the Notes, and the respective holders thereof, shall
each be entitled to the continuing agreements and rights set forth herein, but
shall otherwise in all respects be separable and may be transferred, sold,
modified or otherwise held or dealt in as independent instruments in accordance
with the terms thereof.
PREAMBLE
WHEREAS, SAC has entered into a certain Agreement and Plan of
Recapitalization and Merger with Specialty Catalog Corp. ("SCC") pursuant to
which SAC will acquire certain shares of the outstanding capital stock of SCC
and will then merge with and into SCC (the "Merger"), with SCC being the
surviving entity and all shares of the outstanding capital stock of SCC not
owned by SAC will be cancelled in exchange for $3.75 per share (the "Merger
Consideration"), and
WHEREAS, the Company has requested that the Purchasers
purchase the Notes and Warrants in order to provide funds for the Company to pay
the Merger Consideration and to pay reasonable expenses of the Company
associated with the Merger; and
WHEREAS, the Purchasers are willing to purchase the Notes and
Warrants on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in connection with the issuance of the Notes
and Warrants, the Company agrees with each Purchaser, and each Purchaser
severally agrees with the Company as follows:
SECTION 1. DEFINITIONS.
(a) As used in this Agreement, the following terms shall have
the following meanings. Any term not defined in this Section 1 shall have the
meaning assigned to it elsewhere herein, or which is specifically incorporated
herein by reference.
"Affiliate" of any Person shall mean any other Person (a) that
directly or indirectly, through one or more intermediaries, controls or is
controlled by, or is under common control with such first Person, it being
understood that this shall include any officer or director of a Person which is
a corporation, any manager or director of a limited liability company, and any
general partner of a partnership, and any officer, director or owner of ten
percent (10%) or more of any entity which so serves as such manager or general
partner, (b) that directly or beneficially owns ten percent (10%) or more of any
class of the voting stock of such first Person, or (c) ten percent (10%) or more
of whose voting stock (or in the case of a Person which is not a corporation,
ten percent (10%) or more of whose equity interest) is owned directly or
beneficially by such first Person.
"Agreement" shall mean this Note and Warrant Purchase
Agreement, together with all Exhibits and Schedules hereto, as from time to time
amended, modified or supplemented.
"Business Day" shall mean a day other than a Saturday, Sunday
or other day on which commercial banks in New York, New York, are required by
law to close.
"Capital Expenditures" shall mean expenditures made
(including, without limitation, any capitalized consulting and payroll
expenditures) or liabilities incurred for the acquisition of any fixed assets or
improvements, replacements, substitutions or additions
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thereto which have a useful life of more than one year, including the total
principal portion of Capitalized Lease Obligations.
"Capital Lease" shall mean any lease of any Property (whether
real, personal or mixed) of any Person as lessee which, in conformity with GAAP,
is, or is required to be, accounted for as a capital lease on the balance sheet
of such Person.
"Capital Stock" shall mean any and all shares, interests,
participations or other equivalents (however designated) of capital stock of a
corporation, any and all equivalent ownership or equity interests in a Person
other than a corporation (including partnership interests and limited liability
company interests), and any and all warrants, options, conversion rights or
other rights to obtain any of the foregoing.
"Capitalized Lease Obligation" shall mean any Indebtedness
represented by obligations under a lease that is required to be capitalized for
financial reporting purposes in accordance with GAAP.
"Change of Control" shall be deemed to occur (subject to the
last proviso set forth below) upon the occurrence of any event or series of
events, or the entering into of any agreement, contract or arrangement of any
kind by the Company, its Subsidiaries or any one or more of the Company's
stockholders, which results in, or which provides for, (i) the stockholders of
the Company on the date hereof owning beneficially less than a "Controlling
Percentage" (as defined below) of the Company's aggregate outstanding voting
securities of any and all kinds, or less than a Controlling Percentage of the
Company's Fully-Diluted Common Stock, (ii) the stockholders of the Company on
the date hereof (excluding Warrants and Warrant Shares held by the Purchasers)
not having the power to elect a majority or more of the Company's Board of
Directors, or otherwise to direct or cause the direction of the management and
policies of the Company, or agreeing to limit such right or power, (iii) the
Company ceasing to own both a Controlling Percentage and at least a majority of
the issued and outstanding Capital Stock of any Subsidiary (excluding for this
purpose a sale of a majority or greater interest in the Company's Western
Schools or AHI business in an arm's length, good faith transaction to an
unaffiliated third party, or the sale of any other Subsidiary which does not
conduct any material amount of business or own a material amount of assets), or
(iv) ▇▇▇ ▇▇▇▇▇▇ and [COMPANY TO PROVIDE THE NAMES OF THE TRUSTS], shall cease to
own, directly or indirectly, in the aggregate, thirty-five percent (35%) or more
of the Company's Common Stock or such lesser percentage that results from
exercise of all of the Warrants and/or exercise of options granted under the
Stock Option Plan; provided, however, that in the case of any agreement entered
into by the Company which, by its terms and as a condition to consummation,
calls for the repayment in full of the Notes and payment of all obligations
under the Purchaser Documents, a Change of Control shall only be deemed to occur
upon the consummation of the transactions called for in such agreement.
"Closing Date" shall mean the date of the Closing of the
issuance and sale of the Notes and Warrants to the Purchasers pursuant hereto.
"Closing" shall mean the closing of the issuance and sale of
the Notes and Warrants to the Purchasers pursuant hereto.
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"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
"Common Stock" shall mean the Company's Common Stock, $.01 par
value.
"Consolidated" or "Consolidating," and "consolidated" or
"consolidating" shall, when used with reference to any financial information
pertaining to (or when used as a part of any defined term or statement
pertaining to the financial condition of) the Company and its Subsidiaries, mean
the accounts of the Company and its Subsidiaries determined on a consolidated or
consolidating basis, as the case may be, all determined as to principles of
consolidation and, except as otherwise specifically required by the definition
of such term or by such statements, as to such accounts, in accordance with
GAAP.
"Controlling Percentage" shall mean that portion of the voting
Capital Stock of all classes of the Company, or the applicable Subsidiary, which
shall be necessary to give the holders thereof the power, without the consent of
any other holder of capital stock, to approve the merger, consolidation,
recapitalization, liquidation or dissolution of such entity, and/or the sale of
all or substantially all of its assets, and any similar extraordinary
transaction, whether under the applicable charters, bylaws, or similar governing
instruments, or otherwise.
"Corporation" or the "Company" shall mean (a) prior to the
Closing Date, SAC, SCC and their respective Subsidiaries, and (b) from and after
the Closing Date, SCC (as the surviving entity after the Merger of SAC with and
into SCC) and its Subsidiaries.
"Costs and Expenses" shall having the meaning set forth in
Section 15.5.
"Default" shall mean any one of the events specified in
Section 9 which is or would become, with the lapse of time specified therein or
the giving of any required notice, or both, an Event of Default.
"Distribution", in respect of any Corporation, shall mean and
include: (i) the payment of any dividends or other distributions on Capital
Stock of the Corporation (except distributions made in additional shares of such
stock) and (ii) the redemption or acquisition of securities of the Corporation
(or any warrant or option for the purchase of any such securities).
"Dollars" and "$" shall mean dollars in lawful currency of the
United States of America.
"EBITDA" shall mean for any period of determination, (a) Net
Income plus (b) all amounts deducted in computing Net Income in respect of (i)
interest expense on Indebtedness, (ii) taxes based on or measured by income and
(iii) depreciation and amortization expense, in each case for the period of
determination.
"Environmental Law" shall mean any federal, state or local
statute, law, rule, regulation, ordinance, code, policy or rule of common law
now or hereafter in effect and in each case as amended, and any judicial or
administrative interpretation thereof, including any judicial or administrative
order, consent decree or judgment, relating to the environment, health, safety
or Hazardous Materials, including without limitation, the Rivers and Harbors Act
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of 1899, 33 U.S.C.ss.401, et seq., the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund Amendment
and Reauthorization Act of 1986, as amended ("CERCLA") 42 U.S.C.ss.9601 et seq.;
the Hazardous Materials Transportation Act, as amended, 49 U.S.C. ss.1801 et
seq.; the Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act, as amended, 42 U.S.C.ss.6901 et seq.; the Federal Water Pollution
Control Act, as amended, 33 U.S.C.ss.1251 et seq.; the Toxic Substances Control
Act, 15 U.S.C.ss.2601 et seq.; the Clean Air Act, 42 U.S.C.ss.7401 et seq.; the
Clean Water Act, 33 U.S.C.ss.1251, et seq., the Safe Drinking Water Act, 42
U.S.C.ss.3808 et seq.; and their counterparts under state and any local law.
"Environmental Notice" shall mean any summons, citation,
directive, information request, notice of potential responsibility, notice of
violation or deficiency, order, claim, complaint, investigation, proceeding,
judgment, letters or other communication, written or oral, actual or threatened,
from the United States Environmental Protection Agency or other Governmental
Authority, concerning any intentional or unintentional act or omission which
involves Management of Hazardous Substances on or off the Property of any
Corporation, or concerning any alleged violation of or responsibility under
Environmental Laws, in each case which reasonably could be expected to result in
a material liability to any of the Corporations or the imposition of a Lien on
any Property of any of the Corporations.
"ERISA Affiliate" shall mean each trade or business (whether
or not incorporated) which together with any Corporation would be treated as a
single employer under the provisions of Title I or Title IV of ERISA.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
"Event of Default" shall mean any one or more of the events
specified in Section 9, provided that any requirement set forth in such Section
9 for the giving of notice or the lapse of time, or both, has been satisfied.
"Excess Cash Flow" shall mean, for any period, Operating Cash
Flow less Total Debt Service, each determined for such period.
"Financial Statements" shall have the meaning set forth in
Section 4.7(a). "Fully-Diluted Common Stock" shall have the
meaning given thereto in the Warrant Agreement.
"Funded Debt" shall mean as of any date of determination, the
sum, without duplication, of (a) all Indebtedness of the Company or any
Subsidiary for borrowed money or for the deferred purchase price of property or
services as of such date (other than trade liabilities incurred in the ordinary
course of business and not yet payable in accordance with their terms) or which
is evidenced by a note, bond, debenture or similar instrument, (b) all
obligations of the Company or any Subsidiary under Capital Leases as of such
date, (c) all obligations of the Company or any Subsidiary in respect of letters
of credit, acceptances or similar obligations issued or created for the account
of the Company or any Subsidiary as of
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such date, (d) all liabilities secured by any lien on any property owned by the
Company or any Subsidiary as of such date even though the Company or the
applicable Subsidiary has not assumed or otherwise become liable for the payment
thereof, (e) all contingent obligations of the Company or any of its
Subsidiaries that should be classified as liabilities on the Company's or
Subsidiary's balance sheets, determined in accordance with GAAP and (f) all
obligations of the Company or any of its Subsidiaries as a guarantor or surety
whether or not such obligations are classified as liabilities.
"GAAP" shall mean generally accepted accounting principles, in
all cases consistently applied in conformity with the accounting methods and
practices used in connection with the preparation of the Company's audited
Financial Statements for the twelve months ended December 30, 2000.
"Governmental Authority" shall mean any nation or government,
any state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"Hazardous Materials" means (a) any petroleum or petroleum
products, radioactive materials, asbestos in any form that is or could become
friable, urea formaldehyde foam insulation, transformers or other equipment that
contain dielectric fluid containing levels of polychlorinated biphenyls, and
radon gas; (b) any chemicals, materials or substances defined as or included in
the definition of "hazardous substances," "hazardous wastes," "hazardous
materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic
substances," "toxic pollutants," "contaminants" or "pollutants," or words of
similar import, under any applicable Environmental Law; and (c) any other
chemical, material or substance exposure to which is prohibited, limited or
regulated by any Governmental Authority.
"Indebtedness" shall mean, as of any applicable date of
determination, all items of indebtedness, obligation or liability of the Company
and its consolidated Subsidiaries, whether matured or unmatured, liquidated or
unliquidated, direct or indirect, absolute or contingent or joint or several,
that should be classified as liabilities in accordance with GAAP, plus (whether
or not classified as liabilities) all obligations and liabilities of the Company
and its Subsidiaries as guarantors or sureties or with respect to letters of
credit.
"Investors" shall have the meaning given thereto in Section
12.2.
"Joinder Agreement" means that certain Joinder Agreement of
even date herewith by which the Purchasers become parties to the Stockholder
Agreement.
"Licenses" shall have the meaning set forth in Section 4.16.
"Lien" shall mean any interest in Property securing an
obligation owed to, or a claim by, a Person other than the owner of the
Property, whether such interest is based on common law, statute or contract. The
term "Lien" shall also include reservations, exceptions, encroachments,
agreements, rights-of-way, covenants, conditions, restrictions, leases and other
title exceptions and encumbrances affecting Property. For the purpose of this
Agreement, a Person shall be deemed to be the owner of any Property which it has
acquired or holds subject
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to a conditional sale agreement or other arrangement pursuant to which title to
the Property has been retained by or vested in some other Person for security
purposes.
"Manage" or "Management" shall mean to generate, handle,
manufacture, process, treat, store, use, re-use, refine, recycle, reclaim, blend
or burn for energy recovery, incinerate, accumulate speculatively, transport,
transfer, dispose of, release, threaten to release or abandon Hazardous
Materials.
"Material Adverse Effect" shall mean the effect of any event
or condition which, alone or when taken together with other events or conditions
previously occurring, or existing concurrently therewith (a) has or is
reasonably expected to have a material adverse effect upon the business,
operations, performance, Property, assets or condition (financial or otherwise)
of the Company and its Subsidiaries taken as a whole, whether immediately or
over the term of the Notes, (b) impairs in any material manner the ability of
the Company or any of its Subsidiaries to perform their respective obligations
under the Transaction Documents to which they are parties or (c) impairs in any
material manner the ability of the Purchasers to enforce a covenant or
agreement, or collect the obligations of the Company or any of its Subsidiaries,
under any of the Purchaser Documents.
"Material Indebtedness" shall have the meaning given thereto
in Section 6.1(k).
"Merger Consideration" is defined in the Preamble to this
Agreement.
"Multiemployer Plan" shall mean a "multiemployer plan" as
defined in Section 4001(a)(3) of ERISA.
"Net Income" shall mean the net income (or loss) of the
Company and its Subsidiaries for any period (in each case after excluding
non-operating transaction expenses incurred in connection with the Merger to the
extent the same have been deducted in computing Net Income) determined in
accordance with GAAP on a consolidated basis.
"Notes" shall have the meaning given thereto in the first
paragraph of this Agreement. The Notes shall be in the form of Exhibit B hereto.
"Operating Cash Flow" shall mean (a) EBITDA less (b) the sum
of the Company's and its Subsidiaries' (i) unfinanced Capital Expenditures plus
(ii) net cash payments for taxes for the applicable period.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"Pension Plan" shall mean any Plan which is subject to the
provisions of Title IV of ERISA.
"Permitted Lien" shall mean a Lien permitted by Section 7.1.
"Person" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, limited
liability company, association, corporation, institution, entity, party, or
government (whether national, federal, state, county, city, municipal
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or otherwise, including without limitation any instrumentality, division,
agency, body or department thereof).
"Plan" shall mean any employee benefit plan within the meaning
of Section 3(3) of ERISA and which is maintained (in whole or in part) for
employees of any Corporation or any ERISA Affiliate.
"Principal Increase" shall have the meaning given thereto in
Section 3.1(c).
"Property" shall mean any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
"Purchase Money Indebtedness" shall mean and include (i)
Indebtedness (other than the Senior Debt) for the payment of all or any part of
the purchase price of any fixed assets, (ii) any Indebtedness (other than the
Senior Debt) incurred at the time of or within ten (10) days prior to or after
the acquisition of any fixed assets for the purpose of financing all or any part
of the purchase price thereof, and (iii) any renewals, extensions or
refinancings thereof, but not any increases in the principal amounts thereof
outstanding at the time; provided, however that in each such case such
Indebtedness is not in excess of the purchase price of the fixed assets
acquired, and is secured solely, if at all, by a Purchase Money Lien.
"Purchase Money Lien" shall mean a Lien upon fixed assets
which secures Purchase Money Indebtedness, but only if such Lien shall at all
times be confined solely to the fixed assets (together with all additions,
replacements, substitutions, modifications, attachments and proceeds thereof)
the purchase price of which was financed through the incurrence of the Purchase
Money Indebtedness secured by such Lien.
"Purchaser Documents" shall mean, collectively, this
Agreement, the Notes, the Warrant Agreement, the Warrants, the Security
Agreement, the Subsidiary Guaranties, the Joinder Agreement, the Senior
Subordination Agreement and any other agreement, document or certificate
relating to any thereof, including amendments thereto, and any other document
entered into between the Purchasers and the Company and any of its Subsidiaries.
"Purchaser Representatives" shall have the meaning given
thereto in Section 6.10.
"Purchaser Transactions" shall mean all transactions
contemplated by the Purchaser Documents.
"Purchaser" shall mean any holder from time to time of any of
the Notes, Warrants or Warrant Shares.
"Release" shall mean any actual or threatened spilling,
leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping,
leaching, dumping or disposing of Hazardous Materials into the environment, as
"environment" is defined in CERCLA.
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"Reportable Event" shall mean a Reportable Event as defined in
Section 4043(b) of ERISA as to which the PBGC has not by regulation waived the
requirement that it be notified within 30 days of the occurrence of such an
event.
"Respond" or "Response" shall mean any action taken pursuant
to Environmental Laws to correct, remove, remediate, clean up, prevent,
mitigate, monitor, evaluate, investigate or assess the Release of a Hazardous
Material.
"SCC Merger Documents" shall mean the Agreement and Plan of
Recapitalization and Merger dated as of May 4, 2001 between SAC and SCC, the
Stockholders Agreement, any subscription agreement between SAC and a Purchaser
and all other documents executed and/or delivered in connection with either of
the foregoing (including, without limitation, any employment agreements and
option agreements entered into between the Company and its senior executives or
directors).
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Security Agreement" shall mean the Security Agreement or
Security Agreements between the Company and each of its Subsidiaries and the
Purchasers, pursuant to which the Company and each such Subsidiary grants a
blanket security interest in all of its Property, as the same may be hereafter
amended, modified or supplemented, which shall be in the form of Exhibit E
hereto.
"Senior Debt Documents" shall mean (i) the Senior Loan
Agreement, the promissory notes delivered thereunder and the other documents
delivered pursuant thereto or in connection therewith, or (ii) any replacement
senior debt documents relating to any refinancing permitted pursuant to Section
7.15.
"Senior Debt" shall have the meaning given thereto in the
Senior Subordination Agreement.
"Senior Lender" shall mean each of (i) Fleet National Bank or
(ii) any replacement senior lender(s) in any refinancing permitted pursuant to
Section 7.15.
"Senior Loan Agreement" shall mean the Loan Agreement dated as
of December 27, 2000 between the Company and the Senior Lender, as the same may
be amended from time to time or any replacement senior loan agreement in any
refinancing permitted pursuant to Section 7.15.
"Senior Subordination Agreement" shall mean the Subordination
Agreement dated as of the date hereof among the Purchasers, the Company, and the
Senior Lender, or any such agreement with a Senior Lender in any refinancing
permitted pursuant to Section 7.15.
"Stockholders Agreement" shall mean the Stockholders Agreement
dated as of May 4, 2001, among the Company and its stockholders, as the same may
be further amended, modified or supplemented from time to time.
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"Stock Option Plan" shall have the meaning given thereto in
the Warrant Agreement.
"Subsidiary Guaranties" shall mean (i) the Guaranties dated as
of the date hereof by each of the Company's Subsidiaries in favor of the
Purchasers, each in the form of Exhibit F hereto and (ii) any guaranty hereafter
executed in favor of the Purchasers by any other Subsidiary pursuant to Section
7.5 hereof (such guaranties hereafter executed also to be in the form of Exhibit
F hereto).
"Subsidiary" shall mean, with respect to any Person: either
(i)(a) any corporation of which more than fifty percent (50%) of the outstanding
Capital Stock having ordinary voting power to elect a majority of the board of
directors of such corporation (irrespective of whether at the time stock of any
other class or classes of such corporation shall have or might have voting power
by reason of the happening of any contingency) is at the time directly or
indirectly owned by such Person or (b) any corporation the Capital Stock of
which having more than fifty percent (50%) of the aggregate fair market value of
all of such corporation's outstanding Capital Stock is at the time directly or
indirectly owned by such Person; or (ii) any partnership, limited liability
company or joint venture or other entity of which more than fifty percent (50%)
of the outstanding equity interests are at the time directly or indirectly owned
by such Person. For purposes of this Agreement, references to "Subsidiary" or
"Subsidiaries" shall specifically include each of SC Corporation (d/b/a SC
Direct), SC Publishing, Inc., Daxbourne International Limited, SC Licensing
Inc., Western Publishing, AHI and any other Subsidiary of the Company created
after the date hereof in accordance with Section 7.5 hereof.
"Total Debt Service" shall mean for any period the sum of the
Company's and its Subsidiaries' (a) interest expense for such period, plus (b)
principal payments on Indebtedness required to be made during such period.
"Transaction Documents" shall mean, collectively, the
Purchaser Documents, the Senior Debt Documents, the SCC Merger Documents and all
other agreements, instruments and documents executed and/or delivered in
connection therewith, as each of the same has been or may hereafter be, amended,
modified or supplemented from time to time with the consent of the Purchasers.
"Transactions" shall mean all transactions contemplated by the
Transaction Documents.
"Warrant Agreement" shall mean the Warrant Agreement dated as
of the date hereof among the Company and the Purchasers, as the same may be
amended, modified or supplemented, and shall be in the form of Exhibit C hereto.
"Warrant Shares" shall mean the shares of the Company's Common
Stock issuable or issued upon exercise of the Warrants, and shall also include
any securities issued in replacement thereof, as a dividend or distribution
thereon, or any stock, equity interest, securities or assets issued in the case
of any reorganization, reclassification, consolidation, merger or sale of assets
of the character referred to in Section 9(b) of the Warrant Agreement.
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"Warrants" shall mean each warrant issued pursuant to the
Warrant Agreement.
(b) As used herein, in the other Purchaser Documents, and in
any certificate, report or other document made or delivered pursuant hereto or
thereto, unless otherwise defined herein accounting terms shall have the
respective meanings given to them under GAAP.
(c) The words "hereof," "herein," "hereunder" and "hereto" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement; and
Section, Schedule and Exhibit references contained in this Agreement are
references to sections, Schedules and Exhibits in or to this Agreement, unless
otherwise specified.
(d) The meanings given to the terms defined herein shall be
equally applicable to both the singular and plural forms of such terms.
(e) References herein to the Purchasers' "approval,"
"discretion" or "judgment" shall mean the Purchasers' sole and absolute
discretion or judgment, exercisable without reference to any external standard,
or approval by the Purchasers in such sole and absolute discretion or judgment.
SECTION 2. PURCHASE AND SALE OF NOTES AND WARRANTS.
2.1 Notes. The Company agrees to sell to each Purchaser, and
each Purchaser severally agrees to purchase from the Company, on the Closing
Date, at par, Notes in the principal amount set forth opposite such Purchaser's
name on Exhibit A hereto. Each Note shall (i) be dated the Closing Date, and
(ii) be substantially in the form of Exhibit B hereto with the blanks
appropriately filled in conformity herewith.
2.2 Warrants. The Company agrees to sell to each Purchaser, on
the Closing Date, Warrants to purchase the percentage of the Company's
Fully-Diluted Common Stock set forth opposite such Purchaser's name on Exhibit A
hereto. The Warrants issued pursuant hereto in connection with the Notes shall
be exercisable for an aggregate of not less than thirteen and four-tenths
percent (13.4%) of the Company's Fully-Diluted Common Stock, subject to the
adjustments described in the Warrant Agreement, which shall be in the form of
Exhibit C hereto. Each Warrant shall be substantially in the form of Exhibit A
to the Warrant Agreement, with the blanks appropriately filled in conformity
herewith, and shall be dated the Closing Date.
2.3 Payment of Purchase Price. The purchase price for the
Notes and Warrants shall be payable on the Closing Date in cash by wire transfer
of immediately available funds pursuant to the Company's written instructions.
2.4 Tax Reporting. The Company and the Purchasers, having
adverse interests and as a result of arms-length bargaining, agree that (i)
neither the Purchasers nor any of their officers, directors, representatives,
partners, members or employees has rendered or has agreed to render any services
to the Company in connection with this Agreement or the issuance of the Notes
and Warrants; (ii) the Warrants are not being issued as compensation; and (iii)
for the
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purposes and within the meaning of Section 1273(c)(2) of the Code the issue
price of the Notes is $7,500,000 and the issue price of the Warrants is $134.00.
The Company and the Purchasers recognize that this Agreement determines the
original issue discount to be taken into account by the Company and the
Purchasers for federal income tax purposes on the Notes and they agree to adhere
to this Agreement for such purposes. For federal, state and local tax purposes,
the Company and the Purchasers agree to take reporting and other positions with
respect to the Notes and Warrants which are consistent with the purchase price
of the Notes and Warrants set forth herein and to use their best efforts to
ensure compliance with this Section.
2.5 Intentionally omitted.
2.6 Manner of Payment. All payments and prepayments of
principal of, premium, if any, and interest on the Notes, and any other fees or
payments due hereunder, shall be made without setoff or counterclaim to the
applicable Purchasers by wire transfer or other transfer or delivery of funds,
in accordance with each Purchaser's instructions from time to time, so that such
funds are received by and available to the Purchasers on or before the due date
of each such payment. Any principal, interest or other amount payable hereunder
that becomes due on a day that is not a Business Day shall be payable on the
next succeeding Business Day and such extension shall be included in computing
interest and fees in connection with such payment.
SECTION 3. TERMS OF THE NOTES; USE OF PROCEEDS; REGISTRATION RIGHTS.
3.1 Terms of the Notes.
(a) Optional Prepayments. The Company shall have the right at
any time and from time to time, upon at least three (3) Business Days' prior
written notice to the holders of the Notes, to prepay the Notes in whole or in
part, in an amount specified in such notice, by payment of the principal amount
of the Notes (or portion thereof) to be prepaid, together with accrued interest
thereon to the date of such prepayment and all Principal Increases (attributable
to the portion of the Notes being prepaid) incurred to the date of the
prepayment, plus (i) any amounts payable pursuant to Section 3.1(h), and (ii) a
premium equal to the applicable percentage of the principal amount to be
prepaid, determined as follows:
--------------------------------------------------------------------------------
If Prepaid During 12 Month Period Ending On: Applicable Percentage
--------------------------------------------------------------------------------
the first anniversary of the Closing Date 7%
--------------------------------------------------------------------------------
the second anniversary of the Closing Date 6%
--------------------------------------------------------------------------------
the third anniversary of the Closing Date 5%
--------------------------------------------------------------------------------
the fourth anniversary of the Closing Date 3%
--------------------------------------------------------------------------------
Thereafter 0%
--------------------------------------------------------------------------------
Any optional partial prepayment of the Notes shall be in the aggregate principal
amount of not less than $250,000, or any greater amount which is a multiple of
$50,000. Partial prepayments
12
of the Notes made as provided in this Section 3.1(a) shall, to the extent
thereof, be applied as set forth in Section 3.1(f). Notwithstanding the
provisions hereof, in the event that the Company elects to make a prepayment
within three (3) Business Days of the sale of all or any substantial portion of
the assets or stock of the Company's Western Schools or AHI businesses, then the
aggregate amount of the premium to be applied to the portion of one or more such
prepayments in an amount equal to the net proceeds from such sale or sales shall
be limited to an aggregate of One Hundred and Fifty Thousand Dollars ($150,000),
less the amount of any premium previously paid on account of a prepayment made
pursuant to Section 3.1(b)(ii).
(b) Mandatory Prepayments.
(i) Unless consented to by Purchasers holding a
majority or more of the then outstanding principal amount of the Notes,
if there shall occur a Change of Control of the Company or any of its
Subsidiaries (other than one to which subsection (ii) applies), then
the Company shall, upon the occurrence of such Change of Control, be
required to prepay the Notes in full, together with accrued interest
thereon to the date of such prepayment (including the amount of all
Principal Increases), together with the applicable premium set forth in
the table in Section 3.1(a).
(ii) Unless consented to by Purchasers holding a
majority or more of the then outstanding principal amount of the Notes,
if there shall occur a merger, consolidation of the Company, or a sale
of 25% or more of the aggregate assets of the Company and its
Subsidiaries, or other transaction which effectively accomplishes such
a sale, then the Company shall, on the closing date of such
transaction, prepay the Notes in full, together with accrued interest
thereon to the date of such prepayment (including the amount of all
Principal Increases), together with the applicable premium set forth in
the table in Section 3.1(a); provided, however, that any such premium
for the events described in this subsection (ii) shall not exceed, in
the aggregate, One Hundred and Fifty Thousand Dollars ($150,000), less
any premiums paid pursuant to the last sentence of Section 3.1(a)
above; and provided further that this subsection (ii) shall not apply
to (A) a transaction involving any Subsidiary which does not conduct a
material amount of business or own a material amount of assets, (B) a
transaction involving the sale of all or any substantial portion of the
assets or stock of the Company's Western Schools or AHI businesses,
provided that such sale is an arm's length, good faith transaction with
an unaffiliated third party or (C) a merger of a Subsidiary with the
Company or with a Subsidiary which is wholly owned by the Company or
any of its Subsidiaries.
(iii) Within 90 days after the end of each fiscal
year, commencing with the fiscal year ending December 31, 2001, the
Company shall prepay the Notes in an amount equal to the greater of (a)
one-half of 25% of the Consolidated Excess Cash Flow for each such
fiscal year, or (b) 25% of such Excess Cash Flow less such amount as
may be required to be paid to the Senior Lender under Section 4.1(d) of
the Senior Loan Agreement (as such Section is in effect on the date
hereof); provided, however, that no premium shall be payable in
connection with prepayments made pursuant to this subsection (iii).
13
(c) Interest. (i) Subject to Section 3.1(d) below, interest on
the Notes shall accrue quarterly at the rate of 14% per annum. The Company shall
pay accrued interest quarterly on the last day of March, June, September and
December of each year or, if any such date shall not be a Business Day, on the
next succeeding Business Day to occur after such date (each date upon which
interest shall be so payable, an "Interest Payment Date"), beginning on
September 30, 2001. Interest on the Notes shall be paid as follows: with respect
to each Interest Payment Date, (I) not less than the Applicable Cash Percentage
(as defined below) of the interest payment due and payable on such Interest
Payment Date shall be paid by wire transfer of immediately available funds to an
account designated by each holder of Notes, and (II) the outstanding principal
amount of each Note shall be increased pro rata based on the principal amount of
each outstanding Note on such Interest Payment Date by an amount (the "Principal
Increase") equal to the remaining balance of such interest payment due on such
Interest Payment Date. Interest on the Notes shall accrue quarterly from the
date of issuance until repayment of the principal and payment of all accrued
interest in full. Interest shall be computed on the basis of a 360-day year of
twelve 30-day months.
(ii) The "Applicable Cash Percentage" shall be equal to
89.2857%.
(iii) On any Interest Payment Date the Company may, at its
option, pay in cash more than the Applicable Cash Percentage of the interest
payment due and payable on such Interest Payment Date.
(iv) Notwithstanding anything to the contrary contained in
subparagraph (i) above, if the Notes shall remain outstanding after June 30,
2006 and the aggregate amount of accrued and unpaid interest on the Notes on any
Interest Payment Date occurring after the fifth anniversary of the date of
issuance thereof shall exceed an amount equal to the first twelve months' yield
accrued after issuance thereof (where the "first twelve months' yield" on Notes
equals the product of such Notes' issue price (as defined in Code Sections
1273(b) and 1274(a)) and their yield to maturity) (the "Maximum Accrual"), all
accrued and unpaid interest on Notes in excess of an amount equal to the Maximum
Accrual shall be paid by the Company to the holders of Notes on each such
Interest Payment Date occurring after the fifth anniversary of the date of
issuance thereof. Any accrued interest which for any reason has not theretofore
been paid shall be paid in full on the date on which the final principal payment
on a Note is made.
(d) Default Rate of Interest. From and after the time that any
principal of or interest on the Notes is not paid when due or there exists any
other Default or Event of Default, the Notes shall bear interest at the rate of
18% per annum, accrued quarterly, until the Interest Payment Date next
following, as applicable, either the date on which such overdue principal or
interest is paid in full or the date on which such other Default or Event of
Default is cured.
(e) Maximum Legal Rate of Interest. Nothing in this Agreement
or in the Notes shall require the Company to pay interest at a rate in excess of
the maximum rate permitted by applicable law and the interest rate otherwise
applicable to the Notes (including any default rate of interest) shall be
reduced, if necessary, to conform to such maximum rate.
14
(f) Application of Payments. Subject to Section 3.1(c)(iii)
above, all cash payments received in respect of the Notes shall be applied (to
the extent thereof) as follows: (i) first, to all costs and expenses of the
Purchasers that are payable by the Company hereunder, (ii) second, to accrued
and unpaid interest on the Notes, (iii) third, to any prepayment premium due as
a result of such payment, and (iv) fourth, to the payment of the then
outstanding principal balance of the Notes; provided that the portion of cash
payments that represents prepayments of principal shall be applied to the
installments of principal remaining due under the Notes in inverse order of such
installments' scheduled maturity, as described in the first paragraph of the
Note attached hereto as Exhibit B. For purposes of this Section, all Principal
Increases shall be deemed due and payable on the date that the final installment
of principal is due and payable. Unless otherwise agreed among the holders of
the Notes, and evidenced in writing to the Company prior to the payment date,
all payments applied pursuant to clauses (i), (ii), (iii) or (iv) above shall be
applied among the Notes pro rata based on the principal amount of the Notes
outstanding and held by each holder thereof.
(g) Agreements Between Note Holders and Subordination
Agreements. The Company agrees to acknowledge and abide by the terms and
conditions of any allocation, participation, sharing or subordination agreements
now or hereafter entered into between and among the holders of the Notes, or
between the holders of the Notes and any other creditor of the Company, and
shall join in any such agreements at the request of the holders of the Notes.
(h) Indemnity for Interrupted Funding. If the Company shall
voluntarily prepay the Notes pursuant to Section 3.1(a), the Company shall
reimburse each Purchaser for out-of-pocket expenses incurred by each Purchaser
as a result of such prepayment (including, without limitation, reasonable legal
and accounting expenses). Such expenses (which the Purchasers shall endeavor to
minimize) shall be specified in a written notice or certificate delivered to the
Company by the Purchasers and shall in any event not exceed $10,000 in the
aggregate for all the Purchasers on account of each event of prepayment.
3.2 Use of Proceeds. The Company will use the proceeds of the
sale of the Notes and Warrants solely in accordance with the statement of
sources and uses previously provided to the Purchasers and attached hereto as
Schedule 5.12 [FINAL SCHEDULE TO MATCH LOI SCHEDULE].
SECTION 4. REPRESENTATIONS AND WARRANTIES.
In order to induce the Purchasers to enter into this Agreement
and to purchase the Notes and Warrants, the Company hereby represents and
warrants to the Purchasers that the representations and warranties set forth
below shall be true and correct as of the date hereof and effective on the
Closing Date after giving effect to the Transactions, including the consummation
of the Merger and the issuance and sale of the Notes and Warrants, and to the
Company's best knowledge (after due inquiry of the Company's employees and
advisors) that the Company is not aware of any event which is scheduled to
occur, or reasonably foreseeable and likely to occur, which will render any
representation or warranty below to be untrue at any time after the Closing
Date.
15
4.1 Corporate Existence; Capitalization.
(a) Each of the Corporations (i) is duly incorporated and in
good standing under the laws of its jurisdiction of incorporation, and (ii) is
duly qualified and in good standing as a foreign corporation under the laws of
all states where the nature and extent of the business to be transacted by it or
assets to be owned by it makes such qualification necessary, except those states
in which the failure to qualify or be in good standing is not reasonably likely
to have a Material Adverse Effect.
(b) Except as set forth on Schedule 4.1(b), on the Closing
Date, immediately after applying the proceeds of the issuance and sale of the
Notes and Warrants to pay the Merger Consideration, there will be no further
amounts owed to any holder of the Company's Capital Stock under any agreement or
obligation whatsoever, except for amounts that may be owed to stockholders of
SCC pursuant to appraisal rights exercised by stockholders of SCC and relating
to an amount of SCC common stock not exceeding five percent (5%) of total issued
and outstanding shares of SCC common stock as of the date hereof.
(c) Except as set forth on Schedule 4.1(c), on the Closing
Date, immediately after giving effect to the Transactions, including the
issuance and sale of the Notes and Warrants and the retirement or reduction of
certain Indebtedness of the Company as set forth in paragraph (b) above: (i) the
Capital Stock of the Company (including Common Stock, Warrants, stock options
and other derivative instruments) will consist of [_________] shares of Common
Stock, all of which will have been duly authorized and [_________] of which will
be issued and outstanding and owned of record and beneficially as set forth on
Schedule 4.1(c) hereto, (ii) such issued and outstanding shares will be validly
issued by the Company and fully paid, non-assessable and free of preemptive
rights (except as provided in the Stockholders Agreement), and (iii) except as
set forth on Schedule 4.1(c) [THIS SHOULD REFLECT NOTHING EXCEPT OPTIONS TO BE
ISSUED TO MANAGEMENT UNDER THE APPROVED PLAN AND POSSIBLY GKN OPTIONS THAT ARE
TO EXPIRE IN OCTOBER], there will be no options, warrants or other rights to
acquire Capital Stock from the Company, or agreements or other rights binding
upon the Company to issue or sell Capital Stock of the Company, whether on
conversion or exchange of convertible securities or otherwise.
(d) Except as set forth on Schedule 4.1(d), all of the
outstanding Capital Stock of each of the Company's Subsidiaries is owned of
record and beneficially by the Company or Subsidiaries of the Company.
(e) The Company has taken all action required to reserve and
keep available, free from pre-emptive rights, for the purpose of enabling it to
satisfy any obligation to issue shares of Common Stock upon any exercise of the
Warrants, the number of shares of Common Stock issuable upon exercise of all
outstanding Warrants.
(f) Except as set forth on Schedule 4.1(f), there are no
agreements or other instruments of any kind to which the Company or, to the
Company's best knowledge (after due inquiry of the Company's employees and
advisors), any other person, firm or corporation is, or
16
immediately after the Closing will be, a party, which relate to the voting of
the Common Stock or the control of the Company other than the Stockholders
Agreement.
4.2 Authority. The Company has all power and authority
necessary to issue and sell the Notes and Warrants, and each of the Company and
its Subsidiaries has all power and authority necessary to execute, deliver and
perform the Transaction Documents to which it is a party. The Company has taken
all action required to authorize the issuance and sale of the Notes and
Warrants, and each of the Company and its Subsidiaries has taken all action
required to authorize the execution, delivery and performance of the Transaction
Documents to which it is a party.
4.3 Due Execution and Delivery; Binding Effect. Each of the
Company and its Subsidiaries has duly executed and delivered each of the
Transaction Documents to which it is a party. Each of the Transaction Documents
is a legal, valid and binding obligation of the Company or the applicable
Subsidiary, enforceable against the Company or such Subsidiary in accordance
with its terms, except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally.
4.4 Consents; Governmental Approvals. No consent or approval
of any person, firm or corporation, and no consent, license, approval or
authorization of, or registration, filing or declaration with, any Governmental
Authority is required to be obtained or made by or on behalf of any Corporation
in connection with the issuance or sale of the Notes and Warrants or the
execution, delivery or performance of the Transaction Documents or the
completion of the transactions contemplated thereby, except for such consents,
approvals, licenses, authorizations, registrations, filings or declarations (a)
as are listed on Schedule 4.4 hereto, each of which shall have been obtained or
made prior to the Closing or (b) which are not known to the Company or as to
which the failure to obtain or make would not have a Material Adverse Effect.
4.5 Absence of Conflicts. The Company's issuance and sale of
the Notes and Warrants, and each Corporation's execution and delivery of the
Transaction Documents to which it is a party and performance of its obligations
thereunder do not and will not (a) conflict with or violate any provision of its
charter documents or by-laws, (b) conflict with or result in a violation, breach
or default by it under (i) any provision of any existing statute, law, rule or
regulation binding on it or any order, judgment, award, decree, license or
authorization of any court or Governmental Authority binding on it, or (ii) any
mortgage, indenture, lease or other contract, agreement, instrument or
undertaking to which it is a party or will be a party immediately after the
Closing, or by which or to which it or any of its Property or assets is now or
immediately after the Closing will be bound or subject, except as set forth on
Schedule 4.5 hereto or which conflict, violation, breach or default is not known
to the Company or would not have a Material Adverse Effect.
4.6 No Default. No Default or Event of Default has occurred
and is continuing or will have occurred and be continuing at the time of or
immediately after the Closing.
17
4.7 Financial Data. (a) The Company has furnished to the
Purchasers (i) audited consolidated and consolidating financial statements of
the Company and its consolidated Subsidiaries for the fiscal years ended
December 31, 1996 through December 30, 2000, certified by the Company's
independent certified public accountants, and (ii) unaudited interim financial
statements of the Company and its consolidated Subsidiaries for the period
beginning December 31, 2000 and ending on the last day of the month immediately
preceding the Closing [statements may be from 2d preceding month if closing is
early in a calendar month] (collectively referred to as the "Financial
Statements"). All of the Financial Statements have been prepared in accordance
with GAAP, and fairly present the financial condition of the Company and its
consolidated Subsidiaries at the dates thereof and the results of operations for
the periods indicated. Since the date of the latest audited Financial
Statements, there has been no event or condition which would constitute a
Material Adverse Effect.
(b) Consolidated and consolidating projected financial
statements for the Company and its consolidated Subsidiaries for the period
beginning on the date of the latest Financial Statements and ending on December
31, 2005, including projected balance sheets, projected funds flow statements,
projected profit and loss (collectively, the "Projections"), copies of which
have been previously provided to the Purchasers, are attached hereto as Schedule
4.7(b). The Projections have been prepared to reasonably reflect the application
of GAAP to such periods, and the current anticipated course of business of the
Company and its consolidated Subsidiaries, in each case as determined in good
faith by the Company in light of the past business of the Company and its
consolidated Subsidiaries. The Company is not aware of any development or event
which has occurred since the date of the preparation of the Projections that
would materially affect the Projections.
(c) The Company has furnished to the Purchasers a consolidated
and consolidating pro forma balance sheet (the "Pro Forma Balance Sheet")
reflecting the financial condition of the Company and its consolidated
Subsidiaries as at the Closing Date or a recent date prior to the Closing Date,
on the assumption that the closing of the Transactions, including the issuance
and sale of the Notes and Warrants occurred on such date. Such balance sheet, a
copy of which is attached hereto as Schedule 4.7(c), was prepared in good faith
and in accordance with GAAP (excluding for this purpose any push down accounting
that may be required by GAAP), and fairly presents, on a pro forma basis, the
financial position of the Company and its consolidated Subsidiaries as at the
date thereof, assuming that the Transactions, including the issuance and sale of
the Notes and Warrants, had then been completed. Except as disclosed on Schedule
4.7(c), immediately after the Closing and the application of the proceeds of the
issuance and sale of the Notes and Warrants as contemplated by Section 3.2, the
Company will not have any Indebtedness or other material liabilities, contingent
or otherwise, which are not reflected in the Pro Forma Balance Sheet or the
Financial Statements. In addition:
(i) As of the Closing Date, all notes payable to the
Company and accounts receivable of the Company will be properly
reflected on its books and records and will be valid receivables
subject to no setoffs or counterclaims other than in the ordinary
course of business consistent with prior years, and such notes due and
accounts receivable are not due from any related party or Affiliate of
any kind;
18
(ii) the accounts receivable reflected on the balance
sheets included in the Financial Statements and on the Pro Forma
Balance Sheet or thereafter acquired by the Company through the Closing
Date, have been collected, or are collectible, at the aggregate gross
recorded amounts thereof less the allowances for doubtful accounts
reflected therein and such accounts receivable are not due from any
related party or Affiliate of any kind; the Company has not employed
any invoice dating procedures or other special credit or delivery terms
with any customer; and the Company has administered its accounts
receivable in the ordinary course in accordance with past practice.
(iii) the inventories reflected on the balance sheets
included in the Financial Statements and on the Pro Forma Balance
Sheet, or thereafter acquired by the Company through the Closing Date,
are in all material respects of a quality and quantity usable or
saleable in the normal course of the business of the Company at values
at least equal to the values at which such items are carried on the
Company's books subject to any reserves disclosed in such balance
sheet, and have not been acquired from any related party or Affiliate
of any kind. The values at which such inventories are carried on the
Financial Statements reflect the normal inventory valuation policy of
the Company, stating inventories at the lower of cost (on a
first-in-first-out basis) or market; and such inventories are saleable
at gross margins consistent with historical results;
(iv) the Company has not delayed or postponed the
payment of accounts payable and other liabilities and in any event any
such delay or postponement does not now create, and is not reasonably
likely to create, any penalty, cost, reversal of pricing discounts,
loss of beneficial supply or similar rights, or any default with any
other party which is not already reflected or contemplated in the
Financial Statements, the Pro Forma Balance Sheet and the Projections,
other than reasonable and customary late payment charges or which are
otherwise set forth on Schedule 4.7 (c)(iv) hereto; and
(v) the Company's working capital is at a level
consistent with the Company's customary practices, and there are no
material past due liabilities or obligations of the Company or its
Subsidiaries.
4.8 Title to Property and Assets; Condition. Except as set
forth on Schedule 4.8, each Corporation has, and on the Closing Date will have,
good and marketable title to all Property owned by it, including all Property
reflected in the Pro Forma Balance Sheet, except as disposed of after the date
thereof in the ordinary course of business, subject in each case to no Lien
other than Permitted Liens. Except for Permitted Liens, there are no, and after
the Closing will not be any, encumbrances on the use, ownership or sale of such
Property, and all such Property is, and after the Closing will be, sufficient
and maintained in appropriate condition to conduct business and operations in a
manner consistent with such Corporation's past practice and with achieving the
Projections.
19
4.9 Solvency. Immediately after giving effect to the Purchaser
Transactions (including the application of the proceeds of the issuance and sale
of the Notes and Warrants as contemplated hereby), each of the Company and its
Subsidiaries will be solvent, will be able to pay its debts as they become due,
will have capital sufficient to carry on its business and will own Property
having a value both at fair valuation and at present fair saleable value
(determined on a going concern basis) greater than the amount required to pay
its Indebtedness as it becomes due. None of the Company or any Subsidiary has
incurred obligations or made any transfer with actual intent to hinder, delay or
defraud present or future creditors (or as a result of the Purchaser
Transactions will incur any such obligation or make any such transfer). Upon
execution and delivery by it of a Subsidiary Guaranty or, at the discretion of
the Purchasers, an assignment and assumption agreement whereby a Subsidiary
becomes a co-maker of each of the Notes., no Subsidiary will have incurred
Indebtedness beyond its ability to pay the same when it matures or will be left
with unreasonably small capital, in each case after disregarding Indebtedness
consisting of its Subsidiary Guaranty or its obligations under the Notes, as
applicable.
4.10 Tax Liabilities. Except as set forth on Schedule 4.10,
each of the Company and each of its Subsidiaries has timely filed or caused to
be timely filed with the appropriate taxing authority all federal and state
income tax returns and all other material tax returns, domestic and foreign (the
"Returns") required to be filed by it or with respect to the income, properties
or operations of the Company and/or any of its Subsidiaries. Except as set forth
on Schedule 4.10, the Returns accurately reflect in all material respect all
liability for taxes of the Company and its Subsidiaries taken as a whole for the
periods covered thereby. Except as set forth on Schedule 4.10, each of the
Company and each of its Subsidiaries has paid all material taxes and assessments
payable by it which have become due (including, without limitation, all
estimated tax payments and all employment taxes). As of the Closing Date and
except as set forth on Schedule 4.10, there is no action, suit, proceeding,
investigation, audit or claim now pending or threatened by any authority
regarding any taxes relating to the Company or any of its Subsidiaries, which,
either individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect or to result in a material liability to the Company or
any of its Subsidiaries. As of the Closing Date and except as set forth on
Schedule 4.10, neither the Company nor any of its Subsidiaries has entered into
an agreement or waiver or been requested to enter into an agreement or waiver
extending any statute of limitations relating to the payment or collection of
taxes of the Company or any of its Subsidiaries, nor will any of them incur any
material amount of tax liability in connection with the Transactions (it being
understood that the representation contained in this sentence does not cover any
future tax liabilities of the Company or any of its Subsidiaries arising as a
result of the operation of their businesses in the ordinary course of business).
4.11 Margin Securities. The Company does not own any margin
securities, and no portion of the proceeds of the sale of the Notes and Warrants
will be used for the purpose of purchasing or carrying any margin securities or
for the purpose of reducing or retiring any Indebtedness which was originally
incurred to purchase any margin securities or for any other purpose not
permitted by Regulation U of the Board of Governors of the Federal Reserve
System.
20
4.12 Subsidiaries; Joint Ventures. On the Closing Date after
giving effect to the issuance and sale of the Notes and Warrants, the Company
will not (a) have any Subsidiaries other than as set forth on Schedule 4.12, or
(b) be engaged in any joint venture or partnership with, or have any equity
investment in, any other Person (other than the Company's equity investment in
its Subsidiaries listed on Schedule 4.12).
4.13 Litigation and Proceedings. Except as disclosed on
Schedule 4.13, no judgments involving amounts in excess of $100,000 in the
aggregate or injunctions are outstanding against any of the Corporations, nor is
there now pending or threatened, any litigation, contested claim, or proceeding
by or against any of the Corporations (a) requesting injunctive relief by or
against such Corporation, (b) involving an amount in controversy in excess of
$100,000, or (c) questioning the validity or the enforceability of, or otherwise
seeking to restrain the performance of, any of the Transaction Documents or any
actions taken or to be taken thereunder.
4.14 Defaults; Adverse Changes. None of the Corporations is,
or immediately after the Closing will be, in default under or in violation of
(a) its charter document, as amended, or by-laws, as amended, (b) any agreement
or instrument to which such Corporation is a party or will be a party
immediately after the Closing, (c) any statute, rule, writ, injunction,
judgment, decree, order or regulation of any Governmental Authority having
jurisdiction over it, (d) any license, permit, certification or approval
requirement of any customer, supplier or other person (other than a Governmental
Authority), or (e) any license, permit, certification or approval requirement of
any Governmental Authority. To the Company's best knowledge (after due inquiry
of the Company's employees and advisors), no Material Adverse Effect could
reasonably be expected to occur as a result of any pending legislative or
regulatory change or any revocation of any license or right to do business or
any casualty, labor trouble, condemnation, requisition or embargo.
4.15 Insurance. Attached hereto as Schedule 4.15 is a list and
description of all insurance policies (including expiration dates) owned or
maintained by each Corporation. Each Corporation maintains insurance in amounts
and on terms reasonably adequate in relation to the nature of such Corporation's
business and assets (and covering such risks as are customarily insured against
by Persons of established reputation engaged in the same or a similar business
and similarly situated), under policies believed by the Company to be valid and
enforceable and issued by the insurers set forth on Schedule 4.15. None of the
Corporations is in default of any obligation under any such policy. To the
extent any insurance policy has a cash surrender, rebate or similar value, there
is no restriction, Lien or other encumbrance affecting the Corporation's receipt
or claim of such value, and no obligation or agreement to pay, directly or
indirectly, such value to any other party. Each insurance company issuing a
policy listed on Schedule 4.15 has an A.M. Best rating of not less than A.
4.16 Patents, Trademarks, Licenses, etc. Attached hereto as
Schedule 4.16 is a list of all (i) patents, patent applications, registered and
material unregistered trademarks, service marks, trade names, brands and
material copyrights (collectively, "Intellectual Property") owned by each
Corporation, (ii) licenses pursuant to which each Corporation uses any
Intellectual Property and (iii) licenses pursuant to which each Corporation
licenses its
21
Intellectual Property to others (the licenses referred to in subsections (ii)
and (iii) are referred to herein as the "Licenses"). Except as disclosed on
Schedule 4.16 hereto, the applicable Corporation owns the entire unencumbered
right, title and interest in and to all such Intellectual Property and Licenses,
and such Intellectual Property and Licenses constitute all of the patents,
patent applications, trademarks, service marks, trade names, brands, copyrights,
licenses and other intellectual property rights, both domestic and foreign,
necessary for the conduct of its business as now conducted, without any known
conflict with the rights of others which, if determined adversely to such
Corporation, would result in a Material Adverse Effect. Except as disclosed on
Schedule 4.16, no stockholder, officer, director or any other Affiliate owns or
possesses any rights in any of the Intellectual Property or Licenses.
4.17 Environmental Matters. Except as disclosed on Schedule
4.17, and except for items not known to the Company and which in the aggregate
do not have a Material Adverse Effect:
(a) none of the Corporations has Managed Hazardous Materials
on or off its property other than in compliance in all respects with
Environmental Laws;
(b) each of the Corporations has complied in all respects with
all applicable Environmental Laws;
(c) none of the Corporations has any contingent liability with
respect to the Management of any Hazardous Material; and
(d) none of the Corporations has received any Environmental
Notice, and the Company is not aware of any occurrence or state of
facts which could reasonably be expected to result in any such
Environmental Notice.
4.18 Investment Bankers' Fees. The Company is not in any way
obligated to any Person in respect of any finder's or broker's fee or similar
commission in connection with the closing of the issuance and sale of the Notes
and Warrants or any part of the Transaction, other than as may be set forth on
Schedule 4.18 hereof. The Company agrees to indemnify the Purchasers and hold
the Purchasers harmless from any claims for any such fees or commissions from
any Persons.
4.19 Investment Company Act. None of the Corporations is an
"investment company" or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended. None of
the Corporations is subject to regulation under any federal or state statute or
regulation which limits its ability to incur Indebtedness.
4.20 Disclosure. Except as corrected in writing prior to the
date hereof, all information presented in the Company's most recent Form 10K,
10Q, 8K, Schedule 13E-3 and the proxy statement used in connection with the
Merger (as the same have been filed with the Securities and Exchange
Commission), and all written information, certificates and other documents
attached hereto or otherwise delivered at the Closing and all statements made
herein
22
or therein, are true and accurate in all material respects and do not omit any
material fact necessary to make the statements therein not misleading. There is
no fact of which the Company is aware that has not been disclosed to the
Purchasers and which would, or could reasonably be expected to, indicate the
existence of a Material Adverse Effect .
4.21 Pension Plans. Except as disclosed on Schedule 4.21, none
of the Corporations has any Plan on the date hereof. Each of the Corporations is
in compliance in all material respects with requirements of ERISA and the
regulations promulgated thereunder with respect to each Plan. No fact or
situation that could reasonably be expected to result in a Material Adverse
Effect exists in connection with any Plan. None of the Corporations has been
assessed any withdrawal liability in connection with a Multiemployer Plan.
4.22 Compensation and Benefits. The Company has delivered to
the Purchasers copies of all employment, management, consulting, retirement
benefit and compensation contracts and commitments now in effect with any
employee, officer, director or shareholder (or any Affiliate thereof) of any of
the Corporations, or with any other Person and each of such agreements or plans
(other than those with employees in which the agreement provides for annual
compensation of less than $100,000) is set forth on Schedule 4.22.
4.23 SCC Merger Documents. The representations and warranties
of the parties to the SCC Merger Documents (other than the Purchasers and their
Affiliates) were true and correct in all material respects as of the dates made.
4.24 Labor Relations. Neither the Company nor any of its
Subsidiaries is engaged in any unfair labor practice that could reasonably be
expected, either individually or in the aggregate, to have a Material Adverse
Effect. There is (a) no unfair labor practice complaint pending against the
Company or any of its Subsidiaries or threatened against any of them, before the
National Labor Relations Board, and no grievance or arbitration proceeding
arising out of or under any collective bargaining agreement is so pending
against the Company or any of its Subsidiaries or threatened against any of
them, (b) no strike, labor dispute, slowdown or stoppage pending against the
Company or any of its Subsidiaries, (c) no union representation question exists
with respect to the employees of the Company or any of its Subsidiaries, except
(with respect to any matter specified in clause (a), (b) or (c) above, either
individually or in the aggregate) such as could not reasonably be expected to
have a Material Adverse Effect, and (d) no notice, claim, formal or informal
investigation or proceeding or other matter existing or threatened under the
Occupational Health and Safety Act, or similar state statutes or regulations,
regarding any matter of safety, working conditions, worker eligibility or
similar matter, and Schedule 4.24 describes any of such matters which have
occurred or been threatened since January 1, 1998, whether or not such matter
was thereafter resolved or settled. No senior executive of the Company or any of
its Subsidiaries has indicated any intention of terminating his or her
employment, and none of such persons has filed any claim for severance, change
of control payments or similar compensation as a result of the consummation of
the Transactions, except as may be set forth in Schedule 4.24 hereof.
4.25 Trade and Consumer Relations and Practices. There exists
no actual or, to the Company's best knowledge (after due inquiry of the
Company's employees and advisors),
23
threatened, termination, cancellation or limitation of, or any adverse
modification or change in, the business relationships of the Company or any of
its Subsidiaries or their respective businesses with any customer or any group
of customers whose purchases are individually or in the aggregate material to
the business of the Company and its Subsidiaries taken as a whole, or with any
material supplier, and there exists no present condition or state of facts or
circumstances that would have a Material Adverse Effect or prevent the Company
or any of its Subsidiaries from conducting its business after the consummation
of the Transactions, in substantially the same manner in which such business has
heretofore been conducted. There is no notice, claim, formal or informal
investigation or similar proceeding or other matter existing or, to the
Company's best knowledge (after due inquiry of the Company's employees and
advisors), threatened by the Federal Trade Commission, or any other federal or
state agency or authority regarding any of the Corporation's sales practices,
advertisements or conduct of any kind regarding consumers or customers, or which
regards competition or relationship with competitors or any other matter, and
Schedule 4.25 describes any of such matters which have occurred or been
threatened since January 1, 1998, whether or not such matter was thereafter
resolved or settled.
4.26 Other Agreements. Except for the Transaction Documents or
as set forth on Schedule 4.26 attached hereto, none of the Company or any of its
Subsidiaries is a party to or otherwise bound or affected by any written or
oral:
(a) agreement, contract or commitment with any
present or former shareholder, director, officer, or with any
other Affiliate;
(b) agreement, contract or commitment for the
purchase of, or payment for, supplies or products, or for the
performance of services by a third party, involving in any one
case $50,000 or more, other than purchase orders issued to
vendors in the ordinary course of business involving $500,000
or less;
(c) agreement, contract or commitment to sell or
supply products or to perform services, involving in any one
case $50,000 or more, other than purchase orders received from
customers in the ordinary course of business involving
$1,000,000 or less;
(d) note, debenture, bond, conditional sale
agreement, equipment trust agreement, letter of credit
agreement, loan agreement or other agreement or contract,
commitment or arrangement for the borrowing or lending of
money in an amount in excess of $50,000 (including without
limitation loans to or from officers, directors, any
stockholder or any member of any of their immediate families,
but excluding the extension of trade credit in the ordinary
course of business consistent with past practices and travel
allowances made in the ordinary course of business),
agreement, contract, commitment or arrangement for a line of
credit or guarantee, pledge or undertaking in any manner
whatsoever of the Indebtedness of any other Person;
(e) agreement, contract or commitment for any capital
expenditure in excess of $50,000; or
24
(f) agreement, contract or commitment limiting or
restraining it from engaging or competing in any lines of
business with any Person, nor is any director, officer or
employee of the Company or any of its Subsidiaries subject to
any such agreement except where such limitation runs to the
benefit of the Company or one of its Subsidiaries.
Except as set forth on Schedule 4.26, the Company and each of its Subsidiaries
and, to the best knowledge of the Company (after due inquiry of the Company's
employees and advisors), each other party thereto have in all material respects
performed all the obligations required to be performed by them to date under,
have received no notice of default under and are not in default under any lease,
agreement or contract now in effect to which any of the Company or any of its
Subsidiaries is a party or by which any of the Company or any of its
Subsidiaries or its respective property may be bound, except where the same
would not have a Material Adverse Effect. None of the Company or any of its
Subsidiaries has any present expectation or intention of not fully performing
all its obligations under each such lease, contract or other agreement, and the
Company has no knowledge of any breach or anticipated breach by any other party
to any contract or commitment to which any of the Company or any of its
Subsidiaries is a party, except where the same would not have a Material Adverse
Effect.
SECTION 5. CONDITIONS PRECEDENT.
The obligation of each Purchaser to purchase Notes and
Warrants shall be subject to the satisfaction, and continuing existence, of each
of the following conditions precedent on to the Closing Date:
5.1 Excess Cash or Senior Credit Availability. On the Closing
Date, and after allowing for the payment of the Merger Consideration, the
Corporations shall have, on a consolidated basis, $2,000,000 of "excess cash or
senior debt availability", which for this purpose shall mean the sum of (a) the
Corporations' cash balances, plus (b) unused but available credit under the
revolving line of credit described in the Senior Loan Agreement, minus (i) any
accrued or incurred but unpaid costs related to the Transactions, minus (ii) an
amount equal to the product obtained by multiplying $3.75 by the number of
shares of SAC's or SCC's Capital Stock which are subject to valid appraisal
demands, minus (iii) any past due trade payables or other liabilities, minus
(iv) any other cash or cash equivalents the use of which by the Corporations is
restricted by contract, lien, agreement, escrow arrangements or similar
restrictions and minus (v) $435,000 [AWAITING COMPANY INPUT TO FINALIZE]. At the
Closing, the Company shall deliver to the Purchasers as Schedule 5.1 a written
calculation of excess cash or availability, with a description of the elements
thereof.
5.2 Purchaser Documents. The Company shall have issued and
delivered the Notes and Warrants to the Purchasers; and each Purchaser shall
have received a counterpart of this Agreement and of each of the other Purchaser
Documents, duly executed by each party thereto.
25
5.3 Legal Opinions. The Purchasers shall have received the
executed legal opinion of ▇▇▇▇ ▇▇▇▇▇▇▇, P.C. or other counsel to the Company,
dated the Closing Date, in form and substance satisfactory to the Purchasers and
their counsel and covering such matters incident to the Purchaser Transactions
and the other Transactions as the Purchasers may reasonably require, including
without limitation the matters referred to in Sections 4.1-4.6, 4.13, 4.14 and
4.19 hereof, and the Purchasers shall have received all opinions of counsel to
other parties in respect of any aspect or consequence of the Purchaser
Transactions and the other Transactions as the Purchasers may reasonably
request.
5.4 Other Documents. The Purchasers shall have received all
closing certificates, corporate documents, evidence of authorization, forms and
information required by the U.S. Small Business Administration, and other
agreements, instruments and documents in respect of any aspect or consequence of
the Purchaser Transactions as the Purchasers may reasonably request, including
without limitation all documents listed on the List of Closing Documents
provided by the Purchasers to the Company on or prior to the Closing Date, all
of which shall be in form and substance reasonably satisfactory to the
Purchasers.
5.5 Representations and Warranties; No Default or Event of
Default. The representations and warranties made by each of the Company and each
Subsidiary in the Purchaser Documents to which it is a party shall be true and
correct in all respects as is required by Article 4 hereof as of the Closing
Date, with the same force and effect as though made again on such date at the
time of, and giving effect to, the issuance and sale of the Notes and Warrants.
At the time of, and giving effect to, the issuance and sale of the Notes and
Warrants and the consummation of the other Purchaser Transactions on the Closing
Date, no Default or Event of Default shall have occurred and be continuing.
5.6 Purchaser Transactions; Other Transactions.
(a) All consents necessary to the consummation of the
Purchaser Transactions shall have been obtained, and all conditions precedent to
the consummation of the Purchaser Transactions shall have been or shall be
satisfied or waived prior to or concurrently with the issuance and sale of the
Notes and Warrants. All Purchaser Transactions shall have been or shall be
consummated pursuant to the terms of the applicable Purchaser Documents prior to
or concurrently with the issuance and sale of the Notes and Warrants, and in
compliance with all applicable laws.
(b) True, correct and complete execution copies of all
Transaction Documents shall have been delivered to the Purchasers and their
counsel, who shall be satisfied with the form and substance thereof. The
Purchasers shall be satisfied with the terms of the subordination of the Notes
and the liens and rights granted to the Senior Lender pursuant to the Senior
Debt and the Senior Subordination Agreement and with the Purchasers' rights to
enforce and exercise Liens granted to Purchasers.
5.7 Funding Fee; Transaction Expenses. The Purchasers or their
designees shall have received their pro rata shares of (i) a funding fee of
$150,000, less any amounts paid by
26
the Company as a commitment fee prior to Closing, and (ii) Costs and Expenses
incurred in connection with the Transaction.
5.8 SCC Merger. The Purchasers shall be satisfied with the
terms of the SCC Merger Documents and with the legal structure and
capitalization of the Company and its Subsidiaries, and all documentation
relating thereto; and evidence of the equity ownership of each Corporation shall
have been delivered to the Purchasers and shall be satisfactory in form and
substance to them. All parties described in the SCC Merger Documents and related
proxy statement as intending to, or having the right to, exchange common stock
interests of SCC for interests in the Company in the Merger shall have
consummated such exchange to the fullest extent described therein or shall have
waived such right in writing, and the capitalization of SAC shall otherwise be
completed as therein described and contemplated.
5.9 Additional Matters. All corporate and other proceedings,
and all documents, instruments and other legal matters in connection with the
Purchaser Transactions shall be satisfactory in form and substance to the
Purchasers, in their discretion; the Purchasers and their counsel shall be
satisfied that each of the Company and its Subsidiaries is in compliance with,
or upon completion of the Transactions shall comply with, all matters described
in Article 4 and Article 5 of this Agreement, and the Purchasers shall have
received information, documentation and certifications regarding any matter or
question that may affect, or be related to, such compliance, satisfactory to the
Purchasers in their discretion.
5.10 Due Diligence; No Adverse Change or Events. The
Purchasers shall have completed their due diligence investigations of the
Corporations and the results thereof shall be satisfactory to the Purchasers in
their discretion; and there shall not exist in the Purchasers' judgment (i) any
event or condition that has had or would have a Material Adverse Effect, or (ii)
any law or regulation which, in the opinion of the Purchasers' counsel, prevents
or prohibits any Purchaser from funding its purchase of the Notes and Warrants
or maintaining its investment therein, or which would materially adversely
affect the economic benefits expected to be realized by the Purchasers in the
Transactions.
5.11 Minimum EBITDA. The Company shall have minimum EBITDA for
the twelve-month period ending on the date of the latest Financial Statements,
of not less than $5,810,000 (as adjusted, subject to documentation satisfactory
to the Purchasers, solely for up to $115,000 of non-recurring relocation and
recruitment costs associated with the employment of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ but solely
to the extent that such costs were accounted for as an expense in the Financial
Statements during such twelve-month period). The chief financial officer of the
Company shall provide a certificate to the Purchasers at Closing, certifying (a)
as to the Company's EBITDA for the twelve-month period ending on the date of the
latest Financial Statements, (b) that such EBITDA was determined in accordance
with GAAP, and (c) that such officer reasonably believes that the Company's
EBITDA as of the end of the month during which the Closing occurs will not be
less than the minimum described in the first sentence of this Section.
5.12 Compliance With Sources and Uses. The Company shall have
provided the Purchasers with a statement of the sources and uses of funds in
connection with the
27
transactions occurring pursuant to the Transaction Documents on the Closing
Date, which statement shall conform to that set forth on Schedule 5.12 hereto.
Any variance from the sources and uses set forth in Schedule 5.12 shall require
the consent of the Purchasers, and the Company shall provide documentation
satisfactory to the Purchasers that the items listed on such statement are true
and accurate in all material respects. Any non-compliance with or variance from
the statement of sources and uses consented to by the Purchasers shall be
described on an attachment to Schedule 5.12.
5.13 Closing Certificates. On or prior to the Closing Date,
the Purchasers shall have received:
(i) a solvency certificate from the chief financial officer of
the Company certifying that: (a) the Corporations do not and will not
have, immediately following the closing of the Transactions,
unreasonably small capital to carry out their respective businesses as
now conducted or as proposed to be conducted; and (b) the Corporations
do not intend to, and do not believe that they will, incur Indebtedness
beyond their ability to pay such Indebtedness as it matures;
(ii) certificates of insurance complying with the requirements
of Section 6.5 for the business and properties of the Corporations, in
form and substance reasonably satisfactory to the Purchasers; and
(iii) a certificate of the chief executive officer of the
Company certifying that (a) all of the representations and warranties
of the Corporations set forth in the Transaction Documents are true,
complete and accurate in all respects as of the Closing Date, and (b)
as of the Closing Date, the Corporations have complied with and
performed all of the covenants and agreements, and satisfied all of the
conditions, to be complied with, performed or satisfied by the
Corporations pursuant to the Transaction Documents on or prior to the
Closing Date.
5.14 Reservation of Common Stock. The Company shall at all
times have authorized, and reserved and kept available, free of preemptive
rights, the number of shares of Common Stock necessary to accommodate the
exercise of all outstanding Warrants.
SECTION 6. AFFIRMATIVE COVENANTS.
The Company hereby agrees that until each and all of the Notes
are paid in full, including any accrued and unpaid interest, charges, fees,
expenses or Principal Increases, and so long as this Agreement is in effect:
6.1 Financial and Other Information. The Company will keep,
and will cause its Subsidiaries to keep, proper books of record and account in
which full and true entries will be made of all dealings or transactions
relating to their business and affairs, and the Company shall cause to be
furnished to each Purchaser:
(a) as soon as practicable and in any event within thirty (30)
days after the end of each month and each fiscal quarter, as the case
may be, and within forty-five (45)
28
days after the end of December, (i) unaudited consolidated and
consolidating statements of income, retained earnings and cash flows of
the Company and its consolidated Subsidiaries for such month and the
year-to-date period and, if applicable, the fiscal quarter, and
unaudited consolidated and consolidating balance sheets of the Company
and its consolidated Subsidiaries as of the end of such month, in the
forms prepared by the Company for its internal use consistent with past
practice, subject to changes resulting from normal year-end adjustment,
and (ii) in comparative form, figures for the actual results for the
corresponding month and year-to-date periods and, if applicable, the
fiscal quarter in the immediately preceding fiscal year and amounts
projected for such month, year-to-date period and quarter pursuant to
Section 6.1(e), together with a written report providing explanations
of any material variances;
(b) intentionally deleted;
(c) as soon as practicable and in any event within ninety (90)
days after the end of each fiscal year, (i) consolidated and
consolidating statements of income, retained earnings and cash flows of
the Company and its consolidated Subsidiaries for such year, and
consolidated balance sheets of the Company and its consolidated
Subsidiaries as of the end of such year, setting forth in each case, in
comparative form, corresponding figures for the period covered by the
preceding annual audit and as of the end of the preceding fiscal year,
all of which statements and balance sheets shall be in reasonable
detail and satisfactory in scope to the Purchasers and prepared by
Deloitte & Touche or another respected national firm of independent
certified public accountants selected by the Company and reasonably
satisfactory to the Purchasers, whose opinion shall be unqualified and
shall be prepared in accordance with GAAP and generally accepted
auditing standards, provided, that each Purchaser hereby agrees that
such Purchaser will consider satisfactory any Big 5 accounting firm
retained by the Company, (ii) any accountants' comment letter on the
Company's and its consolidated Subsidiaries' internal financial or
accounting systems or controls which shall be issued as well as copies
of all other reports submitted by the Company's accountants;
(d) intentionally deleted;
(e) as soon as practicable and in any event before the end of
each fiscal year, an operating budget and projected financial
statements for each month of the next succeeding fiscal year (including
a statement of underlying assumptions), in the same format as the
financial statements provided pursuant to Sections 6.1(a) and (c);
provided, that the Company shall deliver such operating budget and
projected financial statements for the fiscal year ending December 31,
2001 prior to the Closing Date;
(f) (i) as soon as practicable, and in any event at the same
time as any notice is given to the Senior Lender (but in no event later
than three (3) Business Days after any officer of the Company obtains
knowledge of the occurrence of an event or the existence of a
circumstance giving rise to a Default or an Event of Default), notice
of any default under the Senior Debt, or of any Defaults or Events of
Default hereunder, and (ii) any other notice, certificate, or other
document or information given to or
29
received from the Senior Lender not later than these (3) Business Days
after the date thereof;
(g) with reasonable promptness, such other information
reasonably available to the Company as the Purchasers may from time to
time reasonably request respecting the business, properties, prospects,
condition or operations, financial or otherwise, of the Company and its
Subsidiaries, including without limitation, all forms and information
requested or required by the U.S. Small Business Administration as a
result of any Purchaser being a small business investment company;
(h) if the Company shall provide its Board of Directors with
any financial information not otherwise provided for herein, it shall
also furnish the same to the Purchasers in addition to the financial
statements and other information for the Company and its Subsidiaries
required to be furnished pursuant to the foregoing provisions of this
Section 6.1;
(i) Each Purchaser shall keep confidential all information
concerning the Corporations furnished by the Company pursuant to this
Section 6.1, as well as all other information concerning the
Corporations acquired by the Purchasers by virtue of their status as
Purchasers under the Purchaser Documents or as a result of their (or
their representatives') attendance as directors or non-voting observers
at meetings of the Board of Directors of any of the Corporations
(including information acquired as a result of any inspection conducted
in accordance with Section 6.2 below); provided, that a Purchaser may
communicate such information to such Purchaser's officers, employees,
professional advisors, creditors and owners, subject to the same
confidentiality provisions applicable to such Purchaser. A Purchaser
may also disclose such information to any Governmental Authority having
jurisdiction over such Purchaser, to the extent required by such
Governmental Authority, provided that (except in the case of
disclosures to the U.S. Small Business Administration by a Purchaser
which is a Small Business Investment Company) such Purchaser shall use
reasonable effort to notify the Company prior to such disclosure so
that the Company will have a reasonable amount of time to contest such
disclosure if the Company wishes to do so. A Purchaser may also
disclose such information to any other Person in connection with such
Purchaser's sale of any participations in, or assignments of, the
Notes, Warrants or Warrant Shares, provided that such Person shall
execute a confidentiality agreement requiring the recipient to maintain
the confidentiality of the information to the same extent as required
hereunder for the Purchaser. Following any Default or Event of Default
or as may be reasonably necessary to effect the exercise of rights
hereunder, a Purchaser may disclose information to others in connection
with the exercise of such Purchaser's rights hereunder or under any of
the other Purchaser Documents and as may be required by applicable law;
(j) If requested by Purchasers, together with each delivery of
financial statements required by Section 6.1(c), a certificate of the
accountants who performed the audit in connection with such statements
(i) stating that they have reviewed this Agreement and that, in making
the audit necessary to the issuance of a report on such
30
financial statements, they have obtained no knowledge of any Default or
Event of Default or, if such accountants have obtained knowledge of a
Default or Event of Default, specifying the nature and period of
existence thereof and (ii) setting forth the calculations necessary to
establish whether or not the Company was in compliance with the
covenants contained in Section 7.19 as of the date of such statements.
The Company authorizes the Purchasers to discuss the financial
condition of the Company with the Company's independent certified
public accountant and agrees that such discussion or communication
shall be without liability to either Purchasers or the Company's
independent certified public accountants. The Company shall deliver a
letter addressed to such accountants authorizing them to comply with
the provisions of this Section 6.1(j); in any event, such accountants
are irrevocably authorized to rely upon a copy of this Agreement as
authority for such discussions and communications; and
(k) Together with each delivery of financial statements
required by Sections 6.1(a), (i) a detailed report that provides a
discussion of the operations and financial condition of the Company and
its Subsidiaries for the period covered by such financial statements
and a summary and discussion of catalog performance measures. Such
certificate and report shall be in form satisfactory to the Purchasers
in their discretion, and (ii) if the financial statements are for a
fiscal quarter, a certificate of the Company's president or chief
financial officer (A) stating that, based on an examination sufficient
to enable an informed statement, no Default or Event of Default exists
or, if such is not the case, specifying such Default or Event of
Default and its nature, when it occurred, whether it is continuing and
the steps being taken by the Company with respect to such Default or
Event of Default, and (B) setting forth the calculations necessary to
establish whether or not the Company was in compliance with the
covenants contained in Section 7.19 as of the date of such statements
and for the periods then ended, as the case may be.
6.2 Inspection. Any Purchaser, or any Person designated by a
Purchaser in writing, shall have the right, from time to time hereafter, to call
at the place or places of business of any Corporation during ordinary business
hours (a) to inspect, audit and check any of its books, records, journals,
orders, receipts and any correspondence and other data relating to its business
or to any transactions among the parties to the Transaction Documents, and (b)
to discuss its affairs, finances and business with any of its officers or
directors.
6.3 Conduct of Business. Except as contemplated in connection
with the sale of the Company's Western Schools or the AHI businesses, the
Company shall, and shall cause each Subsidiary to, (a) maintain its corporate
existence, (b) maintain in full force and effect all bonds, franchises, patents
and trademarks, and all governmental licenses, permits and authorizations, in
each case which are material to the conduct of its business, (c) maintain in
full force and effect all leases, contracts and other rights, and all
non-governmental licenses, permits and authorizations, in each case the loss of
which would have a Material Adverse Effect, (d) engage only in (i) the
businesses in which they are currently engaged as of the Closing Date and (ii)
businesses reasonably related to the businesses in which they are currently
engaged as of the Closing Date; provided, however, that (A) such reasonably
related
31
businesses do not involve direct retail operations and do not require
significant expenditures or commitments, and (B) the addition of such reasonably
related businesses does not materially change the nature of the business of the
Company or its Subsidiaries, (e) comply with all applicable laws, orders,
regulations and ordinances of all Governmental Authorities, except for such
laws, orders, regulations and ordinances the violation of which would not be
reasonably likely to have a Material Adverse Effect, and (f) maintain its
Property in good working order.
6.4 Taxes. The Company shall pay, and cause its Subsidiaries
to pay, all of their respective (i) license fees, bonding premiums and related
taxes and charges, (ii) real and personal property taxes, assessments and
charges, (iii) franchise, income, unemployment, use, excise, old age benefit,
withholding, sales and other taxes and (iv) other governmental charges assessed
against any of them, or payable by any of them, in each case at such times and
in such manner as to prevent any penalty from accruing or any Lien from
attaching to any of their property, provided that the applicable Corporation
shall have the right to contest in good faith, by an appropriate proceeding
promptly initiated and diligently conducted, the validity, amount or imposition
of any such tax, assessment or charge, and upon such good faith contest to delay
or refuse payment thereof, if it establishes adequate reserves to cover such
contested taxes, assessments or charges.
6.5 Property, Liability and Business Interruption Insurance.
The Company shall, and shall cause each of its Subsidiaries to, maintain
insurance to such extent and covering such risks as shall be required by law or
by any agreement to which any of such Corporations is a party, and, in any
event, keep and maintain their properties and businesses insured against such
risks as are ordinarily insured against (and in such amounts, and subject to
such deductibles as are ordinarily obtained) by prudent Persons engaged in
similar businesses similarly situated with nationally recognized and financially
sound insurers. The Company shall maintain, and cause each of its Subsidiaries
to maintain, at the Company's or such Subsidiary's expense, such public
liability insurance, third party property damage insurance and business
interruption insurance, in such amounts and with such deductibles, as is
reasonably acceptable to the Purchasers and as is customary for similar
businesses similarly situated. All such policies of insurance shall be issued by
insurers having A.M. Best ratings no less than A, and if any such insurer shall
cease to have such rating, then the Company shall replace such policy with one
issued by an insurer with such rating within 45 days. Upon request, the Company
shall deliver to each Purchaser a certified copy of each such policy of
insurance and evidence of payment of all premiums therefor.
6.6 Pension Plans. The Company shall (i) deliver to the
Purchasers promptly, and in any event within 30 days, any notice, letter or
communication received by any Corporation from the PBGC, the IRS or any other
Governmental Authority with respect to any Plan, if such notice could result in
any material liability to any Corporation, (ii) upon Purchaser's request,
provide the Purchasers with copies of any annual report filed by any Corporation
with the PBGC in connection with any Plan, promptly after the request therefor,
and (iii) notify the Purchasers prior to terminating any Plan if such
termination could result in any material liability to any Corporation.
32
6.7 Notice of Suits, Adverse Changes in Business and Defaults.
The Company shall, as soon as possible, and in any event within five (5)
Business Days after it learns of any of the following, give written notice to
the Purchasers of:
(a) any proceeding(s) being instituted or threatened to be
instituted by or against any Corporation in any federal, state, local
or foreign court or before any Governmental Authority in which the
amount in controversy exceeds $200,000 (unless the same is covered by
insurance and arises in the ordinary course of business in accordance
with such Corporation's historical experience) or in which injunctive
relief is requested, and any litigation, proceeding, investigation or
claim that relates in any material way to (i) any of the Transaction
Documents, or (ii) the Certificate of Incorporation, as amended, or
By-laws, as amended, of any Corporation;
(b) any change in the business, assets or condition, financial
or otherwise, of any Corporation which can reasonably be expected to
have a Material Adverse Effect;
(c) any failure by any party to perform any material term or
provision of any of the SCC Merger Documents;
(d) the occurrence of any "Default" or "Event of Default" as
defined in any of the Senior Debt Documents;
(e) the occurrence of any material default under any other
material lease, contract or other agreement to which the Company is a
party; and
(f) the occurrence or existence of any event or condition
which could reasonably be expected to cause a Default or Event of
Default.
6.8 Environmental Laws. (a) The Company shall promptly notify
and furnish the Purchasers with a copy of any and all Environmental Notices
which are received by any Corporation on or after the date hereof which can
reasonably be expected to have a Material Adverse Effect. The Company shall, and
shall cause its Subsidiaries to, take prompt and appropriate action in response
to any and all such Environmental Notices, and shall promptly furnish the
Purchasers with a description of the applicable Corporation's Response thereto.
The Company shall promptly notify the Purchasers of any event or state of facts
which could reasonably be expected to result in any such Environmental Notice.
(b) The Company shall, and cause each of its Subsidiaries to,
(i) comply in all material respects with all Environmental Laws, (ii) obtain,
comply with and maintain any and all licenses, approvals, registrations or
permits required by Environmental Laws, (iii) conduct and complete all
investigations, studies, sampling and testing, and all remedial, removal and
other actions required under Environmental Laws, and (iv) promptly comply in all
material respects with all lawful orders and directives of all Governmental
Authorities respecting Environmental Laws (and provide copies of all such orders
and directives to the Purchasers), except, in each case, to the extent that the
same are being contested in good faith by appropriate
33
proceedings and the pendency of such proceedings could not be reasonably
expected to have a Material Adverse Effect.
(c) The Company shall defend, indemnify and hold harmless each
of the Purchasers and their respective employees, agents, officers and
directors, from and against any claims, demands, penalties, fines, liabilities,
settlements, damages, costs and expenses of whatever kind or nature known or
unknown, contingent or otherwise (including without limitation attorneys' and
consultants' fees, investigation and laboratory fees, court costs and litigation
expenses), arising out of, or in any way relating to (i) any Environmental Laws
applicable to any of the Corporations, any of their operations, or any real
property owned or operated by any of them, (ii) any orders, requirements or
demands of any Governmental Authority or any private party related to any
Environmental Laws or to Hazardous Materials, or (iii) the actual or alleged
presence of Hazardous Materials on any property previously, now or hereafter
owned, leased or otherwise held by any of the Corporations. The indemnity set
forth in this paragraph (c) shall survive any termination of this Agreement.
6.9 Notices Relating to Transactions. The Company shall
promptly provide the Purchasers with copies of all amendments, consent letters,
waivers or modifications to, and any material notices or reports provided by any
Person to any Corporation pursuant to the terms of or in connection with, any
Transaction Document, or any Corporation's charter or bylaws, or by any
Corporation to any such Person; without limiting the foregoing, the Company
agrees to notify the Purchasers of the effective date and amount of any
prepayment pursuant to the Senior Loan Agreement.
6.10 Boards of Directors. The Company shall allow two
representatives of the Purchasers to attend and observe all meetings of the
Boards of Directors of each of the Company and its Subsidiaries and all
committees thereof, and at all times after either (a) the repayment in full of
the Notes or (b) upon and after the occurrence of an Event of Default, shall
cause the Purchasers to have the right to designate one member of the Board of
Directors of the Company (such representatives and any director are referred to
herein as the "Purchaser Representatives"). The Company shall (i) give the
Purchaser Representatives notice of all such meetings, at the same time as
furnished to the directors of the applicable Corporation, and cause all such
meetings to be held in New York, New York or the Boston, Massachusetts
metropolitan area, (ii) pay the reasonable out-of-pocket costs and expenses of
the Purchaser Representatives and otherwise compensate a Purchaser
Representative at the same level as the most highly compensated non-employee
member of the Board of Directors of each of the Company and its Subsidiaries,
and indemnify each of the Purchaser Representatives to the fullest extent
permitted by law in connection therewith, (iii) provide to such Purchaser
Representatives all notices, documents and information furnished to the
directors of the applicable Corporation whether at or in anticipation of a
meeting, an action by written consents or otherwise, at the same time furnished
to such directors, (iv) notify such Purchaser Representatives of, and permit
such Purchaser Representatives to participate by telephone in, emergency
meetings of such Boards of Directors and all committees thereof, (v) provide
such Purchaser Representatives copies of the minutes of all such meetings at the
time such minutes are furnished to the directors of the applicable Corporation,
(vi) cause regularly-scheduled meetings of the Boards of Directors of each
Corporation to be held no less frequently than
34
quarterly, (vii) upon the request of any of the Purchasers, obtain and maintain
in force directors' and officers' liability insurance in an amount reasonably
acceptable to Purchasers, (viii) cause the creation on each Corporation's Board
of an audit committee composed solely of outside directors, the responsibility
of which shall be to fulfill all functions recommended by the Auditing Standards
Board of the AICPA as well as monitoring and reviewing all major accounting
policies and auditor relationships of such Corporation, and (ix) cause the
creation on each Corporation's Board of a compensation committee composed solely
of outside directors, the responsibility of which shall be to monitor and review
compensation plans, the Stock Option Plan, other Plans, annual performance
objectives for senior executives, and the achievement of these performance
objectives.
6.11 Subsidiary Mergers. The Company shall not cause any
merger of Subsidiaries of the Company, unless, in the reasonable opinion of
counsel for and/or the independent certified public accountants of the Company,
such merger would not result in material adverse tax consequences to the Company
and to the Purchasers.
6.12 Intentionally omitted.
6.13 Intentionally omitted.
6.14 Notice of Amendment of Senior Loan Agreement. The Company
(i) shall not enter into any amendment of the Senior Loan Agreement without
providing the Purchasers with advance written notice of the proposed terms of
such amendment not less than five (5) Business Days prior to the making of such
amendment, and (ii) without the prior written consent of the Purchasers, shall
not enter into any amendment of the Senior Loan Agreement, or in any other
manner modify or supplement or alter by agreement or waiver, the Senior Loan
Agreement, the purpose of which is (a) a voluntary permanent reduction of any
revolving credit facility provided under the Senior Loan Agreement or (b)
violative of Section 7.15 hereof.
6.15 Exercise of Rights. The Company will, and will cause each
of its Subsidiaries to, enforce all of the Company's and its Subsidiaries'
material rights under the SCC Merger Documents, including, without limitation
all material indemnification rights thereunder, and pursue all material remedies
available to the Company and its Subsidiaries with diligence and in good faith
in connection with the enforcement of any such rights.
6.16 Use of Proceeds. The Company shall use the proceeds of
the sale of the Notes solely as described in the statement of sources and uses
referenced in Section 5.12.
6.17 New Subsidiaries. The Company shall cause all
Subsidiaries whose formation is permitted hereunder to execute a Security
Agreement in the form attached as Exhibit E and, at the discretion of the
Purchasers, either a Subsidiary Guaranty in the form attached as Exhibit F or an
assignment and assumption agreement whereby each such Subsidiary becomes a
co-maker of each of the Notes.
SECTION 7. NEGATIVE COVENANTS.
35
The Company hereby agrees that so long as there remains unpaid
any Note or other obligation to the Purchasers under this Agreement:
7.1 Liens or Encumbrances. The Company will not create or
suffer to exist, or permit any Subsidiary to create or suffer to exist, any Lien
upon any of its Property, income or profits, whether now owned or hereafter
acquired, and will not enter into or suffer to exist, or permit any Subsidiary
to enter into or suffer to exist, any agreement that would be inconsistent with
the Purchasers' exercise of exclusive rights to Liens on the Corporations
Property excepting the rights of the Senior Lender and the following:
(i) Liens at any time granted in favor of the Purchasers, and
Liens granted to the Senior Lender pursuant to the Senior Debt
Documents as in effect on the date hereof;
(ii) Liens not exceeding $50,000 in the aggregate outstanding
at any one time consisting of (A) Liens for taxes (excluding any Lien
imposed pursuant to any of the provisions of ERISA) not yet due or that
are being actively and diligently contested in good faith; (B)
statutory Liens arising in the ordinary course of the Company's
business by operation of law or regulation, but only if payment in
respect of any such Lien is not at the time required or such Liens are
being actively and diligently contested in good faith; and (C) Liens
(other than judgments and awards) created by or resulting from any
litigation or legal proceeding, provided that execution or other
enforcement thereof is effectively stayed and the claims secured
thereby are being actively and diligently contested in good faith;
(iii) Purchase Money Liens securing Purchase Money
Indebtedness permitted pursuant to Section 7.2(f) below;
(iv) Liens securing Indebtedness of one of the Company's
Subsidiaries to the Company or another such Subsidiary;
(v) reservations, exceptions, easements, rights-of-way, zoning
restrictions and other similar encumbrances affecting the real Property
of the Company and its Subsidiaries that do not interfere with the
ordinary conduct of the business of the Company and its Subsidiaries;
(vi) Liens arising by operation of law to secure landlords,
lessors or renters under leases or rental agreements made in the
ordinary course of business and confined to the premises or property
rented;
(vii) deposits or pledges made in connection with, or to
secure payment of, workmen's compensation, unemployment insurance, old
age pensions or other social security;
(viii) Liens arising by operation of law in the nature of
workmen's liens securing claims for labor, or related materials or
supplies in an amount that does not exceed, in the aggregate, $25,000;
36
(ix) such other Liens existing on the Closing Date which are
set forth on Schedule 7.1; and
(x) such other Liens as the Purchasers may hereafter approve
in writing.
7.2 Indebtedness. The Company will not incur, create, assume,
become or be liable in any manner with respect to any Indebtedness, or permit
any Subsidiary to do so, except (a) the Indebtedness evidenced by the Notes and
other obligations of the Corporations under this Agreement and the other
Purchaser Documents, (b) Senior Debt provided by the original Senior Lender, or
any refinancing thereof permitted pursuant to Section 7.15 (in the event of any
such permitted refinancing, all references herein to "Senior Debt", "Senior Debt
Documents", "Senior Lender" and "Senior Loan Agreement" shall be appropriately
adjusted to apply to the refinancing, (c) Indebtedness of the Corporations which
is subordinated to the Notes on terms reasonably acceptable to the Purchasers,
(d) the Merger Consideration, which is to be paid off with the proceeds of the
issuance and sale of the Notes and Warrants, (e) other Indebtedness of the
Corporations which is to continue after the Closing Date and is identified on
Schedule 7.2, (f) Indebtedness of the Corporations secured by Purchase Money
Liens and Indebtedness of the Corporations under Capital Leases not to exceed
$600,000 in the aggregate, provided, however, that the Company may incur up to
$1,000,000 of Indebtedness under long-term Capital Leases in order to replace
its Renaissance MIS System (which such Capital Leases shall be secured solely by
the assets leased or financed thereunder), (g) Indebtedness incurred to finance
the payment of the aggregate consideration payable pursuant to one or more
exercises of the Put Option (as defined in the Warrant Agreement), (h)
Indebtedness with respect to the exercise of appraisal rights of SCC
shareholders in connection with the Merger, [(i) THE SC LICENSING NOTE - COMPANY
TO PROVIDE DETAILS]; and (j) Indebtedness consisting of interest rate protection
agreements entered into with the Senior Lender.
7.3 Consolidations, Mergers or Acquisitions. Unless the
transaction constitutes an arm's length, good faith transaction with an
unaffiliated third party and concerns the acquisition of, or a merger with, a
business or entity in the same or substantially similar line of business as the
Company, and either (a) does not result in a Default, an Event of Default or a
Change in Control, or (b) requires payment in full of all Notes and other
obligations to the Purchasers upon consummation of the transaction, the Company
will not, and will not permit any Subsidiary to, recapitalize or consolidate
with, merge with, acquire the Capital Stock of, or otherwise acquire all or any
substantial part of the assets or Properties of any other Person except that (i)
a wholly-owned Subsidiary of the Company may merge into another wholly-owned
Subsidiary of the Company, and (ii) a Subsidiary of the Company may merge into
the Company (including as contemplated by Section 6.11).
7.4 Investments or Loans. The Company shall not, and shall not
permit any Subsidiary to, acquire any Property in exchange for cash or other
Property, whether in the form of an acquisition of securities or other
Indebtedness or obligations, or the purchase or acquisition by the Company or
any of its Subsidiaries of any other Property, or a loan, advance, capital
contribution or subscription, except acquisitions of the following:
37
(i) investments in one or more Subsidiaries of the Company to
the extent existing on the Closing Date or in Subsidiaries formed or
acquired after the Closing Date but solely to the extent that (a) such
Subsidiaries are, or become as a result of the acquisition or
investment, wholly-owned by the Company or a wholly-owned Subsidiary of
the Company and (b) prior to the date of formation or acquisition such
Subsidiary has executed and delivered a Security Agreement and, at the
discretion of the Purchasers, either a Subsidiary Guaranty or an
assignment and assumption agreement whereby such Subsidiary becomes a
co-maker of each of the Notes;
(ii) fixed assets to be used in the business of the Company
and its Subsidiaries so long as the acquisition costs thereunder
constitute Capital Expenditures permitted hereunder;
(iii) goods held for sale or lease or to be used in the
manufacture of goods or the rendition of services by the Company or any
of its Subsidiaries in the ordinary course of business;
(iv) investments having a maturity of less than one year from
the date thereof consisting of (a) debt obligations of the Senior
Lender, (b) obligations of the United States of America or any agency
or instrumentality thereof, (c) repurchase agreements with the Senior
Lender involving securities described in clauses (a) and (b), and (d)
commercial paper which is rated not less than prime-one or A-1 or their
equivalents by ▇▇▇▇▇'▇ Investors Service, Inc. or Standard & Poor's
Corporation, respectively, or their successors;
(v) loans to employees not in excess of an aggregate of
$50,000 at any one time outstanding;
(vi) accounts receivable arising from transactions in the
ordinary course of business; contingent liabilities represented by
endorsements of negotiable instruments for collection or deposit in the
ordinary course of business; advances, deposits, down payments and
prepayments on account of firm purchase orders made in the ordinary
course of business;
(vii) investments consisting of interest rate protection
agreements entered into with the Senior Lender; and
(viii) investment by SC Corporation in SC Licensing, Inc., as
evidenced by the SC Licensing Note.
7.5 Subsidiaries. The Company will not create or have (or
permit any Subsidiary to create or have) any Subsidiaries other than the
Subsidiaries in existence on the date hereof without the prior written consent
of the Purchasers, which consent shall not be unreasonably withheld with respect
to Subsidiaries that are wholly-owned by the Company or any of its Subsidiaries.
In addition, (i) the Company shall cause each Subsidiary to comply with all the
covenants and provisions of this Agreement (including, without limitation, the
38
covenants set forth in Section 6.17 hereof), and (ii) the financial covenants
contained herein shall apply to the Company and its Subsidiaries on a
consolidated basis.
7.6 Disposal of Property. Except as set forth on Schedule 7.6,
and except for a sale of all or any substantial portion of the stock or assets
of the Company's Western Schools or AHI businesses (but only to the extent that
such sale is an arm's length, good faith transaction with an unaffiliated third
party), the Company will not sell, lease, transfer or otherwise dispose of any
of its Properties, assets (including Capital Stock) or rights, or permit any
Subsidiary to do so, except (i) sales of inventory in the ordinary course of
business, (ii) sales or other dispositions in the ordinary course of business of
equipment which is obsolete, uneconomical or no longer useful in its business or
which is being replaced with other equipment of substantially equal or greater
utility, (iii) dispositions of obsolete inventory, and (iv) other sales or other
dispositions of Property where such sale or disposition (a) is an arm's length,
good faith transaction in which at least 75% of the consideration received by
the Company is in cash, (b) the sale price is at least the fair market value of
the Property sold, and (c) the proceeds of the sale or disposition is applied to
payment of Indebtedness for money borrowed, the aggregate fair market value of
which, together with all such other Property so sold or disposed of in any
12-month period, shall not exceed 5% of the Company's tangible assets as at the
beginning of such 12-month period.
7.7 Capital Expenditure Limitations. Intentionally not used.
7.8 Compensation; Management or Consulting Fees; Certain Other
Payments.
(a) Except as provided in subsection (b) of this Section 7.8,
the Company will not, and will not permit any Subsidiary to, pay any salaries,
bonuses or management, consulting, advisory or similar fees to its stockholders
or their Affiliates, for services rendered to such Corporation or otherwise.
(b) Notwithstanding anything to the contrary contained in
subsection (a) of this Section 7.8, the Company may: (i) pay regular salaried
compensation to stockholders who are full-time executive officers of the Company
at current levels consistent with past practice, and may pay bonuses and make
salary increases approved by the Board of Directors in the ordinary course of
business, so long as (A) the bonuses and increases in compensation of any senior
manager are consistent with past practice during the twelve months immediately
preceding the Closing, or consistent with the compensation levels for like
positions in similar companies as specifically considered and determined by the
Board of Directors, and (B) any increases in such compensation are consistent
with increases granted to employees holding like positions in similar companies
as determined by the Board of Directors; (ii) pay compensation of $[________] to
its directors and pay their reasonable expenses in connection with meetings and
other activities of the Board of Directors or committees thereof; and (iii) pay
success-based investment banking fees (but not retainer, periodic advisory or
similar installment or ongoing fees) in amounts which are negotiated on an arm's
length basis with a committee of directors of the Company, each member of which
is not an affiliate of the person or entity which is to receive such fee, which
is consistent with custom and practice in the industry for transactions of
39
comparable size and nature, and which are incurred in connection with merger and
acquisition services actually rendered in respect of a strategic business
acquisition or sale.
7.9 Dividends, Stock Redemptions, Etc. While any Note is
outstanding, the Company will not (a) declare or pay, or set apart any funds for
the payment of, any dividends in any fiscal year on any shares of its Capital
Stock, or (b) apply any of its funds, Property or assets to, or set apart any
funds, Property or assets for, the purchase, redemption or retirement of, or
make any Distribution, by reduction of capital or otherwise, in respect of any
of its shares of Capital Stock, whether now or hereafter outstanding (other than
in connection with exercises of the Put Option, as defined in the Warrant
Agreement); provided, however, that so long as no Default or Event of Default
shall have occurred and be continuing, the Company may repurchase, at "Market
Price" (as defined in the Warrant Agreement attached hereto), Common Stock
purchased by any employee who is not a party to the Stockholders Agreement as of
the date of this Agreement if such Common Stock was acquired by such employees
upon exercise of options, but only in connection with the termination of such
employees' employment with the Company.
7.10 Issuance of Additional Capital Stock by Subsidiaries;
Stock Option Plan. None of the Subsidiaries will issue any additional Capital
Stock or equity interests of any kind or character, other than to the Company or
a wholly-owned Subsidiary of the Company.
7.11 Operating Leases. The Company will not, and will not
permit any Subsidiary to, enter into any leases other than Capital Leases which
would cause the annual payment obligations of the Company and its Subsidiaries
under all such leases to exceed Eight Hundred Thousand Dollars ($800,000) in the
aggregate.
7.12 Intentionally omitted.
7.13 Transactions with Affiliates. Except as expressly
permitted under Section 7.8, the Company will not, and will not permit any
Subsidiary to, transfer any cash or Property to any officer, director, employee
or Affiliate, enter into any contract or transaction with any such Person, or
modify any outstanding contract or transaction with any such Person, including
without limitation the purchase, lease, sale or exchange of Property or the
rendering of any service to any such Person.
7.14 ERISA. The Company will not, and will not permit any
Subsidiary or ERISA Affiliate to:
(a) engage in any transaction in connection with which such
Corporation or ERISA Affiliate could be subject to either a material
civil penalty assessed pursuant to the provisions of Section 502 of
ERISA or a material tax imposed under the provisions of Section 4975 of
the Code;
(b) terminate any Pension Plan in a "distress termination"
under Section 4041 of ERISA;
40
(c) fail to make payment when due of all amounts which, under
the provisions of any Plan, such Corporation or ERISA Affiliate is
required to pay as contributions thereto, or, with respect to any
Pension Plan, permit to exist any material "accumulated funding
deficiency" (within the meaning of Section 302 of ERISA and Section 412
of the Code), whether or not waived, with respect thereto; or
(d) adopt an amendment to any Pension Plan requiring the
provision of security under Section 307 of ERISA or Section 401(a)(29)
of the Code.
7.15 Certain Amendments of Senior Debt Documents and Other
Transaction Documents; Refinancing of Senior Debt. The Company will not amend,
modify or alter, or permit to be amended, modified or altered, (a) any of the
Senior Debt Documents or the Senior Debt (in a refinancing thereof or
otherwise), if the effect would be (i) that the amount of Indebtedness under the
Senior Debt Documents or constituting the Senior Debt thereunder, as so amended,
modified or altered, would exceed the sum of the "Maximum Revolving Credit
Amount" plus the outstanding principal balance of the "Term Loan" (as those
terms are defined in the Senior Loan Agreement as of the date of Closing), or
which would change the borrowing availability under the Senior Loan Agreement
from that which exists as of the date of Closing, (ii) to cause any applicable
interest rate margin under the Senior Loan Agreement as in effect on the date of
Closing to be increased by more than three percent (3%) per annum, or to impose
an interest rate margin where none presently exists greater than three percent
(3%) per annum, (iii) to extend the final maturity of the Senior Debt beyond the
maturity date set forth in the Senior Loan Agreement as of the date of Closing
or accelerate the scheduled amortization thereof as set forth in the Senior Loan
Agreement as of the date of the Closing, (iv) to add or change any "Default" or
"Event of Default" (as defined in the Senior Loan Agreement on the date of the
Closing) or any covenant (as set forth in the Senior Loan Agreement on the date
of Closing), if such addition or change would make such Default or Event of
Default or covenant more restrictive or burdensome on the Company, or would
adversely affect the payment or other rights of the Purchasers hereunder, or (v)
add any financial test or ratios to the Senior Loan Agreement which are more
restrictive than those included therein as of the date of Closing, or (b) any of
the other Transaction Documents (including, without limitation, the SCC Merger
Documents), in any way which would adversely affect the Purchasers. The Company
will not, and will not permit any of its Subsidiaries to, enter into any
refinancing of the Senior Debt Documents which would change the terms of the
Senior Debt in any respect which would not be permitted in the case of an
amendment, modification or alteration pursuant to the foregoing provisions of
this Section 7.15.
7.16 Other Amendments. The Company will not, and will not
permit any of its Subsidiaries to amend, modify or change its certificate or
articles of incorporation or other charter documents (including, without
limitation, by the filing or modification of any certificate of designation),
certificate of formation, limited liability company agreement or by-laws (or the
equivalent organizational documents), as applicable, or amend or modify any
agreement entered into by it with respect to its Capital Stock or other equity
interests (including any stockholders' agreement), or enter into any new
agreement with respect to its Capital Stock or other equity interests, unless
such amendment, modification, change or other action
41
contemplated by this Section could not reasonably be expected to be adverse to
the interests of the Purchasers in any material respect.
7.17 Accounting Methods. The Company shall not, and shall not
suffer or permit any Subsidiary to, make any significant change in accounting
treatment or reporting practices, except (a) as required by GAAP, (b) a change
in the depreciation method employed thereby to straight line depreciation or (c)
a change in a Subsidiary's accounting treatment or reporting practices to
conform the accounting practices or reporting practices of newly acquired
Subsidiaries to the methods used by the Company, unless such significant change
is required by the Company's independent certified public accountants and
provided, however, that upon such change, the Purchasers shall be entitled to
modify the financial and other covenants set forth herein in such manner as the
Purchasers shall determine, in their sole discretion, exercised in good faith,
to require compliance in a manner most nearly equivalent to the effect or
requirements of such provisions prior to such change in accounting treatment or
accounting practice.
7.18 Payments on Subordinated Debt. The Company will not make,
or permit any Subsidiary to make, any principal payment of or interest payment
on, or purchase or acquire, or prepay, any Indebtedness which is subordinate to
the Notes except in accordance with the provisions of the subordination thereof;
or permit any notes or agreements evidencing Indebtedness which is subordinate
to the Notes, or any subordination agreement executed in connection therewith,
to be modified or amended or any agreement or consent to be given thereunder
whereby (i) any provisions thereof relating to the subordination thereof to the
Notes are waived, modified or discharged, or (ii) there is any acceleration of
the maturities therein provided.
7.19 Financial Covenants. On and after the date hereof, until
the Notes and all other obligations of the Corporations to the Purchasers
hereunder have been unconditionally and irrevocably paid in full (including,
without limitation, the obligations pursuant to Section 15.5 hereof), the
Company shall observe, and shall cause its Subsidiaries to observe, the
covenants set forth on Exhibit G attached hereto. The Company shall give notice
to the Purchasers immediately upon any change in the financial covenants set
forth in the Senior Loan Agreement from those set forth therein on the Closing
Date. The Company acknowledges that upon receipt of any such notice, the
Purchasers (in their discretion) may, by written notice given within ten (10)
business days of receipt of such notice from the Company, amend Exhibit G to
conform the covenants set forth therein to such change.
7.20 Limitation on Certain Restrictions on Subsidiaries. The
Company will not, and will not permit any of its Subsidiaries to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of any such Subsidiary to (a) pay
dividends or make any other distributions on its Capital Stock or any other
interest or participation in its profits owned by the Company or any of its
Subsidiaries, or pay any Indebtedness owed to the Company or any of its
Subsidiaries, (b) make loans or advances to the Company or any of its
Subsidiaries or (c) transfer any of its properties or assets to the Company or
any of its Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (i) applicable law, (ii) this Agreement and the other
Purchaser
42
Documents, (iii) the Senior Debt Documents, (iv) customary provisions
restricting subletting or assignment of any lease governing any leasehold
interest of the Company or any of its Subsidiaries, (v) customary provisions
restricting assignment of any licensing agreement (in which the Company or any
of its Subsidiaries is the licensee) or other contract entered into by the
Company or any of its Subsidiaries in the ordinary course of business, (vi)
restrictions on the transfer of any asset pending the close of the sale of such
asset, and (vii) restrictions on the transfer of any asset subject to a Lien
permitted by Section 7.1 hereof.
SECTION 8. SUBORDINATION
The Purchasers covenant and agree that the Indebtedness
evidenced by the Notes and the liens granted in the Security Agreement shall be
subordinate and junior in right of payment to the Senior Debt and the liens
securing the Senior Debt, in the manner and to the extent set forth in the
Senior Subordination Agreement. The Company will not make (or give any notice in
respect of), and will not permit any of its Subsidiaries to make (or give any
notice in respect of), any voluntary, optional or mandatory payment or
prepayment on or redemption or acquisition for value of (including, in each
case, without limitation, by way of depositing with any Person money or
securities before due for the purposes of paying when due), any Senior Debt or
make any other payment in respect thereof (whether for principal, interest or
other amounts) except as otherwise expressly permitted by the Senior Loan
Agreement and the Senior Subordination Agreement.
SECTION 9. EVENTS OF DEFAULT.
9.1 Events of Default. The occurrence of any of the following
events shall constitute an "Event of Default" hereunder:
(a) all or any portion of the principal of and/or premium, if
any, interest or other amounts payable on the Notes is not paid when
due, and such failure continues for more than three (3) calendar days;
or
(b) a breach by the Company or any of its Subsidiaries of any
of the covenants, conditions, promises or agreements contained in
Sections 6 or Section 7; or
(c) a breach by the Company or any of its Subsidiaries of any
of the covenants, conditions, promises or agreements contained in any
Purchaser Document (other than those specified in Sections 9.1(a) or
(b) above), and such breach continues for a period of ten (10) Business
Days after a Corporation first knows or reasonably should have known of
the occurrence of the acts or omissions that constitute such breach; or
(d) any warranty or representation heretofore, now or
hereafter made by the Company or any of its Subsidiaries in or pursuant
to any of the Purchaser Documents or the Senior Debt Documents is
determined by the Purchasers (as set forth in a written notice given at
any time by the Purchasers) to be, or have been, untrue or incorrect in
any material respect as of the date as of which made; or any schedule,
certificate, statement, report, financial data, notice or other writing
furnished at any time by the
43
Company or any of its Subsidiaries to the Purchasers under or pursuant
to the Purchaser Documents is untrue or incorrect in any material
respect on the date as of which made; or
(e) a judgment or order requiring payment in excess of
insurance coverage by more than $250,000 shall be rendered against the
Company or any of its Subsidiaries and such judgment or order shall
remain unsatisfied or undischarged or unbonded and in effect for thirty
(30) consecutive days without a stay of enforcement or execution; or
(f) a notice of Lien, levy or assessment (other than a
Permitted Lien) is filed or recorded with respect to any material
portion of the assets of the Company or any of its Subsidiaries by any
party, or action is taken or commenced by any Governmental Authority on
account of any taxes or debts owing at any time or times hereafter
which results in a Lien (other than a Permitted Lien) upon any material
portion of the assets of the Company or any of its Subsidiaries; or
(g) any material portion of the assets of the Company or any
of its Subsidiaries is attached, seized, subjected to a writ or
distress warrant, or is levied upon, or comes within the possession of
any receiver, trustee, custodian or assignee for the benefit of
creditors; or
(h) a proceeding under 11 U.S.C. ss.ss.101 et seq., as
amended, and any similar or successor Federal statute, and the rules
and regulations thereunder (collectively, the "Bankruptcy Code"),
seeking an order for relief or under any other bankruptcy,
reorganization, arrangement of debt, insolvency, readjustment of debt
or receivership law or statute is filed against the Company or any of
its Subsidiaries and such proceeding is not dismissed within sixty (60)
days of the date of its filing, or a proceeding under the Bankruptcy
Code seeking an order for relief or under any bankruptcy,
reorganization, arrangement of debt, insolvency, readjustment of debt
or receivership law or statute is filed by the Company or any of its
Subsidiaries, or the Company or any of its Subsidiaries makes an
assignment for the benefit of creditors, or the Company or any of its
Subsidiaries takes any corporate action to authorize any of the
foregoing; or
(i) the Company or any of its Subsidiaries voluntarily or
involuntarily dissolves or is dissolved, or its existence terminates or
is terminated without the consent of the Purchasers (other than
pursuant to a Subsidiary merger permitted hereunder); or
(j) the Company or any of its Subsidiaries becomes insolvent
or fails generally to pay its debts as they become due; or
(k) the Company or any of its Subsidiaries fails to pay any
principal of or interest on any Indebtedness having an outstanding
principal amount of $100,000 or more ("Material Indebtedness")
(including without limitation any such Indebtedness assumed or
guaranteed) for a period longer than the grace period, if any, provided
for such payment; or any default under any instrument or agreement
evidencing, creating,
44
securing or otherwise relating to Material Indebtedness (including
without limitation any guaranty or assumption agreement relating to
such Material Indebtedness) or other event occurs and continues beyond
any applicable grace period, and the effect of such default or other
event is to cause, or to permit the holder or holders of such Material
Indebtedness (or their representative) to cause, such Material
Indebtedness (or the obligations under any such guaranty or assumption
agreement) to become due and payable prior to the stated maturity
thereof; or
(l) a Change of Control shall occur or ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ shall
cease to serve as the chief executive officer of the Company and its SC
Direct and SC Publishing Subsidiaries, whether by reason of death,
disability, resignation, action by the applicable board of directors,
or otherwise, and one hundred and twenty (120) days shall have passed
without express written waiver by the Purchasers of the Event of
Default caused by ▇▇. ▇▇▇▇▇▇▇▇▇'▇ failure to so serve; or
(m) a Reportable Event shall occur which a majority in
interest of the Purchasers, in their discretion, shall determine in
good faith constitutes grounds for the termination by the PBGC of any
Plan or for the appointment by the appropriate United States district
court of a trustee for any Plan, or if any Plan shall be terminated or
any such trustee shall be requested or appointed, or if the Company or
any of its Subsidiaries is in "default" (as defined in Section
4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan
resulting from such Corporation's complete or partial withdrawal from
such Plan; or
(n) any Subsidiary Guaranty shall cease to be in full force
and effect (other than as a result of a Subsidiary merger permitted
hereunder), or any Subsidiary shall so assert; or any Subsidiary shall
fail, after request of the Purchasers, to execute and deliver a
Subsidiary Guaranty or an assignment and assumption agreement whereby
such Subsidiary becomes a co-maker of each of the Notes; or
(o) the Purchasers' security interest under the Security
Agreement or rights under the other Purchaser Documents, or the
Corporations' ability to fulfill their obligations and comply with
their covenants hereunder or under any of the Purchaser Documents,
shall be impaired for any reason, or any action or proceeding is
commenced by the Company or any of its Subsidiaries, or on their
behalf, that would result, in the Purchasers' judgment, in such
impairment; or
(p) there shall occur any material damage to, or loss, theft
or destruction of, any material assets of any of the Company and of its
Subsidiaries, or any strike, lockout, labor dispute, embargo,
condemnation, act of God or public enemy, or other casualty, which in
any such case causes, for more than ten (10) consecutive days, the
cessation or substantial curtailment of revenue producing activities at
any facility of any of the Company or any of its Subsidiaries if such
event or circumstance is not covered by business interruption insurance
and would have a Material Adverse Effect; or
45
(q) there shall occur the loss, suspension or revocation of,
or failure to renew, any license or permit, qualification or contract
right now held or hereafter acquired by any of the Company or any of
its Subsidiaries if such loss, suspension, revocation or failure to
renew would have a Material Adverse Effect; or
(r) any of the Company or any of its Subsidiaries shall be
convicted for a state or federal felony or misdemeanor where such
conviction would have a Material Adverse Effect; or
(s) if, prior to the maturity of the "Term Loan" (as defined
in the Senior Loan Agreement), the Senior Lender shall not continue to
make available to the Corporations a committed revolving line of credit
upon terms comparable to those applicable to the line of credit
described in the Senior Loan Agreement; or
(t) the occurrence of any "Default" or "Event of Default" as
defined in any of the Senior Debt Documents; or
(u) any other default by any Corporation in any of its payment
obligations, covenants or agreements under the Transaction Document not
otherwise specifically set forth in this Section 9, if such default
would or could reasonably be expected to have a Material Adverse
Effect; or
(v) the default by any Corporation in any of its payment
obligations, covenants or agreements under any other lease, contract or
agreement to which such Corporation is a party and with respect to
which such default would or could reasonably be expected to have a
Material Adverse Effect.
If an Event of Default under paragraph (h) or (i) of this Section 9, or on
account of a breach of the obligations set forth in Section 6.1(f) shall occur,
the Notes and all other amounts owing under this Agreement shall automatically
become due and payable. Upon the occurrence of any other Event of Default, and
at any time thereafter, if such Event of Default shall then be continuing,
subject to the provisions of Section 10, the holders of a majority in
outstanding principal amount of the Notes may, by written notice to the Company,
declare due and payable the principal of, premium, if any, and interest on, the
Notes and all other amounts owing under this Agreement, whereupon the same shall
be immediately due and payable on the tenth (10th) day following the date of
such notice. In the event that the Notes become or are declared due and payable
prior to their stated maturity, the same shall become due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived.
9.2 Intentionally omitted.
9.3 Consultants. Upon the occurrence of a Default or Event of
Default, the Company shall retain at the Purchasers' request and the Company's
expense, consultants and accountants to evaluate the Corporations' financial
condition, business, operations and prospects. Such Persons shall, in all cases,
be acceptable to the Purchasers. The Company
46
shall cooperate fully with such evaluation and in connection therewith shall
make available such senior executives and other members of management and all
information, books and records requested by such Persons. The Company shall
cause such Persons to share all results, reports and other data generated as a
result of such evaluation with the Purchasers.
9.4 Other Costs and Expenses. The Company shall be obligated
to pay, upon demand, all costs and expenses paid or incurred by the Purchasers
(a) in enforcing its rights and remedies under this Agreement or any of the
other Purchaser Documents, or (b) in connection with the prosecution or defense
of any claim in any way arising out of, related to or connected with this
Agreement or any of the other Purchaser Documents, all of which such costs and
expenses shall include the reasonable fees and disbursements of counsel and of
experts and other consultants retained by the Purchasers. The foregoing shall
not be construed to limit any other provision of this Agreement or the other
Purchaser Documents regarding costs and expenses to be paid by the Company.
SECTION 10. CONSENTS.
Any provision in this Agreement to the contrary
notwithstanding, with the written consents of Purchasers holding a majority or
more of the then outstanding aggregate principal amount of the Notes, the
Company may be relieved from the effect of any Event of Default or from
compliance with any covenant, agreement or undertaking contained herein or in
any instrument executed and delivered as herein provided, except that such
consent shall not affect the terms of the Warrants, the provisions for the
payment or prepayment of the Notes or the continued effect of Section 13 hereof.
SECTION 11. SECURITIES LAW MATTERS.
11.1 Securities Act. Each Purchaser acknowledges (a) that the
Notes and Warrants being acquired by such Purchaser are not being registered
under the Securities Act on the ground that the issuance thereof is exempt from
registration under Section 4(2) of the Securities Act as not involving any
public offering, (b) that it is acquiring the Notes and Warrants for its own
account and will not sell, transfer, or otherwise dispose of any of the Notes
and Warrants or any interest therein, without registration under the Securities
Act and applicable state "blue sky" laws, except in a transaction which in the
opinion of counsel reasonably acceptable to the Company is exempt therefrom, (c)
that it is an "accredited investor" as that term is defined in rules promulgated
under the Securities Act, (d) that it has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risk of an investment in the Notes and Warrants and has obtained, in its
judgment, sufficient information from the Company to evaluate the merits and
risks of an investment in the Notes and Warrants, (e) that it has been provided
the opportunity to obtain information and documents concerning the Company and
its investment in the Notes and Warrants, and has been given the opportunity to
ask questions of, and receive answers from, the directors and officers of the
Company concerning the Company, its investment in the Notes and Warrants, and
other matters pertaining to this investment, and (f) that the offer of the Notes
and Warrants will not be reviewed by any governmental agency and is being sold
to the Purchasers in reliance upon exemption from the Securities Act. Except as
provided in ▇▇▇▇▇▇▇ ▇▇, ▇▇▇▇ of
47
the Purchasers is aware of any particular occasion, event or circumstance upon
the occurrence or happening of which it intends to dispose of its Notes and
Warrants.
11.2 Resales.
(a) None of the Purchasers or Investors (as defined in Section
12.2) will sell or transfer all or any part of its Notes, Warrants or Warrant
Shares except:
(i) pursuant to Rule 144 under the Securities Act;
(ii) pursuant to any other exemption from, or otherwise in a
transaction not subject to, the registration requirements of the
Securities Act (as confirmed in an opinion delivered by transferor
counsel , to the effect that the proposed transfer may be effected
without registration under the Securities Act);
(iii) in a transfer by a Purchaser to any Affiliate or
wholly-owned Subsidiary of the Purchaser; or by a Purchaser to
Investors as contemplated by Section 12.2; or
(iv) pursuant to an effective registration statement under the
Securities Act.
(b) The restrictions set forth in Section 11.2(a) shall
terminate and cease to be effective with respect to any Notes, Warrants or
Warrant Shares registered under the Securities Act or transferred pursuant to
Rule 144, or if the Company receives an opinion of counsel reasonably
satisfactory to the Company to the effect that the securities represented
thereby need no longer be subject to such restrictions in order to ensure
compliance with the Securities Act. Whenever such restrictions shall so
terminate the holder or transferee of such Notes, Warrants or Warrant Shares
shall be entitled to receive from the Company, without expense (other than
transfer taxes, if any), certificates for such Notes, Warrants or Warrant Shares
not bearing the first legend set forth in Section 11.3 at which time the Company
will terminate or rescind any transfer restrictions relating thereto. In
addition, the Company will issue certificates for the Notes, Warrants or Warrant
Shares without all or part of the second legend whenever this Agreement, the
Warrant Agreement and the Stockholders Agreement cease to restrict the transfer
of the securities evidenced by such certificate.
11.3 Legends. Each Warrant and each certificate for Warrant
Shares issued to the Purchasers or to a subsequent transferee or holder shall
bear legends in substantially the following form:
[THIS WARRANT AND THE UNDERLYING SHARES] [THE SHARES] REPRESENTED BY
THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION
FROM, OR OTHERWISE IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF SUCH ACT.
48
IN ADDITION, THIS WARRANT AND THE UNDERLYING SHARES MAY BE TRANSFERRED
ONLY IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THE NOTE AND
WARRANT PURCHASE AGREEMENT AND THE WARRANT AGREEMENT, EACH DATED _____,
2001, BETWEEN THE COMPANY AND THE INITIAL HOLDERS OF THE WARRANTS NAMED
THEREIN, AND THE STOCKHOLDERS AGREEMENT DATED MAY 4, 2001, BETWEEN THE
COMPANY AND THE STOCKHOLDERS NAMED THEREIN, COMPLETE AND CORRECT COPIES
OF WHICH ARE AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE
COMPANY AND WILL BE FURNISHED TO THE HOLDER HEREOF UPON WRITTEN REQUEST
AND WITHOUT CHARGE.
SECTION 12. TRANSFERS.
12.1 Transfers. Subject only to compliance with the
requirements of Section 11.2 and the Stockholders Agreement (if applicable),
each Purchaser shall be entitled to assign and transfer all or any part of its
Notes, Warrants and Warrant Shares, or any interest or participation therein,
and its related rights under this Agreement and, if applicable, the Warrant
Agreement and the Stockholders Agreement; provided, however, that such transfers
shall not result in the Notes being held by greater than ten (10) holders unless
such transfers are the result of the winding up of the transferee and the
distribution in kind of the Notes to the owners of the transferee or at such
owners' directions. Upon the assignment or transfer by such Purchaser of all or
any part of its Notes, Warrants or Warrant Shares or its interest therein
(except in public offering registered under the Securities Act, or a sale
pursuant to Rule 144 thereunder), the term "Purchaser" as used herein shall
thereafter include, to the extent of the interest so assigned or transferred,
the assignee or transferee of such interest.
12.2 Participations. A Purchaser may wish to grant
participations in the Notes, Warrants or Warrant Shares to other accredited
investors ("Investors") pursuant to a participation agreement; provided,
however, that at the time any such participation is granted by the grantor it
will so inform the Company and furnish it the representation of each
participating Investor (in form and substance reasonably acceptable to the
Company) that such Investor is acquiring his, her or its participation with no
present intention of reselling or distributing the same; and provided, further,
that such participation agreement shall provide that the Purchaser selling or
granting the participation shall retain the sole right to take or refrain from
taking any action under the Transaction Documents, except that such
participation agreement may provide that such Purchaser shall not, without the
consent of the participant, agree to any amendment or waiver that would have the
effect of (i) extending the maturity date of the Notes or (ii) reducing any
amount payable under the Notes, to the extent that the participant would be
affected thereby. If at any time a Purchaser wishes to assign and transfer of
record into the name of an Investor its participation and related rights and
obligations arising under this Agreement, the Company and the other Purchasers
will execute and deliver such agreements and instruments as the Purchaser may
reasonably request (including without limitation new Notes and certificates for
Warrants, Shares and Warrant Shares in such amounts as the Purchaser may
request) to effect the assignment and transfer to such Investor (in its own
name) of such participation, or such part thereof as may be so assigned and
transferred.
49
12.3 Issuance of New Notes. The Company will at any time, at
its expense, at the request of a holder of a Note, and upon surrender of such
Note for such purpose, issue a new Note or Notes in exchange therefor, payable
to the order of the holder or (subject to Section 11.2) such person or persons
as may be designated by such holder, dated the last date to which interest has
been paid on the surrendered Note, or, if such exchange shall take place prior
to the due date of the first interest payment, the Closing Date, in such
denominations as may be requested, in an aggregate principal amount equal to the
unpaid principal amount of the Note so surrendered and substantially in the form
of such Note with appropriate revisions. Upon such exchange the term "Note" as
used herein shall include such new Note or Notes.
SECTION 13. CONTINUED EFFECTIVENESS OF AGREEMENT.
The covenants and all terms contained in this Agreement shall
continue in full force and effect for the benefit of the Purchasers (including
Purchasers who hold Warrants or Warrant Shares) after the Notes and all other
Indebtedness outstanding under this Agreement in respect of the Notes are paid
in full, except that the following provisions shall terminate and be of no
further force and effect on and after such repayment: Sections 3.1, 3.2, 6.4
through 6.6, 6.8(a) and (b), 6.14, 6.16, 6.17, 7.1 through 7.8, 7.11, 7.15, 7.17
through 7.20, 9.1 through 9.3.
SECTION 14. JUDICIAL PROCEEDINGS.
(a) The Company irrevocably submits to the non-exclusive
jurisdiction of any state or federal court sitting in the City of New York over
any suit, action or proceeding arising out of or relating to this Agreement or
any of the other Purchaser Documents. To the fullest extent it may effectively
do so under applicable law, the Company irrevocably waives and agrees not to
assert, by way of motion, as a defense or otherwise, any claim that it is not
subject to the jurisdiction of any such court, any objection that it may now or
hereafter have to the laying of the venue of any such suit, action or proceeding
brought in any such court and any claim that any such suit, action or proceeding
brought in any such court has been brought in an inconvenient forum.
(b) The Company agrees, to the fullest extent it may
effectively do so under applicable law, that a judgment in any suit, action or
proceeding of the nature referred to in paragraph (a) above brought in any such
court shall, subject to such rights of appeal on issues other than jurisdiction
as may be available, be conclusive and binding upon it and may be enforced in
the courts of the United States of America or the State of New York (or any
other courts to the jurisdiction of which it is or may be subject) by a suit
upon such judgment.
(c) The Company consents to service of process in any suit,
action or proceeding of the nature referred to in paragraph (a) above by mailing
a copy thereof by registered or certified mail, postage prepaid, return receipt
requested, to its address specified in or designated pursuant to Section 15.1.
Such service (i) shall be deemed in every respect effective service of process
upon the Company in any such suit, action or proceeding and (ii) shall, to the
fullest extent permitted by law, be taken and held to be valid personal service
upon and personal delivery to the Company.
50
(d) Nothing in this Section 14 shall affect the right of any
of the Purchasers to serve process in any manner permitted by law, or limit any
right that any of the Purchasers may have to bring proceedings against the
Company in the courts of any jurisdiction or to enforce in any lawful manner a
judgment obtained in one (1) jurisdiction in any other jurisdiction.
(e) Upon breach or default by any Corporation with respect to
any obligation hereunder or under any of the other Purchaser Documents, the
Purchasers (or their agents) shall be entitled to protect and enforce their
rights at law, or in equity or by other appropriate proceedings for specific
performance of such obligation, or for an injunction against such breach or
default, or in aid of the exercise of any power or remedy granted hereby or
thereby or by law.
SECTION 15. MISCELLANEOUS.
15.1 Notices. All notices, requests, demands or other
communications to or upon the respective parties hereto shall be in writing and
shall be deemed to have been given or made, and all financial statements,
information and the like required to be delivered hereunder shall be deemed to
have been delivered, either (a) three (3) Business Days after deposited in the
United States certified mail, return receipt requested, with postage prepaid, or
(b) one (1) Business Day after delivery to a nationally recognized courier,
designated for overnight delivery with all fees prepaid, in either case
addressed to the Company at ▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇,
Attn: Chief Executive Officer, and to the Purchasers at their respective
addresses set forth on Exhibit A hereto, or to such other address as any of them
shall specify in writing to the others. The Company shall maintain registers of
the holders of the Notes, Warrants and Warrant Shares which shall contain the
last address specified as provided in the preceding sentence. Upon reasonable
request of any Purchaser, the Company will deliver to such Purchaser, at the
Company's expense, additional copies of all financial statements, information
and the like required to be provided to the Purchasers hereunder, subject to the
confidentiality provisions of Section 6.1.
15.2 Cumulative Remedies, Etc. No failure or delay on the part
of any of the Purchasers in exercising any right, power or privilege hereunder,
and no course of dealing between any Corporation and the Purchasers, or any of
them, shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or privilege hereunder preclude the simultaneous or
later exercise of any other right, power or privilege. The rights and remedies
herein expressly provided are cumulative and not exclusive of any rights or
remedies which the Purchasers, or any of them, would otherwise have. No notice
to or demand on any Corporation in any case shall entitle such Corporation to
any other or further notice or demand in similar or other circumstances or
constitute a waiver of the rights of the Purchasers, or any of them, to take any
other or further action in any circumstances without notice or demand.
15.3 No Oral Changes; Assignment; Survival of Representations.
This Agreement may not be changed or terminated orally. This Agreement shall be
binding upon the Company and the Purchasers and their successors and assigns.
The Company shall not make any assignment of its rights under this Agreement or
subject this Agreement or its rights
51
hereunder to any Lien; and any such Lien shall be absolutely void and
unenforceable as against the Purchasers. All agreements, representations and
warranties made herein or in writing otherwise in connection herewith shall
survive the issuance of the Notes and Warrants.
15.4 Several Obligations. The Purchasers shall not be jointly
obligated hereunder; their obligations are several. The sales of the Notes and
Warrants to the Purchasers shall be deemed separate sales to each Purchaser.
Notwithstanding any provision of this Agreement, the Company shall not be
obligated to sell less than all of the Notes and Warrants, and no Purchaser
shall be obligated to purchase any of the Notes and Warrants unless all of the
Notes and Warrants are sold.
15.5 Costs and Expenses The Corporations shall pay on demand
all fees, costs and expenses of the Purchasers incurred in connection with, or
otherwise payable by the Corporations with respect to: (a) the preparation,
negotiation, execution, delivery, administration, default, collection, waiver or
amendment of any terms of this Agreement and the other Purchaser Documents
(including, without limitation, any environmental and other "due diligence"
investigations); (b) the preparation, negotiation, execution and delivery of the
letter of intent dated as of May 3, 2001 between the Purchasers and the Company
(including, without limitation, the commitment fee described in the term sheet
attached thereto); (c) the Purchasers' exercise, preservation or enforcement of
any of their rights, remedies or options hereunder (including, without
limitation, pursuant to Sections 9.3 and 9.4 hereof); (d) the granting,
perfecting and protecting of liens upon and security interests in any collateral
now or hereafter securing the Corporations' obligations under this Agreement and
the other Purchaser Documents; and (e) the prosecution or defense of any claim
in any way arising out of, related to or connected with this Agreement or any of
the other Purchaser Documents; including in each case, without limitation, (i)
fees and expenses of outside legal counsel or the allocated costs of in-house
legal counsel, (ii) accounting, consulting, brokerage or other similar
professional fees or expenses, (iii) any fees and expenses associated with
travel or other costs relating to any appraisals or examinations conducted in
connection with the Corporations' obligations under this Agreement and the other
Purchaser Documents or any collateral therefor (including, without limitation,
the collateral described in the Security Agreement), (iv) all filing fees and
other taxes and fees payable or determined to be payable in connection
therewith, including, without limitation, documentary, stamp and similar taxes
and assessments and all recording and filing fees charged by any Governmental
Authority; and (v) all other costs and expenses incurred by the Purchasers as
are payable by the Corporations pursuant to Sections 9.3, 9.4 and 15.8 hereof or
pursuant to any other provision of this Agreement or any of the other Purchaser
Documents. All of the foregoing fees, costs and expenses are referred to herein
collectively as the "Costs and Expenses". The Costs and Expenses shall bear
interest at the default rate described in Section 3.1(d) hereof from the date
demand therefor and reasonable documentation thereof is made until the same are
paid. SAC and SCC hereby acknowledge that their obligations under this Section
(I) are joint and several, (II) are secured by any and all collateral now or
hereafter securing the Corporations' obligations under this Agreement and the
other Purchaser Documents (including, without limitation, the Subsidiary
Guaranties and the collateral described in the Security Agreement), (III) shall
survive any termination of this Agreement and (IV) are absolute and
unconditional regardless of whether or not the Transactions are consummated.
52
15.6 Loss or Destruction of Note. Upon receipt by the Company
of notice of the loss, theft, destruction or mutilation of any Note, and (in the
case of loss, theft or destruction) of indemnity satisfactory to the Company
(the Purchasers' undertaking shall be satisfactory indemnity in the case of
loss, theft or destruction of any Note owned by the Purchaser), and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender or cancellation of such Note, if mutilated, the Company shall
make and deliver a new Note of like tenor in lieu of the lost, stolen, destroyed
or mutilated Note.
15.7 Allocation of Payments among Purchasers. The Purchasers
of Notes agree among themselves that, with respect to all sums received by such
Purchasers applicable to the payment of principal of, premium, if any, or
interest on the Notes, equitable adjustment will be made among such Purchasers
so that, in effect, all such sums shall be shared ratably by all of such
Purchasers holding Notes whether received by voluntary payment, by realization
upon security, by the exercise of the right of setoff, by counter-claim or
cross-action or by the enforcement of any or all of the Notes. If any Purchaser
receives any payment on its Notes in excess of its pro rata portion, then such
Purchaser receiving such excess payment shall purchase for cash from the other
Purchasers holding Notes shares in their Notes in such amounts as shall result
in a ratable participation by all of the Purchasers holding Notes in the
aggregate unpaid amount of Notes then outstanding. In addition to the provisions
set forth in this Section 15.7, two or more of the Purchasers may enter into
agreements among themselves for the allocation of proceeds, and if requested,
the Company hereby agrees to abide by such agreements.
15.8 Indemnification Generally. The Company agrees to
indemnify and hold harmless each Purchaser, its Subsidiaries, and any subsequent
holder of the Notes or the Warrants, and their respective directors, officers,
employees, stockholders, partners and Affiliates, to the maximum extent
permitted by law, from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, reasonable costs, reasonable
expenses and disbursements of any kind or nature whatsoever with respect to the
Merger, the Transaction Documents, any operations or activities of the Company
or any Subsidiary, execution, delivery, enforcement, performance and
administration of the Purchaser Documents and the use of the proceeds of the
issuance and sale of the Notes and Warrants, or any other matter, claim or event
related to, or arising out of the Transactions, the Transaction Documents or the
matters contemplated therein (all the foregoing, collectively, the "indemnified
liabilities"); provided, that the Company shall have no obligation hereunder to
any indemnified party with respect to indemnified liabilities arising from the
gross negligence or willful misconduct of such indemnified party. The
obligations of the Company under this Section 15.8 shall survive and continue to
be in full force and effect notwithstanding the termination of this Agreement.
15.9 Governing Law. This Agreement, the other Purchaser
Documents and the other agreements and instruments executed as provided herein
and therein, and the rights and obligations of the parties hereunder and
thereunder, shall be construed and interpreted in accordance with and governed
by the internal laws of the State of New York.
53
15.10 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
15.11 Captions; Gender. The descriptive headings of the
Sections of this Agreement are inserted for convenience only and shall not
affect the meaning, construction or interpretation of any of the provisions
hereof. The use of the neuter form of a pronoun shall be deemed, where
appropriate, to include the masculine and feminine forms of such pronoun.
15.12 Survival; Right to Indemnification. All representations,
warranties, covenants, and obligations in this Agreement, the certificates
delivered pursuant to Section 5 hereof, and any other certificate or document
delivered pursuant to this Agreement will survive the Closing. The right to
indemnification, payment of damages or other remedy based on such
representations, warranties, covenants, and obligations will not be affected by
any investigation conducted with respect to, or any knowledge acquired (or
capable of being acquired) at any time, whether before or after the execution
and delivery of this Agreement or the Closing Date, with respect to the accuracy
or inaccuracy of or compliance with, any such representation, warranty,
covenant, or obligation. The waiver of any condition based on the accuracy of
any representation or warranty, or on the performance of or compliance with any
covenant or obligation, will not affect the right to indemnification, payment or
damages, or other remedy based on such representations, warranties, covenants,
and obligations.
15.13 Purchasers May Perform; Power of Attorney. If the
Company or any of its Subsidiaries fails to perform any agreement contained
herein or in the other Purchaser Documents, the Purchasers may, but shall not be
obligated to, perform or cause the performance of such agreement, and the costs
and expenses incurred by the Purchasers in connection therewith shall constitute
Costs and Expenses hereunder.
15.14. Integration. This Agreement (including all Exhibits and
Schedules attached hereto and all certificates and other documents executed and
delivered in connection herewith or pursuant hereto) constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof, and supersedes all prior agreements and understandings, written
and oral, among the parties with respect to the subject matter hereof,
including, without limitation, that certain letter of intent dated as of May 3,
2001.
15.15 Severability. An term of provision of this Agreement or
of any of the other Purchaser Documents which is invalid or unenforceable in any
jurisdiction shall, as to that jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and conditions of this Agreement or of any of the other
Purchaser Documents or affecting the validity or unenforceability of any of the
terms or provisions of this Agreement in any other jurisdiction. If any
provision of this Agreement or of any of the other Purchaser Documents is so
broad as to be unenforceable, the provision that be interpreted to be only so
broad as is enforceable.
15.16 Waiver of Jury Trial and Damages . THE COMPANY AND THE
PURCHASERS MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND
54
INTENTIONALLY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY JURISDICTION, COURT AND
PROCEEDING WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS
AGREEMENT, THE OTHER PURCHASER DOCUMENTS, THE OTHER TRANSACTION DOCUMENTS, OR
ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT HERETO OR THERETO OR ANY COURSE OF
CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS
OF ANY PARTY, INCLUDING, WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF
DEALINGS, STATEMENTS OR ACTIONS OF CREDITOR RELATING TO THE ADMINISTRATION OR
ENFORCEMENT OF THIS AGREEMENT, THE OTHER PURCHASER DOCUMENTS OR THE OTHER
TRANSACTION DOCUMENTS, AND AGREE THAT NEITHER PARTY WILL SEEK TO CONSOLIDATE ANY
SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT
BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, THE COMPANY WAIVES ANY RIGHT WHICH IT
MAY HAVE TO CLAIM OR RECOVER IN ANY PROCEEDING REFERRED TO IN THE PRECEDING
SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL OR OTHER TYPE OF
DAMAGES OTHER THAN ACTUAL DAMAGES. THE COMPANY HEREBY CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF THE PURCHASERS HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT THE PURCHASERS WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO
ENFORCE THE FOREGOING WAIVERS. THE COMPANY ACKNOWLEDGES THAT THE FOREGOING
WAIVERS CONSTITUTE A MATERIAL INDUCEMENT FOR THE PURCHASERS TO ENTER INTO THIS
AGREEMENT AND PURCHASE THE NOTES. BY EXECUTING AND DELIVERING THIS AGREEMENT,
THE COMPANY CONFIRMS THAT THE FOREGOING WAIVERS ARE INFORMED AND FREELY MADE.
[Remainder of page intentionally left blank; signature pages follow]
55
If you are in agreement with the foregoing Note and Warrant
Purchase Agreement, please sign in the space provided below.
Company: SPECIALTY ACQUISITION CORP.
By: _____________________________________
Printed Name:_____________________________
Printed Title:______________________________
SPECIALTY CATALOG CORP.
By: _____________________________________
Printed Name:_____________________________
Printed Title:______________________________
SC CORPORATION (d/b/a SC DIRECT)
By: _____________________________________
Printed Name:_____________________________
Printed Title:______________________________
SC PUBLISHING, INC.
By: _____________________________________
Printed Name:_____________________________
Printed Title:______________________________
DAXBOURNE INTERNATIONAL LIMITED
By: _____________________________________
Printed Name:_____________________________
Printed Title:______________________________
(Signatures continue on next page)
56
The foregoing is hereby accepted and agreed to
as of the date first above written.
Purchasers:
LEG PARTNERS III SBIC, L.P.
by ▇▇▇▇▇ ▇▇-▇▇, LLC, its general partner
By: _____________________________________
▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Managing Member
LEG PARTNERS DEBENTURE SBIC, L.P.
by ▇▇▇▇▇ Debenture GP, LLC, its general partner
By: _____________________________________
▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Managing Member
57
EXHIBIT G TO
NOTE AND WARRANT PURCHASE AGREEMENT
Financial Covenants
1. Ratio of Total Funded Debt to EBITDA. The Company and its
Subsidiaries shall not permit the ratio of Funded Debt on any date to EBITDA for
the most recent four quarter period for which financial statements have been
delivered pursuant to Sections 6.1(a) and 6.1(c) to be greater than [to be
inserted].
2. Ratio of Operating Cash Flow to Total Debt Service. The Company and
its Subsidiaries shall not permit for any period of four consecutive fiscal
quarters, commencing with the period ending September, 2001, the ratio of (a)
Operating Cash Flow to (b) Total Debt Service, to be less than [to be inserted].
3. Minimum EBITDA. The Company and its Subsidiaries shall earn EBITDA
for each period of four consecutive fiscal quarters, commencing with the period
ending September, 2001, of not less than $[to be inserted].
4. Capital Expenditures. The Company and its Subsidiaries shall not
make or incur any Capital Expenditures if, after giving effect thereto, the
aggregate of all Capital Expenditures made by the Company and its Subsidiaries
would exceed (a) $[to be inserted] in fiscal year 2001 and in any fiscal year
thereafter (except as otherwise provided in paragraph (b)) and (b) $[to be
inserted] in fiscal year 2002, provided that the Company and its Subsidiaries
shall have earned EBITDA in excess of $[to be inserted] for fiscal year 2001,
and provided further, that not less than $1,000,000 of such Capital Expenditures
during fiscal year 2002 shall be made to purchase and install a management
information system approved by the Purchasers.
5. [OPEN] Excess Cash. The Company and its Subsidiaries shall at all
times maintain Excess Cash of not less than $500,000, determined at the end of
each month on the basis of the average Excess Cash for every Business Day
included in such month.
6. Definitions Applicable to Financial Covenants. Capitalized terms
used but not otherwise defined on this Exhibit shall have the meanings given to
them in the Note and Warrant Purchase Agreement to which this Exhibit is
attached. In addition, as used herein:
"Excess Cash" shall mean, for any period, the sum of (a) the
Corporations' cash balances, plus (b) unused but available credit under the
revolving line of credit described in the Senior Loan Agreement, minus (i) any
accrued or incurred but unpaid costs related to the Transactions, minus (ii) an
amount equal to the product obtained by multiplying $3.75 by the number of
shares of SAC's or SCC's Capital Stock which are subject to valid appraisal
demands, minus (iii) any past due trade payables or other liabilities and minus
(iv) any other cash or cash equivalents the use of which by the Corporations is
restricted by contract, lien, agreement, escrow arrangements or similar
restrictions or which is otherwise required to honor outstanding drafts issued
by the Corporations.