SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
Commission file number: 0-19298
VARSITY BRANDS, INC. (FORMERLY RIDDELL SPORTS INC.)
(Exact name of registrant as specified in its charter)
DELAWARE 22-2890400
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2525 HORIZON LAKE DRIVE, SUITE 1, MEMPHIS, TENNESSEE
38133 (Address of principal executive offices) (Zip code)
(901) 387-4300
(Registrant's telephone number, including area code)
1450 BROADWAY, SUITE 2001, NEW YORK, NY 10018
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1935 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
9,452,250 Common Shares as of November 7, 2001
VARSITY BRANDS, INC.
INDEX
PAGE
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Form 10-Q Cover Page 1
Form 10-Q Index 2
Part I. Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statements of Stockholders' Equity 6
Condensed Consolidated Statements of Cash Flows 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Part II. Other Information:
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain statements which are "forward-looking"
statements under the federal securities laws that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. Forward-looking statements appear throughout Item 2 of Part I,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" concerning Varsity's seasonal patterns of working capital and
revenue and operating results in its business. Certain factors could cause
actual results to differ materially from those in the forward-looking statements
including without limitation, (i) continuation of historical seasonal patterns
of demand for Varsity's products and Varsity's ability to meet the demand; (ii)
actions by competitors, including without limitation new product introductions;
(iii) the loss of domestic or foreign suppliers; (iv) changes in business
strategy or new product lines and Varsity's ability to successfully implement
these; (v) moderation of uniform and accessories revenue growth; and (vi)
changes in interest rates and general economic conditions. Varsity does not
intend to update these forward-looking statements.
Since the unprecedented September 11 terrorist attack on American soil,
U.S. business activities related to domestic and international travel, in
general, have been
2
materially and adversely affected. A number of the Company's business lines that
are travel related, including the Company's annual Thanksgiving trips, which
includes the Macy's Thanksgiving Day Parade, its annual Chistmas trips to London
and Paris for high school cheerleader and dance team participants, and its
cheerleading competitions which are held at Disney World in Orlando. These trips
occur during the fourth quarter of fiscal year 2001, and the first quarter of
fiscal year 2002. Although the Company presently believes that the general
travel concerns, which currently exist, will have some impact on those business
lines, the nature and extent of such impact cannot be quantified at the present
time. The Company will continue to monitor the performance of its travel
related, and other, business lines and will record and disclose the nature of
any costs at such time as they can be reasonably estimated to be related to
terrorist activities in accordance with Issue No. 01-10 of the Financial
Accounting Standards Board's Emerging Issues Task Force. "Accounting for the
Impact of Terrorist Activities of September 11, 2001.
3
Part I. FINANCIAL INFORMATION; Item 1. FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION; Item 1 FINANCIAL STATEMENTS
VARSITY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
September 30, December 31, September 30,
2001 2000 2000
--------- ---------- ---------
ASSETS
Current assets:
Cash and investments $ 26,299 $ 109 $ 198
Accounts receivable, trade less
allowance for doubtful
accounts ($394, $400 and $636,
respectively) 30,915 14,473 31,840
Inventories 9,148 7,202 8,700
Prepaid expenses 1,636 3,250 1,714
Other receivables -- 1,454 1,454
Deferred taxes 2,040 2,270 2,076
Assets held for disposal 5,830 87,632 97,530
--------- --------- ---------
Total current assets 75,868 116,390 143,512
Property, plant and equipment, less
accumulated Depreciation
($8,616, $7,577 and $7,077,
respectively) 4,129 4,349 3,996
Intangibles and deferred charges,
less accumulated amortization
($12,940, $10,858 and $10,159,
respectively) 70,842 72,615 73,306
Other assets 614 463 438
--------- --------- ---------
$ 151,453 $ 193,817 $ 221,252
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,289 $ 4,072 $ 12,114
Accrued liabililties 8,907 7,131 6,316
Customer deposits 3,275 5,490 3,299
Liabilities of discontinued
businesses -- 10,063 11,983
--------- --------- ---------
Total current liabilities 23,471 26,756 33,712
Long-term debt 112,500 138,919 150,339
Deferred taxes -- 2,270 2,076
Other liabilities -- -- --
Contingent liabilities -- -- --
Stockholders' equity:
Preferred stock -- -- --
Common stock 95 95 95
Additional paid-in capital 37,306 37,306 37,306
Accumulated deficit (21,919) (11,529) (2,276)
--------- --------- ---------
15,482 25,872 35,125
--------- --------- ---------
$ 151,453 $ 193,817 $ 221,252
========= ========= =========
See notes to condensed consolidated financial statements.
4
VARSITY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
2001 2000 2001 2000
------- ------- -------- -------
Net revenues:
Uniforms and accessories $ 32,049 $ 31,368 $ 76,030 $ 67,837
Camps and events 28,077 26,282 54,766 51,477
------- ------- -------- -------
60,126 57,650 130,796 119,314
Cost of revenues:
Uniforms and accessories 16,390 15,885 40,383 35,812
Camps and events 19,248 17,965 36,698 35,122
------- ------- -------- -------
Cost of revenues 35,638 33,850 77,081 70,934
------- ------- -------- -------
Gross profit 24,488 23,800 53,715 48,380
Selling, general and
administrative expenses 12,697 12,359 36,551 33,586
------- ------- -------- -------
Income from operations 11,791 11,441 17,164 14,794
Other expense
Interest expense, net 2,990 3,804 7,536 9,276
------- ------- -------- -------
Total other expense 2,990 3,804 7,536 9,276
------- ------- -------- -------
Income from continuing operations
before income taxes, discontinued
operations and extraordinary items 8,801 7,637 9,628 5,518
Income taxes 1,600 -- 1,600 --
------- ------- -------- -------
Income from continuing operations 7,201 7,637 8,028 5,518
Discontinued operations:
Income (loss) from operations of discontinued businesses (113) 2,455 (1,490) 4,296
Loss on disposal of businesses -- -- (18,558) --
------- ------- -------- -------
Total income (expense) from discontinued operations
before extraordinary items 7,088 10,092 (12,020) 9,814
Extraordinary items - Gain on
Retirement of Bonds 1,630 -- 1,630 --
------- ------- -------- -------
Net income (loss) $ 8,718 $10,092 $(10,390) $ 9,814
======= ======= ======== =======
Income from continuing operations per share
Basic $ 0.76 $ 0.81 $ 0.85 $ 0.59
Diluted $ 0.66 $ 0.70 $ 0.76 $ 0.54
Net earnings (loss) per share:
Basic $ 0.92 $ 1.07 $ (1.10) $ 1.05
Diluted $ 0.79 $ 0.92 $ (1.10) $ 0.93
Weighted average number common and
common equivalent shares outstanding:
Basic 9,452 9,449 9,452 9,369
Diluted 11,149 11,111 11,048 10,852
See notes to condensed consolidated financial statements.
5
VARSITY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
(UNAUDITED)
(IN THOUSANDS)
Retained
Common Stock Additional Earnings Total
--------------------- paid-in (Accumulated Stockholders'
Shares Amount Capital deficit) Equity
--------- --------- ---------- ---------- -------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
Balance, January 1, 2000 9,263 93 36,862 (12,090) 24,865
Stock issued to employees 54 -- 169 -- 169
Issuance of common stock upon
exercise of stock options 135 2 275 -- 277
Net income for the period -- -- -- 9,814 9,814
----- ----- ------ -------- -------
9,452 95 37,306 (2,276) 35,125
===== ===== ====== ======== =======
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
Balance, January 1, 2001 9,452 95 37,306 (11,529) 25,872
Net loss for the period -- -- -- (10,390) (10,390)
----- ----- ------ -------- -------
9,452 95 37,306 (21,919) 15,482
===== ===== ====== ======== =======
See notes to condensed consolidated financial statements
6
VARSITY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2001 2000 2001 2000
----------- --------- ---------- --------
Cash flows from operating activities:
Net income (loss) $ 8,718 $ 10,092 $(10,390) $ 9,814
Adjustments to reconcile net
income (loss) to net
cash used in operating activities:
Depreciation and amortization:
Amortization of debt issue costs 173 216 605 648
Other depreciation and amortization 1,041 941 2,976 2,731
Loss on sale of businesses -- -- 18,558 --
Gain on redemption of bonds (2,680) -- (2,680) --
Provision for losses on accounts receivable 150 225 275 294
Deferred taxes -- -- (2,040) --
(Increase) decrease in net assets held for disposal 704 8,513 (8,690) (13,335)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable, trade 5,853 (79) (16,717) (20,146)
Inventories 4,236 3,714 (1,946) 628
Prepaid expenses 2,586 1,746 1,614 2,533
Other receivables -- 39 1,454 (28)
Other assets (54) 68 (151) 1,409
Increase (decrease) in:
Accounts payable (5,431) (2,703) 7,217 7,431
Accrued liabilities 313 (2,227) 1,776 (1,349)
Customer deposits (10,751) (11,396) (2,215) (2,791)
-------- -------- -------- --------
Net cash provided by (used in) operating activities 4,858 9,149 (10,354) (12,161)
Cash flows from investing activities:
Capital expenditures (344) (697) (1,275) (1,459)
Other assets (360) (43) (360) (327)
Net proceeds received from sale of Riddell Sports
Division -- -- 61,871 --
-------- -------- -------- --------
Net cash provided by (used in) investing activities (704) (740) 60,236 (1,786)
Cash flows from financing activities:
Net repayments under line-of-credit agreement -- (8,870) (16,419) 14,242
Redemption of senior bonds (7,050) -- (7,050) --
Debt Issue Costs (223) -- (223) --
Proceeds from issuance of common stock -- 21 -- 277
-------- -------- -------- --------
Net cash provided by (used in) financing activities (7,273) (8,849) (23,692) 14,519
-------- -------- -------- --------
Net increase (decrease) in cash (3,119) (440) 26,190 572
Cash, beginning 29,418 638 109 (374)
-------- -------- -------- --------
Cash, ending $ 26,299 $ 198 $ 26,299 $ 198
======== ======== ======== ========
See notes to condensed consolidated financial statements.
7
VARSITY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements represent Varsity Brands,
Inc., formerly known as Riddell Sports Inc., ("Varsity" or the "Company") and
its wholly-owned subsidiaries. The Company changed its name in September 2001 in
conjunction with the sale of the Riddell Group Division in June 2001. See Item 5
below. All significant intercompany accounts and transactions have been
eliminated. These statements are unaudited, and in the opinion of management
include all adjustments (consisting only of normal recurring adjustments)
necessary for fair presentation of Varsity's condensed consolidated financial
position and the condensed consolidated results of its operations and cash flows
at September 30, 2001 and 2000 and for the periods then ended. Certain
information and footnote disclosures made in Varsity's last Annual Report on
Form 10-K have been condensed or omitted for these interim statements.
Accordingly, these condensed consolidated financial statements should be read in
conjunction with Varsity's Annual Report on Form 10-K for the year ended
December 31, 2000. Operating results for the nine months ended September 30,
2001 are not necessarily indicative of the results to be expected during the
remainder of 2001.
2. DISPOSITION OF ASSETS
On June 22, 2001, the Company completed the sale of its Riddell Group
Division to an acquisition affiliate of Lincolnshire Management, Inc., a New
York based, private-equity fund. The purchase price, which was determined by an
arms-length negotiation, was for approximately $61 million in cash, plus an
adjustment to cover seasonal funded indebtedness incurred by the Riddell Group
Division during 2001. The current amount of the adjustment is estimated at $6.4
million for a total purchase price of approximately $67.4 million.
The sale was made pursuant to a stock purchase agreement dated April 27,
2001 between the Company and Lincolnshire. The Riddell Group Division included:
(i) all of the Company's team sports business, excluding Umbro branded team
soccer products, (ii) the Company's licensing segment, which allows
third-parties to market certain products using the Riddell and MacGregor
trademarks, and (iii) the Company's retail segment, including the New York
Executive Office, which managed the retail and licensing segments, and marketed
a line of sports collectibles and athletic equipment, principally to retailers
in the United States, and to a limited extent internationally. In conjunction
with the sale of the Riddell Group Division, the Company recognized a decline in
value in its net minority investment in a company who makes game uniforms on
behalf of the Riddell Group Division. The Company had previously accounted for
its investment in the game uniform company using the equity method of
accounting. As a result of the sale of the Riddell Group Division and the
write-down in the value of its minority investment in the game uniform
8
company, the Company recorded a loss on the sale of the Riddell Group Division
of $20.6 million ($18.6 million after tax) in the second quarter of 2001.
The net operating results of the Riddell Group Division are presented as
income from operations of discontinued businesses in the Condensed Consolidated
Statements of Operations. Revenues generated by the Riddell Group Division for
the nine-month and three-month periods ended September 30, 2001 and 2000 were
$42.4 million, $0, $75.1 million and $27.2 million, respectively.
In September 2001, the Company settled the litigation that it had brought
earlier this year against Umbro Worldwide, Ltd. ("Umbro Worldwide") involving
the licensing agreement between the Company and Umbro Worldwide. The license
agreement allowed Varsity to sell Umbro branded soccer apparel, equipment and
footwear to soccer specialty stores and others in the team channel of
distribution, principally in the United States.
In connection with the settlement and in exchange for a lump sum payment
of $5.5 million ($2.75 million was received on October 1, 2001 and the remaining
payment of $2.75 million is due on January 2, 2002) and Umbro Worldwide's
agreement to make certain payments to the Company in the future, including the
purchase, at net realizable value, of certain inventory from the Company, for
which the Company will receive payments in six consecutive installments
commencing in February 2002, the Company has voluntarily agreed to terminate its
license effective November 30, 2001. The Company will reflect the transaction as
of the effective date upon determination of reserves necessary in conjunction
with the purchase of inventory by Umbro Worldwide.
The net operating results of the Umbro Division are presented in income
from discontinued operations of discontinued businesses in the Condensed
Consolidated Statements of Operations. Revenues generated by the Umbro division
for the nine-month and three-month periods ended September 30, 2001 and 2000
were $8.6 million, $3.9 million, $8.1 million and $3.4 million, respectively.
3. EARNINGS PER SHARE
Basic earnings (loss) per share amounts have been computed by dividing
earnings (loss) by the weighted average number of outstanding common shares.
Diluted earnings (loss) per share is computed by adjusting earnings for the
effect of the assumed conversion of dilutive securities and dividing the result
by the weighted average number of common share and common equivalent shares
relating to dilutive securities. A reconciliation between the numerators and
denominators for these calculations follows:
9
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
(In thousands)
Earnings (loss) - numerator
Net income (loss) $ 8,718 $ 10,092 ($10,390) $ 9,814
Effect of assumed conversion of
convertible debt, when dilutive -
interest savings 105 105 -- 314
-------- -------- -------- --------
Numerator for diluted per share
computation $ 8,823 $ 10,197 ($10,390) $ 10,128
======== ======== ======== ========
Shares - denominator 9,452 9,449 9,452 9,369
Weighted average number of
outstanding common shares
Weighted average common equivalent
shares:
Options, assumed exercise of dilutive
options, net of treasury shares which
could have been purchased from the proceeds
of the assumed exercise based on
average
market prices -- 267 -- 88
Convertible debt, assumed
conversion when dilutive 1,697 1,395 -- 1,395
-------- -------- -------- --------
Denominator for diluted per share
computation 11,149 11,111 9,452 10,852
======== ======== ======== ========
10
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
(In thousands)
Income from continuing operations -
numerator
Income from continuing operations $ 7,201 $ 7,637 $ 8,028 $ 5,518
Effect of assumed conversion of
convertible debt, when dilutive -
interest savings 105 105 314 314
------- ------- ------- -------
Numerator for diluted per share
computation $ 7,306 $ 7,742 $ 8,342 $ 5,832
======= ======= ======= =======
Shares - denominator 9,452 9,449 9,452 9,369
Weighted average number of
outstanding common shares
Weighted average common equivalent
shares:
Options, assumed exercise of dilutive
options, net of treasury shares which
could have been purchased from the
proceeds of the assumed exercise based on
average
market prices -- 267 -- 88
Convertible debt, assumed
conversion when dilutive 1,697 1,395 1,596 1,395
------- ------- ------- -------
Denominator for diluted per share
computation 11,149 11,111 11,048 10,852
======= ======= ======= =======
For the nine-month period ended September 30, 2001 potentially dilutive
securities, which include convertible debt and common stock options, were not
dilutive due to the net losses incurred and were excluded from the computation
of diluted earnings per share.
4. RECEIVABLES
Accounts receivable include unbilled shipments of approximately
$1,636,000, $350,000 and $3,240,000 at September 30, 2001, December 31, 2000 and
September 30, 2000, respectively. It is Varsity's policy to record revenues when
the related goods have been shipped. Unbilled shipments represent receivables
for shipments that have not yet been invoiced. These amounts relate principally
to partial shipments to customers who are not invoiced until their order is
shipped in its entirety or customers with orders containing other terms that
require a deferral in the issuance of the invoice. Management believes that
substantially all of these unbilled receivables will be invoiced within the
current sales season.
11
5. INVENTORIES
Inventories consist of the following:
(In thousands) September 30, December 31, September 30,
2001 2000 2000
-----------------------------------------------
Finished goods $6,893 $5,355 $6,087
Raw materials 2,255 1,847 2,613
-----------------------------------------------
$9,148 $7,202 $8,700
===============================================
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $6,780,000 and $7,036,000 for the three-month
periods ended September 30, 2001 and 2000, respectively, and $14,349,000 and
$14,730,000 for the nine-month periods ended September 30, 2001 and 2000,
respectively. During the nine months ended September 30, 2001, Varsity received
an income tax refund of approximately $1,500,000 related to a carry back of net
operating losses of its Varsity Spirit Corporation subsidiary for periods
preceding the 1997 acquisition of Varsity Spirit Corporation. This tax refund
had been recorded as a receivable at the time of the acquisition. Other income
tax payments, or refunds, were not significant for the other three periods ended
September 30, 2001 and 2000.
During the nine-month period ended September 30, 2000, Varsity issued
shares of its common stock, valued at $169,000 based on quoted market values at
the time of grant, to certain employees in satisfaction of an accrual for
compensation included in accrued liabilities at December 31, 1999.
7. INCOME TAXES
Operating results for the three and nine-month periods ended September
30, 2001, reflect an income tax expense based on the anticipated effective
annual rate for 2001. The anticipated effective annual tax rate is estimated
based on remaining net operating loss carryforwards and anticipated income and
non-dedectible expenses for the year. The actual tax rate for the year could
vary substantially from the anticipated rate due to the use of these estimates.
Operating results from continuing operations for the three and nine-month
periods ended September 30, 2000 included no income tax expense or benefit
because net operating loss carryforwards were available to offset income taxes
for the year ended December 31, 2000.
The Company recorded a $1 million income tax expense in conjunction with
the extraordinary gain realized on the retirement of Senior Notes during the
third quarter of 2001. This expense is shown as a reduction of the extraordinary
gain on retirement of bonds in the Condensed Consolidated Statements of
Operations.
12
A tax benefit of $2,040,000 was recognized in the second quarter of
2001 in conjunction with the loss realized on the sale of the Riddell Sports
Group. This benefit is included in Discontinued operations - Loss on disposal of
businesses in the Condensed Consolidated Statement of Operations.
8. SEGMENT INFORMATION
Net revenues and income or loss from operations for the Company's two
reportable segments are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------
2001 2000 2001 2000
---------------------------------------------------------
(In thousands)
Net revenues:
Uniforms and accesories...................... $32,049 $31,368 $76,030 $67,837
Camps and events............................ 28,077 26,282 54,766 51,477
------ ------ ------ ---------
Consolidated total........................... $60,126 $57,650 $130,796 $119,314
=======================================================
Income (loss) from operations:
Uniforms and accessories..................... $7,314 $7,173 $12,798 $10,658
Camps and events............................. 4,920 4,635 5,872 5,678
Corporate and unallocated expenses........... (443) (367) (1,506) (1,542)
----- ---- ------ -------
Consolidated total....................... $11,791 $11,441 $17,164 $14,794
=======================================================
9. SUBSEQUENT EVENT
Subsequent to September 30, 2001, the Company repurchased an additional
$1.8 million of its 10.5% Senior Notes for a total cost, including commissions,
of $1.3 million. As a result of these repurchases, the Company will recognize an
extraordinary gain, before tax, of approximately $0.5 million.
On November 14, 2001, the Board of Directors authorized the Company to
expend up to $23.1 million of the cash proceeds from the sale of RGD to tender
for the repurchase of some of the Company's 10.5% senior notes. The Board
authorized the Company to offer a minimum of $700 and a maximum of $800 per
$1,000 in principal amount to acquire such notes.
10. RECLASSIFICATION OF PRIOR PERIODS
Certain prior period balances have been reclassified to conform to
current year presentation.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview and seasonality
On June 22, 2001, the Company completed the sale of its Riddell Group
Division ("RGD") to an acquisition affiliate of Lincolnshire Management, Inc., a
New York based private equity fund. In conjunction with this sale, the Company
wrote down its net minority investment in an entity that provides game uniforms
to RGD. As a result of these two transactions, the Company recorded a loss of
$20.6 million ($18.6 million after tax). In September 2001, the Company settled
the litigation that had been brought earlier this year against Umbro Worldwide,
Ltd. ("Umbro Worldwide") involving its licensing agreement between the Company
and Umbro Worldwide. In connection with the settlement and in exchange for an
upfront payment and Umbro Worldwide's agreement to make certain additional
payments to the Company, until the third quarter of 2002, the Company has
voluntarily agreed to terminate its license effective November 30, 2001. The
Company will reflect the transaction as of the effective date upon determination
of reserves necessary in conjunction with the purchase of inventory by Umbro
Worldwide.. RGD's and Umbro's operating results are shown as income from
operations of discontinued businesses in the Condensed Consolidated Statements
of Operations.
RGD included: (i) all of the Company's Team Sports business, excluding
Umbro branded team soccer products, (ii) the Company's licensing segment, which
allowed third-parties to market certain products using the Riddell and MacGregor
trademarks, and (iii) the Company's retail segment, which marketed a line of
sports collectibles and athletic equipment to retailers.
The Umbro operations that are being discontinued as a result of the
termination of the license with Umbro Worldwide included sales of Umbro branded
soccer apparel, equipment and footwear to soccer specialty stores and others in
the team channel of distribution, primarily in the United States.
As a result of the sale of RGD and the discontinuance of the Umbro
license, Varsity's continuing financial results consist of operations within the
school spirit industry, including: (i) the design, market and manufacture of
cheerleader and dance team uniforms and accessories, (ii) the operation of
cheerleading and dance team camps throughout the United States, (iii) the
production of nationally televised cheerleading and dance team championships and
other special events and (iv) the operation of studio dance competitions and
conventions.
14
During the third quarter of 2001, the Company used a portion of the
proceeds received from the sale of RGD to repurchase $10 million of its 10.5%
Senior Notes for a total cost, including commissions, of $7.1 million. As a
result of the repurchase, the Company recognized an extraordinary gain of
approximately $1.6 million, net of income taxes, commissions and related debt
acquisition costs. Subsequent to September 30, 2001, the Company repurchased
$1.8 million of its 10.5% Senior Notes for a total cost, including commissions,
of $1.3 million, resulting in an extraordinary gain, before tax, of $0.5
million.
The Company posted net income of $8.7 million, or $0.79 per diluted
share, for the third quarter of 2001, compared with earnings of $10.1 million,
or $0.92 per diluted share, a year earlier.
Operating income before interest, taxes, discontinued operations and
extraordinary items for the third quarter of 2001 increased $0.4 million, or 3%,
to $11.8 million from $11.4 million in the third quarter of 2000. For the
nine-month period, operating income before interest, taxes, discontinued
operations and extraordinary items increased $2.4 million, or 16%, in 2001 to
$17.2 million from $14.8 million in 2000. Varsity benefited from increases in
revenues and decreases in selling, general and administrative expenses as a
percentage of sales, as described in more detail in the discussion which follows
this overview.
The Company's operations are highly seasonal. In recent years, the
Company's operations have been profitable in the second and third quarters, with
the third quarter typically the strongest, while losses have typically been
incurred in the first and fourth quarters.
The operating results of RGD and the Umbro Division are reported as
income from operations of discontinued businesses in the Condensed Consolidated
Statements of Operations. The following management's discussion and analysis of
financial condition reflects changes occurring in the Company's income from
continuing operations, exclusive of the discontinued operations of RGD and the
Umbro division.
Revenues
Revenues for the three-month period ended September 30, 2001 increased by
$2.4 million, or 4%, to $60.1 million from $57.7 million in the third quarter of
2000. For the nine-month period ended September 30, 2001, revenues increased by
$11.5 million, or 10%, to $130.8 million from $119.3 million for the first nine
months of 2000.
15
Revenues from the sale of uniforms and accessories increased by $0.7
million, or 2%, to $32.0 million in the second quarter of 2001 from $31.3
million for the second quarter of 2000. For the nine-month period, uniform and
accessories revenues increased by $8.2 million, or 12%, to $76.0 million in 2001
from $67.8 million in 2000. This increase was attributable to an overall strong
increase in most product categories, primarily uniforms and lettering, offset by
a slight decrease in campwear and shoe sales. The significant increase in
revenues is a direct result of quicker delivery of uniforms and accessories
combined with higher merchandise sales generated at our instructional camps. The
improvement in delivery times is partially attributable to improvements made to
the Company's order entry system combined with better availability of inventory
items for delivery. The improvement in camp merchandise sales is partially
attributable to the consolidation of merchandising and warehousing activities
within our camps and events divisions.
Revenues from camps and events increased by $1.8 million, or 7%, to $28.1
million in the third quarter of 2001 from $26.3 million in the third quarter of
2000. For the nine-month period, camps and events revenues increased by $3.3
million, or 6%, to $54.8 million in 2001 from $51.5 million in 2000. The
increase in revenues for the nine-month period is directly attributable to the
following: (i) a 50% revenue growth, or $0.6 million, in our studio dance
competitions and conventions, such growth being directly attributable to the
acquisition of the assets of the Netherland Corporation, an operator of dance
competitions, in June 2000, and (ii) a 7% increase in camp participants during
the first nine months of 2001 as compared to the same period in 2000. Such
increases were offset somewhat by a decrease in the number of choir and band
tours handled by the Company's group tour business during the first nine months
of 2001. The three month increase in revenues is directly attributable to the
increase in camp participants, offset by the decrease in group tour business and
by $0.4 million loss of revenues related to a change in the timing of the Co.
Dance National Finals from the third quarter of 2000 to the second quarter of
2001.
Gross Profit
Gross profit for the third quarter of 2001 increased by 3% to $24.5
million from $23.8 million in the third quarter of 2000 and for the nine-month
period increased by 11% to $53.7 million in 2001 from $48.4 million in 2000.
Gross margin rates decreased by 0.6 percentage points to 40.7% in the third
quarter of 2001 from 41.3% in the third quarter of 2000. For the year-to-date
period, gross margin rates increased to 41.1% in 2001 from 40.5% in 2000.
Gross margin rates for the uniforms and accessories segment decreased to
48.9% in the third quarter of 2001 from 49.4% in the third quarter of 2000. For
the nine-month period the segment's margin rates decreased to 46.9% in 2001 from
47.3% in 2000. These decreases are a result of lower margins earned on the new
performance dance wear line as compared to our other uniform lines combined with
slightly higher manufacturing costs associated with the new warehouse and
production facility.
16
Gross margin rates for the camps and events segment decreased to 31.4% in
the third quarter of 2001 from 31.6% in the third quarter of 2000. For the
nine-month period the segment's margin rates increased to 33.0% in 2001 from
31.8% in 2000. The increase in the nine month gross margin rate is primarily due
to the overall decrease in the Company's 2001 group tour operations, which have
historically generated lower gross margins than the other parts of the Company's
business; therefore, the decrease in group tour operations resulted in an
overall increase in the segment's gross margin rate. The increase is also
partially due to increased participation in the Company's studio dance
competitions and conventions which have historically generated higher gross
margins than the cheerleading and dance camps.
Selling, general and administrative
Selling, general and administrative expenses decreased as a percentage of
revenues to 21.1% in the third quarter of 2001 from 21.4% in the third quarter
of 2000. For the nine-month period, selling, general and administrative expense
as a percentage of revenues decreased slightly to 27.9% in 2001 from 28.1% in
2000. The improvement is principally due to economies of scale realized by
spreading fixed and certain variable administrative expenses over a greater
revenue base.
Selling, general and administrative expenses as a percentage of revenues
with respect to the uniforms and accessories segment decreased to 26.0% in the
third quarter of 2001 from 26.5% in the third quarter of 2000. For the
nine-month period the segment's selling, general and administrative expense
ratio decreased to 30.0% in 2001 from 31.5% in 2000. These gains were due to
improved economies of scale as discussed in the preceding paragraph.
Selling, general and administrative expense ratios for the camps and
events segment increased to 14.4% in the third quarter of 2001 from 14.0% in the
second quarter of 2000. For the nine-month period the segment's expense ratio
increased to 22.3% in 2001 from 20.7% in 2000. Both the three-month and the
nine-month increases are due to additional overhead incurred as a result of the
acquisition of the assets of the Netherland Corporation in June 2000.
Netherland's management team is responsible for managing the Company's studio
dance competitions and conventions, as well as the Company's line of performance
and recital dance wear, introduced during fiscal 2000.
Interest Expense
Interest expense for the nine-month period ended September 30, 2001 has
been reduced by $3.1 million as a result of an allocation of interest expense to
the discontinued operations of RGD. Interest allocated to discontinued
operations for the nine-month period ended September 30, 2000 is $3.2 million.
17
Interest expense, after the allocation of interest to discontinued
operations, decreased by $0.8 million to $3.0 million in the third quarter of
2001 from $3.8 million in the third quarter of 2000. For the nine-month period
ended September 30, 2001, interest expense decreased by $1.8 million to $7.5
million from $9.3 million in the first nine months of 2000. Interest expense for
both periods decreased due to lower interest on the revolving line of credit
resulting from lower outstanding indebtedness and decreases in the prime and
LIBOR interest rates during 2001. The net interest expense for the year also
decreased due to the receipt of interest income of approximately $250,000 as
part of a federal tax refund and interest earned on the net cash proceeds
received from the sale of RGD. The tax refund related to a carry back of net
operating losses of the Company's Varsity Spirit Corporation subsidiaries for
periods preceding the 1997 acquisition of Varsity Spirit Corporation. The tax
refund was for approximately $1.5 million and was recorded as a receivable at
the time of acquisition.
As a result of the sale of RGD, the Company used a portion of the
proceeds received, approximately $32.7 million, to paydown all of the
indebtedness then outstanding on its line of credit agreement. See "Liquidity
and Capital Resources" below.
During the third quarter, the Company used a portion of the net proceeds
received from the sale of RGD to repurchase $10 million of its 10.5% Senior
Notes for a total cost, including commissions, of $7.1 million. As a result of
the repurchase, the Company recognized an extraordinary gain of approximately
$1.6 million, net of income taxes, commissions and related debt acquisition
costs. Subsequent ot September 30, 2001, the Company repurchased $1.8 million of
its 10.5% Senior Notes for a total cost, including commissions, of $1.3 million,
resulting in an extraordinary gain, before tax, of $0.5 million.
Income Taxes
Operating results for the three and nine-month periods ended September
30, 2001, reflect an income tax expense based upon the anticipated effective
annual rate for 2001. The anticipated effective annual rate is estimated based
upon the remaining net operating loss carryforwards and anticipated income and
non-deductible expenses for the year. The actual tax rate for the year could
vary substantially from the anticipated rate due to the use of these estimates.
Operating results from continuing operations for the three and nine-month
periods ended September 30, 2000 included no income tax expense or credit
because management anticipates net operating loss carryforwards will be
available to offset income taxes for the year ended December 31, 2000.
The Company recorded a $1 million income tax expense in conjunction with
the extraordinary gain realized on the retirement of Senior Notes during the
third quarter of 2001. This expense is shown as a reduction of the extraordinary
gain on retirement of bonds in the Condensed Consolidated Statements of
Operations.
18
The Company has recorded an income tax benefit of $2.1 million in
conjunction with the loss on sale of RGD. This benefit is shown as a reduction
of the loss on disposal of businesses in the Condensed Consolidated Statements
of Operations.
Liquidity and Capital Resources
The seasonality of the Company's working capital needs is impacted by
three key factors. First, a significant portion of the products the Company
sells in the uniforms and accessories segment are sold in the late spring and
summer, with the related receivables collected in the fall and early winter
after the new school year begins. Second, the Company incurs costs related to
the Company's summer camp business from the fourth quarter and into the second
quarter as the Company prepares for the upcoming camp season, while camp
revenues are mostly collected in the mid-May to August period. Lastly, the
Company's debt structure impacts working capital requirements, as the
semi-annual interest payments on the Company's 10.5% Senior Notes come due each
January and July.
To finance these seasonal working capital demands, the Company maintains
a credit facility in the form of a revolving line of credit. Histrorically, the
outstanding balance on the credit facility usually follows the seasonal cycles
described above, increasing during the early part of the operating cycle in the
first and second quarters of each year and then decreasing from the middle of
the third quarter and into the fourth quarter as collections are used to reduce
the outstanding balance. Such seasonality should continue in the future.
A portion of the proceeds received from the sale of the RGD were used to
repay all of the then outstanding indebtedness, approximately $32.7 million, on
the revolving line of credit. Outstanding balances under the revolving credit
line were $16.4 million at December 31, 2000 and $27.8 million at September 30,
2000.
In conjunction with the sale of RGD and the subsequent repayment of the
then outstanding indebtedness under its revolving line of credit facility, the
Company amended and reduced its revolving line of credit agreement from $48
million to $15 million.
According to the terms of the 10.5% Senior Notes Agreement, the use of
the proceeds received from the sale of the RGD, net of applicable expenses, is
limited to the reduction of existing senior indebtedness, reinvestment in the
business and/or the acquisitions of outside business interests; provided, in the
event that the Company has not executed a reinvestment in the business and/or
acquisition(s) of outside business interests within two hundred and seventy
(270) days after the receipt of proceeds from the sale of RGD, the Company is
required, under the terms of the 10.5% Senior Notes Agreement, to offer to
repurchase the Senior Notes at par. Net cash proceeds remaining from the sale of
RGD, are approximately $23.1 million as of November 14, 2001.
19
The Company's current debt service obligations are significant and,
accordingly, the Company's ability to meet its debt service and other
obligations will depend on the Company's future performance and is subject to
financial, economic and other factors, some of which are beyond the Company's
control. Furthermore, due to the seasonality of the Company's working capital
demands described above, year-over-year growth in the Company's business and
working capital requirements could lead to higher debt levels in future periods.
Management believes operating cash flow together with funds available from the
Company's credit facility will be sufficient to fund the Company's current debt
service, seasonal capital expenditures and other working capital requirements.
However, many factors, including growth and expansion of the Company's business,
could necessitate the need for increased lines of credit or other changes in the
Company's credit facilities in the future.
Accounting Pronouncements
In June 2001, Statement of Financial Accounting Standards No. 141 ("SFAS
141"), "Business Combinations" was issued and is applicable to all business
combinations initiated after June 30, 2001 and to all business combinations
acounted for using the purchase method for which the date of acquisition is July
1, 2001 or later. SFAS 141 requires all business combinations to be accounted
for by the purchase method of accounting. It also requires separate recognition
of intangible assets that can be identified and named and also requires
disclosure of the primary reasons for the business combination and the
allocation of the purchase price by balance sheet caption. The Company does not
presently expect the adoption of SFAS 141 to have a material effect on the
Company's financial statements taken as a whole.
In June 2001, Statement of Financial Accounting Standards No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets" was issued and is effective for
all fiscal years beginning after December 15, 2001. SFAS 142 changes the methods
of amortizing goodwill and intangible assets. Goodwill and intangible assets
that have indefinite useful lives will not be amortized but will be tested
annually for impairment. Intangible assets with finite useful lives will
continue to be amortized over their useful lives. The statement provides
specific guidance for testing goodwill for impairment. Goodwill will be tested
at least annually with a two-step process that begins with an estimation of the
fair value of the reporting unit. SFAS 142 is required to be applied at the
beginning of an entity's fiscal year with impairment losses that arise from the
initial application of this Statement to be reported as resulting from a change
in accounting principle. The Company will implement SFAS 142 as of the beginning
of fiscal 2002. The Company has not determined the impact of this statement on
the carrying value of its goodwill and other long-lived intangible assets.
Part II OTHER INFORMATION
Item 1. Legal Proceedings
20
The Company from time to time becomes involved in various claims and
lawsuits incidental to its business. None of these matters are expected to have
a material adverse effect on the Company's consolidated financial statements.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On September 19, 2001, the Company held its Annual Meeting of
Stockholders' of the Company. At the meeting, stockholders of the Company
re-elected all management's nominees to the Board of Directors; approved
changing the name of the Company from Riddell Sports Inc. to Varsity Brands,
Inc.; and ratified the appointment of Grant Thorton LLP as the Company's
independent auditors for the year ended December 31, 2001.
Item 5. Other Information
In conjunction with the sale of the Riddell Sports Division, the Company
changed its name to Varsity Brands, Inc. from Riddell Sports Inc. The name
change was approved by the stockholders at the Annual Meeting of Stockholders'
on September 19, 2001.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit index:
Note Purchase Agreement between Riddell Sports Inc. and Silver Oak
Capital, L.L.C. dated August 16, 2001
4.10% Senior Note due November 1, 2007
Registration Rights Agreement between Riddell Sports Inc. and Silver Oak
Capital, L.L.C., dated August 16, 2001
Subordinated Guaranty, dated August 16, 2001 by Varsity Spirit
Corporation and subsidiaries in favor of Silver Oak Capital, L.L.C.
(b) Reports on Form 8-K:
None
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIDDELL SPORTS INC.
Date: November 14, 2001. By: /s/ Jeffrey G. Webb
President and
Chief Executive Officer
Date: November 11 By: /s/ John M. Nichols
. Chief Financial Officer and
. Principal Accounting Officer
22
RIDDELL SPORTS INC.
$7,500,000
4.10% Convertible Subordinated Note due November 1, 2007
NOTE PURCHASE AGREEMENT
August 16, 2001
TABLE OF CONTENTS
Page
1. AUTHORIZATION OF NOTE................................................1
2. DISCHARGE OF EXISTING NOTE AND PURCHASE OF NEW NOTE..................1
3. CLOSING..............................................................1
4. CONDITIONS TO CLOSING................................................2
4.1. Representations and Warranties.......................................2
4.2. Performance; No Default..............................................2
4.3. Compliance Certificates..............................................2
4.4. Opinion of Counsel...................................................2
4.5. Changes in Corporate Structure.......................................3
4.6. Proceedings and Documents............................................3
4.7. Purchase Permitted By Applicable Law, etc............................3
4.8. Registration Rights Agreement........................................3
4.9. Subordinated Guaranty................................................3
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................3
5.1. Organization; Power and Authority....................................3
5.2. Authorization, etc...................................................4
5.3. Disclosure...........................................................4
5.4. Organization and Ownership of Shares of Subsidiaries; Affiliates.....5
5.5. Compliance with Laws, Other Instruments, etc.........................6
5.6. Governmental Authorizations, etc.....................................6
5.7. Litigation; Observance of Agreements, Statutes and Orders............6
5.8. Taxes................................................................7
5.9. Title to Property; Leases............................................7
5.10. Licenses, Permits, etc...............................................8
5.11. Compliance with ERISA................................................8
5.12. Private Offering by the Company......................................8
5.13. Foreign Assets Control Regulations, etc..............................8
5.14. Status under Certain Statutes........................................8
5.15. Capitalization.......................................................8
5.16. Brokers and other Commissions........................................9
5.17. Absence of Dividends.................................................9
6. REPRESENTATIONS OF THE INVESTOR......................................9
6.1. Acquisition for Investment...........................................9
7. INFORMATION AS TO THE COMPANY........................................9
7.1. Financial and Business Information...................................9
7.2. Officer's Certificate...............................................11
7.3. Inspection..........................................................12
8. PREPAYMENT OF THE NOTES.............................................12
8.1. Sinking Funds.......................................................12
8.2. Optional Prepayments................................................13
8.3. Allocation of Partial Prepayments...................................13
8.4. Maturity; Surrender, etc............................................13
8.5. Repurchase of Note at Option of the Holder Upon Change of Control...13
8.6. Notices; Method of Exercising Repurchase Right, etc.................14
9. AFFIRMATIVE COVENANTS...............................................15
9.1. Compliance with Law.................................................15
9.2. Insurance...........................................................15
9.3. Maintenance of Properties...........................................16
9.4. Payment of Taxes and Claims.........................................16
9.5. Corporate Existence, etc............................................16
9.6. Guaranty by New Subsidiaries........................................16
10. NEGATIVE COVENANTS..................................................17
10.1. Transactions with Affiliates........................................17
10.2. Merger; Purchase of Assets; Acquisitions; etc.......................18
10.3. Anti-Layering.......................................................19
10.4. Limitations on Grants of Options....................................19
11. EVENTS OF DEFAULT...................................................20
12. REMEDIES ON DEFAULT, ETC............................................22
12.1. Acceleration........................................................22
12.2. Other Remedies......................................................22
12.3. No Waivers or Election of Remedies, Expenses, etc...................23
13. SUBORDINATION.......................................................23
13.1. Note Subordinated to Senior Indebtedness............................23
13.2. No Payment on the Note in Certain Circumstances.....................23
13.3. Note Subordinated to Prior Payment of All Senior Indebtedness
on Acceleration of Principal of the Note or on Dissolution,
Liquidation or Reorganization.......................................25
13.4. Noteholders to Be Subrogated to Rights of Holders of
Senior Indebtedness.......................26
13.5. Obligations of the Company Unconditional............................26
13.6. Subordination Rights Not Impaired by Acts or Omissions
of the Company or Holders of Senior Indebtedness. 27
13.7. Section 13 Not to Prevent Events of Default.........................27
14. CONVERSION OF NOTES.................................................27
14.1. Right of Conversion; Conversion Price...............................27
14.2. Issuance of Shares on Conversion....................................28
14.3. No Adjustment for Interest or Dividends.............................28
14.4. Adjustment of Conversion Price......................................29
14.5. Notice of Adjustment of Conversion Price............................32
14.6. Notice of Certain Corporation Action................................32
14.7. Taxes on Conversions................................................33
14.8. Fractional Shares...................................................33
14.9. Provisions in Case of Consolidation, Merger or Sale of Assets.......33
14.10. Covenant to Reserve Shares..........................................34
15. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT........34
16. AMENDMENT AND WAIVER................................................35
16.1. Requirements........................................................35
16.2. Binding Effect, etc.................................................35
17. NOTICES.............................................................35
ii
18. REPRODUCTION OF DOCUMENTS...........................................35
19. CONFIDENTIAL INFORMATION............................................36
20. MISCELLANEOUS.......................................................37
20.1. Successors and Assigns..............................................37
20.2. Payments Due on Non-Business Days...................................37
20.3. Severability........................................................37
20.4. Construction........................................................37
20.5. Counterparts........................................................37
20.6. Governing Law.......................................................37
20.7. Assignments and Restrictions on Transfers...........................38
20.8. Lost Note...........................................................41
20.9. Registration, Transfer and Exchange of the Note.....................42
20.10. Equitable Relief....................................................42
20.11. Expenses............................................................42
SCHEDULE A -- Defined Terms
SCHEDULE 5.3 -- Disclosure
SCHEDULE 5.4 -- Organization and Ownership of Shares of Subsidiaries
SCHEDULE 5.5 -- Compliance with Laws, Other Instruments, etc.
SCHEDULE 5.7 -- Litigation; Observance of Agreements, Statutes and Orders
EXHIBIT 1 -- Form of 4.10% Senior Note due November 1, 2007
EXHIBIT 4.4 -- Form of Opinion of Swidler Berlin Shereff Friedman, LLP
EXHIBIT 4.8 -- Form of Registration Rights Agreement
EXHIBIT 4.9 -- Form of Guaranty
iii
RIDDELL SPORTS INC.
4.10% Convertible Subordinated Note due November 1, 2007
August 16, 2001
Silver Oak Capital, L.L.C.
c/o Angelo, Gordon & Co.
245 Park Avenue, 26th Floor
New York, New York 10167
Ladies and Gentlemen:
Riddell Sports Inc., a Delaware corporation (the "Company"),
agrees with you as follows:
1. AUTHORIZATION OF NOTE.
The Company will authorize the issuance of its 4.10% Convertible
Subordinated Note due November 1, 2007 in the aggregate principal amount of
$7,500,000. The Note shall be in the form set out in Exhibit 1. Certain
capitalized terms used in this Agreement are defined in Schedule A; references
to a "Schedule" or an "Exhibit" are, unless otherwise specified, to a Schedule
or an Exhibit attached to this Agreement.
2. DISCHARGE OF EXISTING NOTE AND PURCHASE OF NEW NOTE.
The Company has previously issued and sold to you, and you have
previously purchased from the Company, a 4.10% Convertible Subordinated Note due
November 1, 2004 in the aggregate principle amount of $7.5 million (the
"Existing Note"). In accordance with that certain Note Exchange Agreement, dated
as of June 21, 2001, by and between you and the Company, the Company shall pay
$7,500,000 to you in complete discharge and satisfaction of the Existing Note,
and such entire amount shall be immediately applied by you to purchase from the
Company the Note, subject to the terms and conditions of this Agreement.
3. CLOSING.
The execution and delivery of this Agreement and the delivery of
the documents required to be delivered pursuant to Sections 4.3 and 4.4 shall
occur at the offices of Swidler Berlin Shereff Friedman, LLP, 405 Lexington
Avenue, New York, New York 10174, at 10:00 a.m., New York time, at a closing
(the "Closing") on the date hereof (the "Closing Date"). The Company will
deliver to you at the Closing the Registration Rights Agreement, the
Subordinated Guaranty and the Note, to be dated the
Closing Date and registered in your name (or in the name of your nominee),
against delivery by you to the Company of the Existing Note for cancellation. If
on the Closing Date the Company shall fail to tender such Note to you as
provided above in this Section 3, or any of the conditions specified in Sections
4.8 and 4.9 shall not have been fulfilled to your satisfaction, you shall, at
your election, be relieved of all further obligations under this Agreement,
without thereby waiving any rights you may have by reason of such failure or
such nonfulfillment.
4. CONDITIONS TO CLOSING.
Your obligation to acquire the Note to be issued to you on the
Closing Date is subject to the fulfillment to your satisfaction, prior to or at
the Closing, of the conditions set forth in this Section 4.
4.1. REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Company in this
Agreement shall be correct as of the Closing Date.
4.2. PERFORMANCE; NO DEFAULT.
The Company shall have performed and complied with all agreements
and conditions contained in this Agreement required to be performed or complied
with by it prior to or at the Closing; and prior to and after giving effect to
the issuance of the Note no Default or Event of Default shall have occurred and
be continuing.
4.3. COMPLIANCE CERTIFICATES.
(a) OFFICER'S CERTIFICATE. The Company shall have delivered to
you an Officer's Certificate, dated the Closing Date, certifying that the
conditions specified in Sections 4.1, 4.2 and 4.6 have been fulfilled.
(b) SECRETARY'S CERTIFICATE. The Company and each of the
Guarantors shall have delivered to you a certificate certifying as to the
resolutions attached thereto and other corporate proceedings relating to
the authorization, execution and delivery of the Note, this Agreement and
the Registration Rights Agreement (with respect to the Company) and the
Subordinated Guaranty (with respect to the Guarantors).
4.4. OPINION OF COUNSEL.
You shall have received an opinion in form and substance
satisfactory to you, dated the Closing Date, from Swidler Berlin Shereff
Friedman, LLP, special counsel for the Company in the form of Exhibit 4.4
hereto.
2
4.5. CHANGES IN CORPORATE STRUCTURE.
Neither the Company nor any Guarantor shall have changed its
jurisdiction of incorporation or been a party to any merger or consolidation or
have succeeded to all or any substantial part of the liabilities of any other
entity, at any time following the date of the most recent financial statements
filed with the Securities and Exchange Commission pursuant to the Exchange Act.
4.6. PROCEEDINGS AND DOCUMENTS.
All corporate and other proceedings in connection with the
transactions contemplated by this Agreement and all documents and instruments
incident to such transactions shall be satisfactory to you and your special
counsel, and you and your special counsel shall have received all such
counterpart originals or certified or other copies of such documents as you or
they may reasonably request.
4.7. PURCHASE PERMITTED BY APPLICABLE LAW, ETC.
On the Closing Date your purchase of the Note shall (i) be
permitted by the laws and regulations of each jurisdiction to which you are
subject, (ii) not violate any applicable law or regulation (including, without
limitation, Regulation G, T or X of the Board of Governors of the Federal
Reserve System) and (iii) not subject you to any tax, penalty or liability under
or pursuant to any applicable law or regulation, which law or regulation was not
in effect on the date hereof.
4.8. REGISTRATION RIGHTS AGREEMENT.
On or before the Closing Date you and the Company shall have
entered into a Registration Rights Agreement in the form of Exhibit 4.8 hereto,
duly executed and delivered by the Company.
4.9. SUBORDINATED GUARANTY.
The Guarantors shall have delivered you a Subordinated Guaranty in
the form of Exhibit 4.9 hereto.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to you that:
5.1. ORGANIZATION; POWER AND AUTHORITY.
The Company and each of the Guarantors is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation, and is duly qualified as a foreign corporation
and is in good standing in each jurisdiction in which such qualification is
required by law, other than those jurisdictions as to which the failure to be so
qualified or in good standing could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect. The Company and
3
each of the Guarantors has the corporate power and authority to own or hold
under lease the properties it purports to own or hold under lease, to transact
the business it transacts and proposes to transact, to execute and deliver this
Agreement, the Note, the Registration Rights Agreement (in the case of the
Company) and the Subordinated Guaranty (in the case of the Guarantors), and to
perform the provisions hereof and thereof.
5.2. AUTHORIZATION, ETC.
(a) This Agreement, the Registration Rights Agreement and the
Note have been duly authorized by all necessary corporate action on the
part of the Company, and this Agreement constitutes, and upon execution
and delivery thereof each of the Registration Rights Agreement and the
Note will constitute, a legal, valid and binding obligation of the
Company enforceable against the Company in accordance with its terms,
except as such enforceability may be limited by (i) applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and (ii) general
principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
(b) The Subordinated Guaranty has been duly authorized by all
necessary corporate action on the part of each Guarantor, and upon
execution and delivery thereof will constitute, a legal, valid and
binding obligation of each Guarantor enforceable against such Guarantor
in accordance with its terms, except as such enforceability may be
limited by (i) applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of creditors'
rights generally and (ii) general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at
law).
(c) The shares of Common Stock issuable on conversion of the
Note have been duly authorized and reserved for issuance on conversion of
the Note and, when issued on such conversion, will be validly issued,
fully paid and non-assessable, and the issuance of such shares is not
subject to any preemptive or similar rights.
5.3. DISCLOSURE.
No report or other information furnished to you in writing by or
on behalf of the Company contains any untrue statement of a material fact or
omits to state any material fact necessary to make the statements therein not
misleading in light of the circumstances when and under which they were made.
Each contract, agreement and understanding (including all agreements and
understandings with Affiliates of the Company or any of its Subsidiaries) to
which the Company or any of its Subsidiaries is a party or by which any of their
respective property is bound which is material to the business of the Company
and its subsidiaries taken as a whole has been previously filed with the
Securities and Exchange Commission in the Company's Forms 10-K, 10-K/A,
4
Schedule 14A, 10-Q and 8-K. The Company's current reports on Forms 10-K, 10-Q
and 8-K, taken together, do not, as of the date of filing with the Securities
and Exchange Commission, contain any untrue statement of material fact or omit
to state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. Since
March 31, 2001, there has not been any occurrence that, individually or in the
aggregate, would have a Material Adverse Effect, other than occurrences that are
set forth in Schedule 5.3 or have been disclosed in the Company's filings with
the Securities and Exchange Commission. No representation is made by the Company
as to projections delivered to you in writing in connection with the
transactions contemplated hereby other than that the projections, at the time
they were prepared, were based on information and calculations the Company
believed to be reasonable.
5.4. ORGANIZATION AND OWNERSHIP OF SHARES OF SUBSIDIARIES; AFFILIATES.
(a) Schedule 5.4 contains (except as noted therein) complete
and correct lists (i) of the Company's Subsidiaries, showing, as to each
Subsidiary, the correct name thereof, the jurisdiction of its
organization, and the percentage of shares of each class of its capital
stock or similar equity interests outstanding owned by the Company and
each other Subsidiary and (ii) such information as to the Company's
Affiliates, other than Subsidiaries.
(b) All of the outstanding shares of capital stock or similar
equity interests of each Subsidiary shown in Schedule 5.4 as being owned
by the Company and its Subsidiaries have been validly issued, are fully
paid and nonassessable and are owned by the Company or another Subsidiary
free and clear of any Lien (except as otherwise disclosed in Schedule
5.4). Neither the Company nor any Subsidiary is party to any agreement or
other obligation that would obligate such Person to issue or sell any
shares of capital stock of any Subsidiary to any Person other than the
Company or any wholly-owned Subsidiary.
(c) Each Subsidiary identified in Schedule 5.4 is a corporation
or other legal entity duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization, and is duly
qualified as a foreign corporation or other legal entity and is in good
standing in each jurisdiction in which such qualification is required by
law, other than those jurisdictions as to which the failure to be so
qualified or in good standing could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect. Each
such Subsidiary has the corporate or other power and authority to own or
hold under lease the properties it purports to own or hold under lease
and to transact the business it transacts and proposes to transact.
(d) No subsidiary is a party to, or otherwise subject to any
legal restriction or any agreement (other than this Agreement, the
Company's bank loan documents with Bank of America, N.A., and customary
limitations imposed by corporate law statutes) restricting the ability of
such Subsidiary to pay dividends
5
out of profits or make any other similar distributions of profits to the
Company or any of its Subsidiaries that owns outstanding shares of
capital stock or similar equity interests of such Subsidiary
5.5. COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC.
(a) Except as set forth on Schedule 5.5, the execution,
delivery and performance by the Company of this Agreement, the
Registration Rights Agreement and the Note will not (i) contravene,
result in any breach of, or constitute a default under, or result in the
creation of any Lien in respect of any property of the Company or any of
its Subsidiaries under, any indenture, mortgage, deed of trust, loan,
purchase or credit agreement, lease, corporate charter or by-laws, or any
other agreement or instrument to which the Company or any such Subsidiary
is bound or by which the Company or any such Subsidiary or any of their
respective properties may be bound or affected, (ii) conflict with or
result in a breach of any of the terms, conditions or provisions of any
order, judgment, decree, or ruling of any court, arbitrator or
Governmental Authority applicable to the Company or any such Subsidiary
or (iii) violate any provision of any statute or other rule or regulation
of any Governmental Authority applicable to the Company or any such
Subsidiary.
(b) Except as set forth on Schedule 5.5, the execution,
delivery and performance by each Guarantor of the Subordinated Guaranty
will not (i) contravene, result in any breach of, or constitute a default
under, or result in the creation of any Lien in respect of any property
of such Guarantor or any of its Subsidiaries under, any indenture,
mortgage, deed of trust, loan, purchase or credit agreement, lease,
corporate charter or by-laws, or any other agreement or instrument to
which such Guarantor or any such Subsidiary is bound or by which such
Guarantor or any such Subsidiary or any of their respective properties
may be bound or affected, (ii) conflict with or result in a breach of any
of the terms, conditions or provisions of any order, judgment, decree, or
ruling of any court, arbitrator or Governmental Authority applicable to
such Guarantor or any such Subsidiary or (iii) violate any provision of
any statute or other rule or regulation of any Governmental Authority
applicable to such Guarantor or any such Subsidiary.
5.6. GOVERNMENTAL AUTHORIZATIONS, ETC.
No consent, approval or authorization of, or registration, filing
or declaration with, any Governmental Authority is required by the Company in
connection with the execution, delivery or performance by the Company of this
Agreement, the Registration Rights Agreement or the Note.
5.7. LITIGATION; OBSERVANCE OF AGREEMENTS, STATUTES AND ORDERS.
(a) Except as set forth on Schedule 5.7 and as disclosed in the
Company's reports filed with the Securities and Exchange Commission
pursuant
6
to the Exchange Act, there are no actions, suits or proceedings pending
or, to the knowledge of the Company, threatened against or affecting the
Company or any Subsidiary or any property of the Company or any
Subsidiary in any court or before any arbitrator of any kind or before or
by any Governmental Authority that, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect.
(b) Except as set forth on Schedule 5.7, neither the Company
nor any of its Subsidiaries is in default under any term of any agreement
or instrument to which it is a party or by which it is bound, or any
order, judgment, decree or ruling of any court, arbitrator or
Governmental Authority or is in violation of any applicable law,
ordinance, rule or regulation (including without limitation Environmental
Laws) of any Governmental Authority, which default or violation,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect.
5.8. TAXES.
The Company and its Subsidiaries have filed all tax returns that
are required to have been filed in any jurisdiction, and have paid all taxes
shown to be due and payable on such returns and all other taxes and assessments
levied upon them or their properties, assets, income or franchises, to the
extent such taxes and assessments have become due and payable and before they
have become delinquent, except for any taxes and assessments (i) the amount of
which is not individually or in the aggregate material or (ii) the amount,
applicability or validity of which is currently being contested in good faith by
appropriate proceedings and with respect to which the Company or a Subsidiary,
as the case may be, has established adequate reserves in accordance with GAAP.
The Company knows of no basis for any other tax or assessment that could
reasonably be expected to have a Material Adverse Effect. The charges, accruals
and reserves on the books of the company and its Subsidiaries in respect of
Federal, state or other taxes for all fiscal periods are adequate.
5.9. TITLE TO PROPERTY; LEASES.
The Company and its Subsidiaries have good and sufficient title to
their respective properties that individually or in the aggregate are Material,
including all such properties reflected in the most recent audited balance sheet
filed with the Securities and Exchange Commission pursuant to the Exchange Act
(except for those properties disposed of pursuant to the Stock Purchase
Agreement) or purported to have been acquired by the Company or any such
Subsidiary after said date (except as sold or otherwise disposed of in the
ordinary course of business), in each case free and clear of Liens other than
Liens that do not interfere with the intended use of the Property by the Company
and that would not, individually or in the aggregate, have a Material Adverse
Effect. All leases that individually or in the aggregate are material are valid
and subsisting and are in full force and effect in all material respects and the
Company has not received any notice of default or infringement of any such
lease.
7
5.10. LICENSES, PERMITS, ETC.
The Company and its Subsidiaries own or possess all licenses,
permits, franchises, authorizations, patents, copyrights, service marks,
trademarks and trade names, or rights thereto, that individually or in the
aggregate are Material, without known conflict with the rights of others.
5.11. COMPLIANCE WITH ERISA.
The Company, its ERISA Affiliates and their respective Plans are
in compliance in all material respects with those provisions of ERISA and of the
Code which are applicable with respect to any Plan. No Prohibited Transaction
and no Reportable Event has occurred with respect to any such Plan. None of the
Company or any of its ERISA Affiliates is a contributing employer with respect
to any Multiemployer Plan. The Company and each of its ERISA Affiliates have met
the minimum funding requirements under ERISA and the Code with respect to each
of their respective Plans, if any, and have not incurred any liability to the
PBGC or any Plan. There is no Material unrecorded unfunded benefit liability,
determined in accordance with Section 4001(a)(18) of ERISA, with respect to any
Plan of the Company or its ERISA Affiliates.
5.12. PRIVATE OFFERING BY THE COMPANY.
Neither the Company nor anyone acting on its behalf has taken, or
will take, any action that would subject the issuance of the Note to the
registration requirements of Section 5 of the Securities Act.
5.13. FOREIGN ASSETS CONTROL REGULATIONS, ETC.
Neither the issuance of the Note by the Company hereunder nor its
use of the proceeds thereof will violate the Trading with the Enemy Act, as
amended, or any of the foreign assets control regulations of the United States
Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling
legislation or executive order relating thereto.
5.14. STATUS UNDER CERTAIN STATUTES.
Neither the Company nor any of its Subsidiaries is subject to
regulation under the Investment Company Act of 1940, as amended, the Public
Utility Holding Company Act of 1935, as amended, the Interstate Commerce Act, as
amended, or the Federal Power Act, as amended.
5.15. CAPITALIZATION.
The authorized and outstanding capital stock of the Company
consists of 40,000,000 shares of Common Stock, $0.01 par value, of which
9,452,250 shares are outstanding on the date hereof and 5,000,000 shares of
preferred stock, none of which is outstanding on the date hereof. Except as
disclosed in the Company's reports filed with the Securities and Exchange
Commission pursuant to the Exchange Act and except for
8
the Company's obligation to make an annual grant of an option to acquire 7,500
shares of the Company's Common Stock to each member of its Board of Directors
who is not the Chief Executive Officer and an initial grant of an option to
acquire 15,000 shares of the Company's Common Stock to each person (other than
current members of the Board of Directors) upon becoming a member of the Board
of Directors, there are no outstanding subscriptions, options, warrants, calls,
contracts, demands, commitments, convertible securities, agreements or
arrangements of any character or nature whatsoever under which the Company is or
may become obligated to issue, assign or transfer any shares of the capital
stock of the Company.
5.16. BROKERS AND OTHER COMMISSIONS.
The Company has no agreement or understanding with any finder,
broker or other person requiring the payment of any fee as a result of the
issuance of the Note.
5.17. ABSENCE OF DIVIDENDS.
Since March 31, 2001, the Company has not made any dividend,
redemption, repurchase or other distribution in respect of its Common Stock.
6. REPRESENTATIONS OF THE INVESTOR.
6.1. ACQUISITION FOR INVESTMENT.
You represent that you are acquiring the Note for your own account
and not with a view to the distribution thereof, provided that the disposition
of your or their property shall at all times be within your or their control.
You understand that the Note has not been registered under the Securities Act
and may be resold only if registered pursuant to the provisions of the
Securities Act or if an exemption from registration is available, except under
circumstances where neither such registration nor such an exemption is required
by law, and that the Company is not required to register the Note.
7. INFORMATION AS TO THE COMPANY.
7.1. FINANCIAL AND BUSINESS INFORMATION.
The Company shall deliver to you:
(a) QUARTERLY STATEMENTS -- within 45 days after the end of
each quarterly fiscal period in each fiscal year of the Company (other
than the last quarterly fiscal period of each such fiscal year),
duplicate copies of,
(i) a consolidated balance sheet of the Company and its
Subsidiaries as at the end of such quarter, and
(ii) consolidated statements of income, changes in
shareholders, equity and cash flows of the Company and its
Subsidiaries,
9
for such quarter and (in the case of the second and third
quarters) for the portion of the fiscal year ending with such
quarter,
setting forth in each case in comparative form the figures for the
corresponding periods in the previous fiscal year, all in reasonable
detail, prepared in accordance with GAAP applicable to quarterly
financial statements generally, and certified by a Senior Financial
Officer as fairly presenting, in all material respects, the financial
position of the companies being reported on and their results of
operations and cash flows, subject to changes resulting from year-end
adjustments, PROVIDED that delivery within the time period specified
above of copies of the Company's Quarterly Report on Form 10-Q prepared
in compliance with the requirements therefor and filed with the
Securities and Exchange Commission shall be deemed to satisfy the
requirements of this Section 7.1 (a);
(b) ANNUAL STATEMENTS -- within 90 days after the end of each
fiscal year of the Company, duplicate copies of,
(i) a consolidated balance sheet of the Company and its
Subsidiaries, as at the end of such year, and
(ii) consolidated statements of income, changes in
shareholders, equity and cash flows of the Company and its
Subsidiaries, for such year,
setting forth in each case in comparative form the figures for the
previous fiscal year, all in reasonable detail, prepared in accordance
with GAAP, and accompanied by an opinion thereon of independent certified
public accountants of recognized national standing, which opinion shall
state that such financial statements present fairly, in all material
respects, the financial position of the companies being reported upon and
their results of operations and cash flows and have been prepared in
conformity with GAAP, and that the examination of such accountants in
connection with such financial statements has been made in accordance
with generally accepted auditing standards, and that such audit provides
a reasonable basis for such opinion in the circumstances, and
PROVIDED that the delivery within the time period specified above of the
Company's Annual Report on Form 10-K for such fiscal year prepared in
accordance with the requirements therefor and filed with the Securities
and Exchange Commission, shall be deemed to satisfy the requirements of
this Section 7.1(b);
(c) SEC AND OTHER REPORTS -- promptly upon their becoming
available, one copy of (i) each financial statement, report, notice or
proxy statement sent by the Company or any Subsidiary sent or made
available to public securities holders generally, and (ii) each regular
or periodic report, each registration statement (without exhibits except
as expressly requested by such holder), and each prospectus and all
amendments thereto filed by the Company or any of its
10
Subsidiaries with the Securities and Exchange Commission and of all press
releases and other statements made available generally by the Company or
any such Subsidiary to the public concerning developments that are
Material;
(d) ERISA MATTERS -- promptly, and in any event within five
days after a Responsible Officer becoming aware of any of the following,
a written notice setting forth the nature thereof and the action, if any,
that the Company or an ERISA Affiliate proposes to take with respect
thereto:
(i) with respect to any Plan, any reportable event, as
defined in section 4043(b) of ERISA and the regulations
thereunder, for which notice thereof has not been waived pursuant
to such regulations as in effect on the date hereof; or
(ii) the taking by the PBGC of steps to institute, or the
threatening by the PBGC of the institution of, proceedings under
section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Plan, or the receipt by the
Company or any ERISA Affiliate of a notice from a Multiemployer
Plan that such action has been taken by the PBGC with respect to
such Multiemployer Plan; or
(iii) any event, transaction or condition that could
result in the incurrence of any liability by the Company or any
ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty
or excise tax provisions of the Code relating to employee benefit
plans, or in the imposition of any Lien on any of the rights,
properties or assets of the Company or any ERISA Affiliate
pursuant to Title I or IV of ERISA or such penalty or excise tax
provisions, if such liability or Lien, taken together with any
other such liabilities or Liens then existing, could reasonably be
expected to have a Material Adverse Effect;
(e) NOTICES FROM GOVERNMENTAL AUTHORITY -- promptly, and in any
event within 30 days of receipt thereof, copies of any notice to the
Company or any Subsidiary from any Federal or state Governmental
Authority relating to any order, ruling, statute or other law or
regulation that could reasonably be expected to have a Material Adverse
Effect; and
(f) REQUESTED INFORMATION -- with reasonable promptness, such
other data and information relating to the business, operations, affairs,
financial condition, assets or properties of the Company or any of its
Subsidiaries or relating to the ability of the Company to perform its
obligations hereunder and under the Note as from time to time may be
reasonably requested by you.
7.2. OFFICER'S CERTIFICATE.
Each set of financial statements delivered to you pursuant to
Section 7.1(a) or Section 7.1(b) hereof shall be accompanied by a certificate of
a Senior Financial Officer setting forth a statement that such officer has
reviewed the relevant terms hereof
11
and has made, or caused to be made, under his or her supervision, a review of
the transactions and conditions of the Company and its Subsidiaries from the
beginning of the quarterly or annual period covered by the statements then being
furnished to the date of the certificate and that such review shall not have
disclosed the existence during such period of any condition or event that
constitutes a Default or an Event of Default or, if any such condition or event
existed or exists specifying the nature and period of existence thereof.
7.3. INSPECTION.
The Company shall permit your representatives:
(a) NO DEFAULT -- if no Default or Event of Default then
exists, upon reasonable prior notice to the Company, to visit the
principal executive office of the Company, to discuss the affairs,
finances and accounts of the Company and its Subsidiaries with the
Company's officers, and (with the consent of the Company, which consent
will not be unreasonably withheld) to visit the other offices and
properties of the Company and each of its Subsidiaries, all at such
reasonable times and as often as may be reasonably requested in writing;
and
(b) DEFAULT -- if a Default or Event of Default then exists, to
visit and inspect any of the offices or properties of the Company or any
such Subsidiary, to examine all their respective books of account,
records, reports and other papers, to make copies and extracts therefrom,
and to discuss their respective affairs, finances and accounts with their
respective officers and independent public accountants (and by this
provision the Company authorizes said accountants to discuss the affairs,
finances and accounts of the Company and its Subsidiaries), all at such
times and as often as may be reasonably requested.
8. PREPAYMENT OF THE NOTES.
8.1. SINKING FUNDS.
The Company shall make required principal payments in accordance
with the following schedule:
DATE PRINCIPAL PAYMENT
November 1, 2002 $1,375,000
November 1, 2003 $2,375,000
November 1, 2004 $3,450,000
November 1, 2005 $ 100,000
November 1, 2006 $ 100,000
November 1, 2007 $ 100,000
12
8.2. OPTIONAL PREPAYMENTS.
The Company may, at its option, upon notice as provided below,
prepay on any Interest Payment Date all, or any part of, the Note, at the
following percentage of the principal amount of the Note so prepaid if redeemed
during the 12 month period ending November 1, of the years indicated below:
2001 102.25%
2002 101.50%
2003 100.75%
2004 and thereafter 100.00%
The Company will give the holder of the Note written notice of each optional
prepayment under this Section 8.2 not less than 30 days and not more than 180
days prior to the date fixed for such prepayment. Each such notice shall specify
such date, the aggregate principal amount of the Note to be prepaid on such
date, and the interest to be paid on the prepayment date with respect to such
principal amount being prepaid.
8.3. ALLOCATION OF PARTIAL PREPAYMENTS.
If a portion of the Note has been assigned pursuant to Section
20.7, then in the case of each partial prepayment of the Notes, the principal
amount of the Notes to be prepaid shall be allocated among all of the Notes at
the time outstanding in proportion, as nearly as practicable, to the respective
unpaid principal amounts thereof not theretofore called for prepayment.
8.4. MATURITY; SURRENDER, ETC.
In the case of each prepayment of the Note pursuant to this
Section 8, the principal amount of the Note to be prepaid shall mature and
become due and payable on the date fixed for such prepayment, together with
interest on such principal amount accrued to such date. From and after such
date, unless the Company shall fail to pay such principal amount when so due and
payable, interest on such principal amount shall cease to accrue. If the Note is
paid or prepaid in full, it shall be surrendered to the Company and cancelled
and shall not be reissued, and no Note shall be issued in lieu of any prepaid
principal amount of the Note.
8.5. REPURCHASE OF NOTE AT OPTION OF THE HOLDER UPON CHANGE OF CONTROL.
In the event that a Repurchase Event occurs, the registered
holders of the Note shall have the right, at such holder's option, subject to
the terms and conditions set-forth herein, to require the Company to repurchase
all or any part of such holder's interest in the Note (provided that the
principal amount of such Note at maturity must be $1,000 or an integral multiple
thereof) on the date that is no later than 90 calendar days after the date the
Company gives notice of such Repurchase Event (the "Repurchase Date"), at a cash
purchase price (the "Repurchase Price") equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to and including the
Repurchase Date.
13
8.6. NOTICES; METHOD OF EXERCISING REPURCHASE RIGHT, ETC.
(a) Within 30 calendar days after the occurrence of a
Repurchase Event, the Company shall make an irrevocable unconditional
offer (a "Repurchase Offer") to the registered holders of the Note to
purchase all of the Note pursuant to the offer described in clause (b) of
this Section 8.6 at the Repurchase Price plus accrued and unpaid
interest, if any, to the Repurchase Date. Within five Business Days after
each date upon which the Company knows of the occurrence of a Repurchase
Event requiring the Company to make a Repurchase Offer pursuant to
Section 8.5 hereof, the Company shall so notify you.
(b) Notice of a Repurchase Offer shall be sent, not more than
30 calendar days after the occurrence of the Repurchase Event, by first
class mail, by the Company to you and each other registered holder at its
registered address. The Company will have no liability to send any such
notice to any holder who has not provided the Company with its address.
No failure of the Company to give such notice or defect therein shall
limit any holder's right to exercise his repurchase right or affect the
validity of the proceedings for the repurchase of the Note. The notice,
which shall govern the terms of the Repurchase offer, shall state that:
(i) the Repurchase Offer is being made pursuant to such
notice and Section 8.5 and that the Note, or portion thereof,
properly tendered pursuant to the Repurchase Offer prior to the
thirtieth calendar day prior to the Repurchase Date (the "Final
Repurchase Put Date") will be accepted for payment;
(ii) the Repurchase Price, the Repurchase Date and the
Final Repurchase Put Date;
(iii) that the Note, or portion thereof, not tendered or
accepted for payment will continue to accrue interest, if interest
is then accruing;
(iv) that, unless the Company defaults in paying the
Repurchase Price, or payment is otherwise prevented, the Note, or
portion thereof, accepted for payment pursuant to the Repurchase
Offer shall cease to accrue interest after the Repurchase Date;
(v) that holders electing to have the Note, or portion
thereof, purchased pursuant to a Repurchase Offer will be required
to surrender the Note, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the Note completed, to the
Company;
(vi) that holders will be entitled to withdraw their
election if the Company receives, prior to the close of business
on the Final Repurchase Put Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the holder, the
principal amount of the Note the holder is withdrawing and a
statement containing a facsimile signature that such
14
holder is withdrawing his election to have such principal amount
of the Note purchased; and
(vii) that holders whose interest in the Note was
purchased only in part will be issued a new Note equal in
principal amount to the unpurchased portion of the Note
surrendered.
(c) Any such Repurchase Offer shall comply with all applicable
provisions of federal and state laws, including those regulating tender
offers, if applicable, and any provisions of this Agreement which
conflict with such laws shall be deemed to be superseded by the
provisions of such laws. On or before the Repurchase Date, the Company
shall (a) accept for payment the Note or portions thereof properly
tendered pursuant to the Repurchase Offer prior to the close of business
on the Final Repurchase Put Date, (b) remit by wire transfer of
immediately available funds to the holders so accepted payment in an
amount equal to the Repurchase Price plus accrued and unpaid interest, if
any, to the Repurchase Date, and (c) promptly authenticate and mail or
deliver to such holders a new Note equal in principal amount to any
unpurchased portion of the Note surrendered. Any portion of the Note not
so accepted shall be promptly mailed or delivered by the Company to the
holder thereof and the principal shall, until paid, bear interest to the
extent permitted by applicable law from the Repurchase Date at the rate
borne by the Note and the Note shall remain convertible into Common Stock
until the principal of the Note shall have been paid or duly provided
for.
9. AFFIRMATIVE COVENANTS.
The Company covenants that so long as the Note is outstanding:
9.1. COMPLIANCE WITH LAW.
The Company will and will cause each of its Subsidiaries to comply
with all laws, ordinances or governmental rules or regulations to which each of
them is subject, including, without limitation, Environmental Laws, and will
obtain and maintain in effect all licenses, certificates, permits, franchises
and other governmental authorizations necessary to the ownership of their
respective properties or to the conduct of their respective businesses, in each
case to the extent necessary to ensure that non-compliance with such laws,
ordinances or governmental rules or regulations or failures to obtain or
maintain in effect such licenses, certificates, permits, franchises and other
governmental authorizations could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
9.2. INSURANCE.
The Company will and will cause each of its Subsidiaries to
maintain, with financially sound and reputable insurers, insurance with respect
to their respective properties and businesses against such casualties and
contingencies, of such types, on such terms and in such amounts (including
deductibles, co-insurance and self-insurance,
15
if adequate reserves are maintained with respect thereto) as is customary in the
case of entities of established reputations engaged in the same or a similar
business and similarly situated.
9.3. MAINTENANCE OF PROPERTIES.
The Company will and will cause each of its Subsidiaries to
maintain and keep, or cause to be maintained and kept, their respective
properties in good repair, working order and condition (other than ordinary wear
and tear), so that the business carried on in connection therewith may be
properly conducted at all times, provided that this section shall not prevent
the Company or any such Subsidiary from discontinuing the operation and the
maintenance of any of its properties if such discontinuance is desirable in the
conduct of its business and the Company has concluded that such discontinuance
could not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.
9.4. PAYMENT OF TAXES AND CLAIMS.
The Company will and will cause each of its Subsidiaries to file
all tax returns required to be filed in any jurisdiction and to pay and
discharge all taxes shown to be due and payable on such returns and all other
taxes, assessments, governmental charges, or levies imposed on them or any of
their properties, assets, income or franchises, to the extent such taxes and
assessments have become due and payable and before they have become delinquent
and all claims for which sums have become due and payable that have or might
become a Lien on properties or assets of the Company or any such Subsidiary,
provide that neither the Company nor any such Subsidiary need pay any such tax
or assessment or claims if (i) the amount, applicability or validity thereof is
contested by the Company or such Subsidiary on a timely basis in good faith and
in appropriate proceedings, and the Company or such Subsidiary has established
adequate reserves therefor in accordance with GAAP on the books of the Company
or such Subsidiary or (ii) the nonpayment of all such taxes and assessments in
the aggregate could not reasonably be expected to have a Material Adverse
Effect.
9.5. CORPORATE EXISTENCE, ETC.
The Company will at all times preserve and keep in full force and
effect its corporate existence. The Company will at all times preserve and keep
in full force and effect the corporate existence of each of its Subsidiaries
(unless merged into the Company or one of its Subsidiaries) and all rights and
franchises of the Company and its Subsidiaries unless, in the good faith
judgment of the Company, the termination of or failure to preserve and keep in
full force and effect such corporate existence, right or franchise could not,
individually or in the aggregate, have a Material Adverse Effect.
9.6. GUARANTY BY NEW SUBSIDIARIES.
Immediately upon the incorporation (or merger or other acquisition
by which any entity becomes a Subsidiary) on or after the Closing Date of each
new Subsidiary of the Company or any of its Subsidiaries, the Company shall
cause each such
16
new Subsidiary to deliver its subordinated guaranty of the Company's payment
obligations under the Note by duly executing and delivering to the Holders a
counterpart of the Subordinated Guaranty.
10. NEGATIVE COVENANTS.
The Company covenants that so long as the Note is outstanding:
10.1. TRANSACTIONS WITH AFFILIATES.
(a) The Company will not and will not permit any of its
Subsidiaries to enter into directly or indirectly any Affiliate
Transaction except upon fair and reasonable terms no less favorable to
the Company or such Subsidiary than would be obtainable in a comparable
arm's-length transaction with a Person not an Affiliate;
(b) Furthermore, only at such times that (x) at least
$3,750,000 aggregate principal amount of the Note is outstanding and (y)
Angelo, Gordon & Co. owns or controls directly or through its ownership
of the voting stock of Silver Oak or otherwise at least 50% of the
outstanding principal amount of the Note, then:
(i) the Company will not and will not permit any of its
Subsidiaries to enter into directly or indirectly any Affiliate
Transaction with an aggregate value of more than $100,000 in any
twelve month period (subject to the adjustment provided in Section
10.1(c)) unless (A) such Affiliate Transaction is approved by the
majority of the independent directors (as defined in Regulation
Section 1.162-27(e)(3) promulgated under Section 162(m) of the
Code (as in effect on the Original Effective Date)) of the
Company's Board of Directors; and (B) at least three days before
entering into any such Affiliate Transaction the Company describes
such transaction to Angelo, Gordon & Co. and indicates whether or
not approval of the independent directors was obtained; and
(ii) if the Company or any of its Subsidiaries proposes
to enter into directly or indirectly any Affiliate Transaction
with an aggregate value of more than $250,000 in any twelve month
period (subject to the adjustment provided in Section 10.1(c)),
then it shall notify Angelo, Gordon & Co. of the terms of such
proposed transaction, and the Company or such Subsidiary shall not
enter into such proposed transaction if Angelo, Gordon & Co.
objects directly to the Company's Chief Executive Officer,
President or Senior Financial Officer within 10 Business Days
after such notice is delivered; provided, however, that if Angelo,
Gordon and Co. objects within such 10 Business Days, then the
Company or such Subsidiary may enter into such Affiliate
Transaction if it supplies Angelo, Gordon & Co. with a copy of a
written opinion from an independent investment bank or firm of
independent certified public
17
accountants (other than the Company's auditors) that the Affiliate
Transaction is on terms that are fair and reasonable and no less
favorable to the Company or such Subsidiary than would be obtained
in a comparable arm's-length transaction with a Person not an
Affiliate of the Company.
(c) For purposes of determining the threshold amounts set forth
in Sections 10.1(b)(i) and (ii), such amounts shall be
adjusted on each anniversary of the Original Effective Date to reflect
the aggregate percentage increase (measured on a compounded basis) since
the Original Effective Date (or to reflect the aggregate percentage
increase (measured on a compounded basis) from the Original Effective
Date to October 30, 2000 if the date of adjustment is prior to October
30, 2001) in the Consumer Price Index-Urban Consumer as reprinted by the
Bureau of Labor Statistics of the U.S. Department of Labor or superseding
index or report whether published by the Department of Labor or
otherwise.
(d) Notwithstanding the foregoing, any loan from an Affiliate
to the Company or any of its Subsidiaries will be deemed to have been
made on fair and reasonable terms no less favorable to the Company or
such Subsidiary than would be obtainable in a comparable arm's-length
transaction with a Person not an Affiliate pursuant to Section 10.1(a) if
such loan (i) requires payments of interest (or interest accrues) at the
annual rate of not more than Prime plus 3%, (ii) is PARI PASSU or
subordinated in right payment to the Note, and (iii) does not involve the
issuance of any warrant or other additional consideration from the
Company or any Subsidiary.
(e) Notwithstanding anything to the contrary in Sections
10.1(a) and 10(b), the Company may enter into any Affiliate Transaction
with a Subsidiary that is not a wholly-owned Subsidiary so long as such
transaction is in the ordinary course of the Company's business (such as
an intercompany loan or payroll funding) and upon usual and customary
terms for such transactions.
10.2. MERGER; PURCHASE OF ASSETS; ACQUISITIONS; ETC.
The Company will not (i) merge or consolidate or amalgamate with
any other Person or convey, transfer or lease substantially all of its
properties or assets as an entirety in a single transaction or series of
transactions to any Person unless (X) either (1) the Company shall be the
continuing Person, or (2) the Person formed by such consolidation or into which
the Company is merged or to which all or substantially all of the properties and
assets of the Company are transferred as an entirety (the Company or such other
Person being hereinafter referred to as the "Surviving Person") shall be a
corporation or partnership organized and validly existing under the laws of the
United States, any state thereof or the District of Columbia, and, if the
Company is a party to such consolidation, merger or transfer, the Surviving
Person shall assume all of the obligations of the Company under this Agreement
and the Note; (Y) immediately after giving effect to such transaction, no
Default or Event of Default and no event which, after notice or lapse of time or
both, would become an Event of Default, shall have happened
18
and be continuing; and (Z) the Company has delivered to you an Officer's
Certificate stating that such consolidation, merger, transfer, conveyance or
other disposition complies with this Section 10.2 and that all conditions
precedent herein provided relating to such transaction have been satisfied;
PROVIDED, HOWEVER, that the Company or its Subsidiaries may merge with and among
each other so long as one of the Company or such Subsidiaries is the survivor of
the merger and no other third party is a party to such merger or consolidation.
10.3. ANTI-LAYERING.
Company will not, directly or indirectly, incur or suffer to exist
any Indebtedness that is subordinate in right of payment to any Indebtedness of
the Company, unless such Indebtedness is PARI PASSU with or is subordinate in
right of payment to the Note.
10.4. LIMITATIONS ON GRANTS OF OPTIONS.
The Company will not grant to any Persons (including without
limitation any officer or director of the Company) on any date during any
Contract Year, Incentive Stock Options to acquire more than the number of shares
of Common Stock equal to the difference between the (x) applicable Adjusted
Cumulative Quota for the Contract Year in which the grant is proposed to be made
reduced by (y) the aggregate number of shares of Common Stock underlying
Incentive Stock Options previously granted to any Persons (including without
limitation any officer or director of the Company) during the period commencing
on the Original Effective Date and through such proposed date of grant.
Notwithstanding the foregoing, in connection with the hiring of Varsity
Employees by the Company or any of its Subsidiaries, the Company may grant to
the Varsity Employees Incentive Stock Options to acquire up to 950,000 shares of
Common Stock in the aggregate without regard to the limitations on grants of
options set forth in the immediately preceding sentence. Further, no adjustment
to the Conversion Price need be made pursuant to Section 14.4(e) as the result
of granting any such options to Varsity Employees with a per share exercise
price less than the current market price on the date of grant unless the
cumulative effect of any such adjustments and any other actual or hypothetical
adjustments that would be made under Section 14.4(e) resulting from the
Company's issuance of any shares of its Common Stock to any Varsity Employee
pursuant to the Merger Agreement at a per share price less than the current
market price on the date of actual issuance (notwithstanding the terms of
Section 14.4(e)) would require a decrease of at least $.05 per share to the
Conversion Price.
"CONTRACT YEAR" shall mean the period commencing on the Original
Effective Date and ending on the first anniversary thereof and each succeeding
twelve month period thereafter.
"INCENTIVE STOCK OPTIONS" shall mean options (whether or not such
options constitute incentive stock options (as defined under Sections 421 and
422 of the Code)) to acquire Common Stock granted by the Company or any of its
Subsidiaries pursuant to the terms of the Company's Incentive Stock Option
Plans.
19
"CUMULATIVE QUOTA" shall mean with respect to each Contract Year,
the number of shares of Common Stock set forth below:
First Contract Year 250,000
Second Contract Year 750,000
Third Contract Year 1,250,000
Fourth Contract Year 1,750,000
Fifth Contract Year 2,250,000
Sixth Contract Year 2,750,000
Seventh Contract Year 3,500,000
Eighth Contract Year 4,250,000
Ninth Contract Year 5,000,000
Tenth Contract Year 5,750,000
Eleventh Contract Year 6,500,000
"ADJUSTED CUMULATIVE QUOTA" for any Contract Year shall be the
number of shares of Common Stock constituting the applicable Cumulative Quota
for such year increased (or, in the case of a reverse stock split, reduced) upon
the occurrence of each event described in Section 14.4(a) or (c) by the
percentage that the total number of outstanding shares of Common Stock will be
proportionately increased (or, in the case of reverse stock split, reduced) as a
result of such event; it being understood that such adjustment shall be
effective and determined on the same date(s) that the Conversion Price would be
adjusted pursuant to such Sections.
11. EVENTS OF DEFAULT.
An "EVENT OF DEFAULT" shall exist if any of the following
conditions or events shall occur and be continuing:
(a) the Company fails to pay any principal of the Note when the
same becomes due and payable, whether at maturity or at a date fixed for
prepayment or by declaration or otherwise; or
(b) the Company defaults in the payment of any interest on any
Note for more than five (5) Business Days after written notification
thereof from you to the Company when the same becomes due and payable; or
(c) the Company defaults in the performance of or compliance
with any term contained in Section 10.2 or fails to comply with its
obligations to issue shares of Common Stock on conversion of the Note; or
(d) the Company defaults in the performance of or compliance
with any term contained herein (other than those referred to in
paragraphs (a), (b) and (c) of this Section 11) and such default is not
remedied within 30 days after the earlier of (i) a Responsible officer
obtaining actual knowledge of such default and (ii) the company receiving
written notice of such default from you (any such
20
written notice to be identified as a "notice of default" and to refer
specifically to this paragraph (d) of Section 11); or
(e) any representation or warranty made in writing by or on
behalf of the Company or by any officer of the Company in this Agreement
or in any writing furnished in connection with the transactions
contemplated hereby proves to have been false or incorrect in any
Material respect on the date as of which made; or
(f) (i) the Company or any of its Subsidiaries is in default
(as principal or as guarantor or other surety) in the payment of any
principal of or premium or make-whole amount or interest on any
Indebtedness that is outstanding in an aggregate principal amount of at
least $3,000,000 beyond any period of grace provided with respect thereto
and notice from the lender, or (ii) the Company or any Subsidiary is in
default in the performance of or compliance with any term of any evidence
of any Indebtedness in an aggregate outstanding principal amount of at
least $3,000,000 or of any mortgage, indenture or other agreement
relating thereto or any other condition exists, and as a consequence of
such default or condition such Indebtedness has been declared due and
payable before its stated maturity or before its regularly scheduled
dates of payment; or
(g) the Company or any of its Subsidiaries (i) admits in
writing its inability to pay, its debts as they become due, (ii) files,
or consents by answer or otherwise to the filing against it of, a
petition for relief or reorganization or arrangement or any other
petition in bankruptcy, for liquidation or to take advantage of any
bankruptcy, insolvency, reorganization, moratorium or other similar law
of any jurisdiction, (iii) makes an assignment for the benefit of its
creditors, (iv) consents to the appointment of a custodian, receiver,
trustee or other officer with similar powers with respect to it or with
respect to any substantial part of its property, (y) is adjudicated as
insolvent or to be liquidated, or (vi) takes corporate action for the
purpose of any of the foregoing; or
(h) a court or governmental authority of competent jurisdiction
enters an order appointing, without consent by the Company or any of its
Subsidiaries, a custodian, receiver, trustee or other officer with
similar powers with respect to it or with respect to any substantial part
of its property, or constituting an order for relief or approving a
petition for relief or reorganization or any other petition in bankruptcy
or for liquidation or to take advantage of any bankruptcy or insolvency
law of any jurisdiction, or ordering the dissolution, winding-up or
liquidation of the Company or any of its Subsidiaries, or any such
petition shall be filed against the Company or any of its Subsidiaries
and such petition shall not be dismissed within 60 days; or
(i) a final judgment or judgments for the payment of money
aggregating $3,000,000 in excess of any insurance and reserves for such
judgment are rendered against one or more of the Company and its
Subsidiaries and which judgments are not, within 60 days after entry
thereof, bonded, discharged or
21
stayed pending appeal, or are not discharged within 60 days after the
expiration of such stay; or
(j) if (i) any Plan shall fail to satisfy the minimum funding
standards of ERISA or the Code for any plan year or part thereof or a
waiver of such standards or extension of any amortization period is
sought or granted under section 412 of the Code, (ii) a notice of intent
to terminate any Plan shall have been or is reasonably expected to be
filed with the PBGC or the PBGC shall have instituted proceedings under
ERISA section 4042 to terminate or appoint a trustee to administer any
Plan or the PBGC shall have notified the Company or any ERISA Affiliate
that a Plan may become a subject of any such proceedings, (iii) the
aggregate "amount of unfunded benefit liabilities" (within the meaning of
section 4001(a)(18) of ERISA) under all Plans, determined in accordance
with Title IV of ERISA, shall exceed $500,000, (iv) the Company or any
ERISA Affiliate shall have incurred or is reasonably expected to incur
any Material liability pursuant to Title I or IV of ERISA or the penalty
or excise tax provisions of the Code relating to employee benefit plans,
(v) the Company or any ERISA Affiliate withdraws from any Multiemployer
Plan, or (vi) the Company or any Subsidiary establishes or amends any
employee welfare benefit plan that provides post-employment welfare
benefits in a manner that would increase the liability of the Company or
any Subsidiary thereunder; and any such event or events described in
clauses (i) through (vi) above, either individually or together with any
other such event or events, could reasonably be expected to have a
Material Adverse Effect.
As used in Section 11 (j), the terms "EMPLOYEE BENEFIT PLAN" and "EMPLOYEE
WELFARE BENEFIT PLAN" shall have the respective meanings assigned to such terms
in Section 3 of ERISA.
12. REMEDIES ON DEFAULT, ETC.
12.1. ACCELERATION.
If an Event of Default has occurred and is continuing, the
Majority Lenders may, by written notice to the Company, declare the Note to be
immediately due and payable.
Upon becoming due and payable under this Section 12.1, the Note
will forthwith mature and the entire unpaid principal amount of such Note, plus
all accrued and unpaid interest thereon shall all be immediately due and
payable, in each and every case without demand, protest or further notice, all
of which are hereby waived.
12.2. OTHER REMEDIES.
If any Default or Event of Default has occurred and is continuing,
and irrespective of whether the Note has become or has been declared immediately
due and payable under Section 12.1, you may proceed to protect and enforce your
rights by an action at law, suit in equity or other appropriate proceeding,
whether for the specific
22
performance of any agreement contained herein or in the Note, or for an
injunction against a violation of any of the terms hereof or thereof, or in aid
of the exercise of any power granted hereby or thereby or by law or otherwise.
12.3. NO WAIVERS OR ELECTION OF REMEDIES, EXPENSES, ETC.
No course of dealing and no delay on your part in exercising any
right, power or remedy shall operate as a waiver thereof or otherwise prejudice
your rights, powers or remedies. No right, power or remedy conferred by this
Agreement or by the Note upon you shall be exclusive of any other right, power
or remedy referred to herein or therein or now or hereafter available at law, in
equity, by statute or otherwise. Without limiting the obligations of the Company
under Section 15, the Company will pay to you on demand such further amount as
shall be sufficient to cover the reasonable costs and expenses of you incurred
in any enforcement or collection under this Section 12, including, without
limitation, reasonable fees, expenses and disbursements of one counsel
representing you (and all other holders of the Note).
13. SUBORDINATION.
13.1. NOTE SUBORDINATED TO SENIOR INDEBTEDNESS.
The Company, for itself and its successors, and you agree that (a)
the payment of the principal of, premium, if any, and interest on the Note and
(b) any payment on account of the acquisition or redemption of the Note by the
Company or any of its Subsidiaries, including, without limitation, any payment
pursuant to Section 8 hereof, is subordinated, to the extent and in the manner
provided in this Section 13, to the prior payment in full of all Senior
Indebtedness of the Company and its Subsidiaries and that these subordination
provisions are for the benefit of the holders of Senior Indebtedness.
This Section 13 shall constitute a continuing offer to all Persons
who, in reliance upon such provisions, become holders of, or continue to hold,
Senior Indebtedness, and such provisions are made for the benefit of the holders
of Senior Indebtedness, and such holders are made obligees hereunder and any one
or more of them may enforce such provisions.
13.2. NO PAYMENT ON THE NOTE IN CERTAIN CIRCUMSTANCES.
(a) No payment shall be made by the Company or any Subsidiary
on account of principal of, premium, if any, or interest on the Note or
on account of the redemption, repurchase, acceleration or other
acquisition of the Note (other than in the form of Common Stock or other
capital stock of the Company), or on account of the Subordinated Guaranty
if there shall have occurred and be continuing a default in the payment
of all or any portion of the obligations on any Senior Indebtedness (a
"Senior Payment Default") until such Senior Payment Default shall have
been cured or waived or shall have ceased to exist.
23
(b) During the continuance of any non-payment default or event
of default with respect to Senior Indebtedness pursuant to which the
maturity thereof may be accelerated, and upon receipt by you of notice
thereof from the holders of more than a majority of the aggregate
principal amount of Senior Indebtedness then outstanding (a "Senior
Non-Payment Default"), then, unless and until (i) such default or event
of default shall have been cured or waived or have ceased to exist, or
(ii) a Default under either Section 11(g) or Section 11(h) hereof
involving the Company or any Subsidiary of the Company shall have
occurred and be continuing, or (iii) such Senior Indebtedness shall have
been paid in full (each of clause (i), (ii) and (iii) being a "Blockage
Termination Event"), no payment or distribution (other than in the form
of Common Stock or other capital stock of the Company) will be made by or
on behalf of the Company or any Subsidiary of the Company on account of
or with respect to the Note during a period (a "Blockage Period")
commencing on the date of receipt of such notice and ending 179 days
thereafter.
(c) Notwithstanding anything herein to the contrary, (i) in no
event will a Blockage Period extend beyond the 179 days from the date the
payment on the Note was due and (ii) there must be 180 days in any 365
day period during which no Blockage Period is in effect. Not more than
one Blockage Period may be commenced with respect to the Note during any
period of 365 consecutive days. No default or event of default that
existed or was continuing on the date of commencement of any Blockage
Period with respect to the Senior Indebtedness initiating such Blockage
Period may be, or be made, the basis for the commencement of any other
Blockage Period by the holders of such Senior Indebtedness, whether or
not within a period of 365 consecutive days, unless such default or event
of default has been cured or waived for a period of not less than 90
consecutive days.
(d) In furtherance of the provisions of Section 13.1 hereof, in
the event that, notwithstanding the foregoing provisions of this Section
13.2, any payment or distribution of assets on account of principal of,
premium, if any, or interest on the Note shall be made by the Company or
any Subsidiary of the Company and received by you at a time when such
payment or distribution was prohibited by the provisions of this Section
13.2, then, unless such payment or distribution is no longer prohibited
by this Section 13.2, such payment or distribution (subject to the
provisions of Sections 13.6 and 13.7 hereof) shall be received and held
in trust by you for the benefit of the holders of Senior Indebtedness,
and shall be paid or delivered by you, to the holders of Senior
Indebtedness remaining unpaid and unprovided for or their representative
or representatives, or to the trustee or trustees under any indenture
pursuant to which any instruments evidencing any of such Senior
Indebtedness may have been issued, ratably according to the aggregate
amounts on account of the Senior Indebtedness held or represented by
each, to the extent necessary to enable payment in full (except as such
payment otherwise shall have been provided for), of all Senior
Indebtedness remaining unpaid, after giving effect to all concurrent
payments and distributions and all provisions therefor, to or for the
holders of such Senior Indebtedness. Your
24
obligations under this Section 13.2(d) shall only be to the extent that
any holder of such Senior Indebtedness, as promptly as practical
following notice from you to the holders of such Senior Indebtedness that
such prohibited payment has been received by you, and requesting from
such holder of Senior Indebtedness a statement of amounts owing such
holder, such holder (or a representative thereof) notifies you of the
amounts then due and owing on such Senior Indebtedness, if any, held by
such holder and only the amounts specified in such notices to you shall
be paid hereunder to the holders of such Senior Indebtedness.
(e) The Company shall give prompt written notice to you of any
default or event of default, and any cure or waiver thereof, or any
acceleration under any Senior Indebtedness or under any agreement
pursuant to which Senior Indebtedness may have been issued.
13.3. NOTE SUBORDINATED TO PRIOR PAYMENT OF ALL SENIOR INDEBTEDNESS ON
ACCELERATION OF PRINCIPAL OF THE NOTE OR ON DISSOLUTION, LIQUIDATION OR
REORGANIZATION.
Upon any acceleration of the principal of the Note or any Senior
Indebtedness or any distribution of assets of the Company or any Subsidiary upon
any dissolution, winding up, total or partial liquidation or reorganization of
the Company or any Subsidiary, whether voluntary or involuntary, in bankruptcy,
insolvency, receivership or similar proceeding or upon assignment for the
benefit of creditors:
(a) the holders of all Senior Indebtedness shall first be
entitled to receive payments in full of the principal of, premium, if
any, and interest on and all other amounts payable in respect thereof,
before you are entitled to receive any payment on account of the
principal of, premium, if any, and interest on the Note;
(b) any payment or distribution of assets of the Company or any
Subsidiary of any kind or character, whether in cash, property or
securities, to which you would be entitled except for the provisions of
this Section 13, shall be paid by the liquidating trustee or agent or
other Person making such a payment or distribution, directly to the
holders of Senior Indebtedness or their representative, ratably according
to the respective amounts of Senior Indebtedness held or represented by
each, to the extent necessary to make payment in full of all such Senior
Indebtedness remaining unpaid after giving effect to all concurrent
payments and distributions to or for the holders of such Senior
Indebtedness; and
(c) in the event that, notwithstanding the foregoing, any
payment or distribution of assets of the Company or any Subsidiary of any
kind or character, whether in cash, property or securities, shall be
received by you on account of principal of, premium, if any, or interest
on the Note, as the case may be, before all Senior Indebtedness is paid
in full, such payment or distribution (subject to the provisions of
Sections 13.6 and 13.7 hereof) shall be received and held in trust by you
for the benefit of the holders of such Senior Indebtedness, or their
respective representative, ratably according to the respective amounts of
Senior Indebtedness
25
held or represented by each, to the extent necessary to make payment in
full of all such Senior Indebtedness remaining unpaid after giving effect
to all concurrent payments and distributions to or for the holders of
such Senior Indebtedness, but only to the extent that as to any holder of
such Senior Indebtedness, as promptly as practical following notice from
you to the holders of such Senior Indebtedness that such prohibited
payment has been received by you and requesting from such holder of
Senior Indebtedness a statement of amounts owing such holder, such holder
notifies you of the amounts then due and owing on such Senior
Indebtedness, if any, held by such holder and only the amounts specified
in such notices to you shall be paid hereunder to the holders of such
Senior Indebtedness.
The Company shall give prompt written notice to you of any
dissolution, winding up, liquidation or reorganization of the Company or
assignment for the benefit of creditors by the Company.
13.4. NOTEHOLDERS TO BE SUBROGATED TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS.
Subject to the payment in full of all Senior Indebtedness, you
shall be subrogated to the rights of the holders of such Senior Indebtedness to
receive payments or distributions of assets of the Company applicable to the
Senior Indebtedness until all amounts owing on the Note shall be paid in full,
and for the purpose of such subrogation no such payments or distributions to you
of such Senior Indebtedness by or on behalf of the Company, or by or on behalf
of you by virtue of this Section 13, which otherwise would have been made to you
shall, as between the Company and you, be deemed to be payment by the Company,
to or on account of such Senior Indebtedness, it being understood that the
provisions of this Section 13 are and are intended solely for the purpose of
defining the relative rights of you, on the one hand, and the holders of such
Senior Indebtedness, on the other hand.
If any payment or distribution to which you would otherwise
have been entitled but for the provisions of this Section 13 shall have been
applied, pursuant to the provisions of this Section 13 to the payment of amounts
payable under Senior Indebtedness, then you shall be entitled to receive from
the holders of such Senior Indebtedness any payments or distributions received
by such holders of Senior Indebtedness in excess of the amount sufficient to pay
all amounts payable under or in respect of such Senior Indebtedness in full.
13.5. OBLIGATIONS OF THE COMPANY UNCONDITIONAL.
Nothing contained in this Section 13 or elsewhere in this
Agreement or in the Note is intended to or shall impair, as between the Company
and you, the obligation of the Company, which is absolute and unconditional, to
pay to you the principal of, premium, if any, and interest on the Note as and
when the same shall become due and payable in accordance with its terms, or is
intended to or shall affect the relative rights of you and creditors of the
Company other than the holders of the Senior Indebtedness, nor shall anything
herein or in the Note prevent you from exercising all remedies otherwise
permitted by applicable law upon default under this Agreement, subject to the
rights, if
26
any, under this Section 13, of the holders of Senior Indebtedness in respect of
cash, property or securities of the Company received upon the exercise of any
such remedy. Notwithstanding anything to the contrary in this Section 13 in this
Agreement or in the Note upon any distribution of assets of the Company referred
to in this Section 13, you shall be entitled to rely upon any order or decree
made by any court of competent jurisdiction in which such dissolution, winding
up, liquidation or reorganization proceedings are pending, or a certificate of
the liquidating trustee or agent or other Person making any distribution to you
for the purpose of ascertaining the Persons entitled to participate in such
distribution, the holders of the Senior Indebtedness and other Indebtedness of
the Company, the amount thereof or payable thereon, the amount or amounts paid
or distributed thereon and all other facts pertinent thereto or to this Section
13.
13.6. SUBORDINATION RIGHTS NOT IMPAIRED BY ACTS OR OMISSIONS OF THE COMPANY OR
HOLDERS OF SENIOR INDEBTEDNESS.
No right of any present or future holders of any Senior
Indebtedness to enforce subordination provisions contained in this Section 13
shall at any time in any way be prejudiced or impaired by any act or failure to
act on the part of the Company or any Subsidiary or by any act or failure to
act, in good faith, by any such holder, or by any noncompliance by the Company
with the terms of this Agreement, or by any noncompliance by any Subsidiary with
the terms of the Subordinated Guaranty regardless of any knowledge thereof with
which any such holder may have or be otherwise charged. The holders of Senior
Indebtedness may extend, renew, modify or amend the terms of the Senior
Indebtedness or any security therefor and release, sell or exchange such
security and otherwise deal freely with the Company and the Subsidiaries all
without affecting the liabilities and obligations of the parties to this
Agreement, the subordination provisions of this Section 13 or the rights of
holders of Senior Indebtedness to enforce such provisions.
13.7. SECTION 13 NOT TO PREVENT EVENTS OF DEFAULT.
The failure to make a payment on account of principal of, premium,
if any, or interest on the Note by reason of any provision of this Section 13
shall not be construed as preventing the occurrence of a Default or an Event of
Default under Section 12 hereof or in any way prevent you from exercising any
right hereunder other than the right to receive payment on the Note.
14. CONVERSION OF NOTES.
14.1. RIGHT OF CONVERSION; CONVERSION PRICE.
You shall have the right, at your option, at any time (except
that, in the event all or a portion of the Note shall be called for redemption,
such right shall terminate at the close of business on the last Business Day
prior to the date fixed for such redemption unless the Company shall default in
payment due upon redemption thereof), to convert, subject to the terms and
provisions of this Section 14, the principal of the Note
27
or any portion thereof which is at least $60,000 principal amount and an
integral multiple of 12,000 into shares of Common Stock, at the Conversion
Price.
14.2. ISSUANCE OF SHARES ON CONVERSION.
As promptly as practicable after the surrender, as herein
provided, of the Note or portion of the Note for conversion, the Company shall
deliver or cause to be delivered at its said office or agency, to you,
certificates representing the number of fully paid and nonassessable shares of
Common Stock into which such Note or portion of the Note may be converted in
accordance with the provisions of this Section 14. Such conversion shall be
deemed to have been made as of the close of business on the date that such Note
or portion of the Note shall have been surrendered for conversion with a written
notice of conversion duly executed, so that your rights under the Note shall
cease at such time and, subject to the following provisions of this paragraph,
you shall be treated for all purposes as having become the record holder of such
shares of Common Stock at such time and such conversion shall be at the
Conversion Price in effect at such time; PROVIDED, HOWEVER, that no such
surrender on any date when the stock transfer books of the Company shall be
closed shall be effective to cause your rights under the Note to cease or to
constitute you as the record holder of such shares of Common Stock on such date,
but such surrender shall be effective to cause your rights under the Note to
cease and to constitute you as the record holder thereof for all purposes at the
close of business on the next succeeding day on which such stock transfer books
are open; such conversion shall be at the Conversion Price in effect on the date
that the Note or portion of the Note being converted shall have been surrendered
for conversion, as if the stock transfer books of the Company had not been
closed.
Upon conversion of the Note in part only, the Company shall
execute at the expense of the Company, a new Note in principal amount equal to
the unconverted portion of such Note.
14.3. NO ADJUSTMENT FOR INTEREST OR DIVIDENDS.
No payment or adjustment in respect of interest on the Note or
dividends on the shares of Common Stock shall be made upon the conversion of the
Note; PROVIDED, HOWEVER, that if all or any portion of the Note (other than a
portion thereof called for redemption) shall be converted subsequent to any
Record Date and on or prior to the next succeeding Interest Payment Date, the
interest falling due on such Interest Payment Date shall be payable on such
Interest Payment Date notwithstanding such conversion, and such interest
(whether or not punctually paid or duly provided for) shall be paid at the close
of business on such Record Date and the Note or portion thereof surrendered for
conversion during the period from the close of business on any Record Date to
the opening of business on the corresponding Interest Payment Date must be
accompanied by payment of an amount equal to the interest payable on such
Interest Payment Date.
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14.4. ADJUSTMENT OF CONVERSION PRICE.
(a) In case the Company shall pay or make a dividend or other
distribution on any class of capital stock of the Company in shares of
Common Stock, the Conversion Price in effect at the opening of business
on the day following the date fixed for the determination of stockholders
entitled to receive such dividend or other distribution shall be reduced
by multiplying such Conversion Price by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding at the close of
business on the date fixed for such determination and the denominator
shall be the sum of such number of shares and the total number of shares
constituting such dividend or other distribution, such reduction to
become effective immediately after the opening of business on the day
following the date fixed for such determination. For the purposes of this
paragraph (a), the number of shares of Common Stock at any time
outstanding shall not include shares held in the treasury of the Company.
(b) In case the Company shall issue stock, rights, options or
warrants to all holders of its shares of Common Stock entitling them to
subscribe for or purchase shares of Common Stock at a price per share
less than the current market price per share (determined as provided in
paragraph (g) of this Section 14.4) of Common Stock on the date fixed for
the determination of stockholders entitled to receive such stock, rights,
options or warrants, the Conversion Price in effect at the opening of
business on the day following the date fixed for such determination shall
be reduced by multiplying such Conversion Price by a fraction of which
the numerator shall be the number of shares of Common Stock outstanding
at the close of business on the date fixed for such determination plus
the number of shares of Common Stock which the aggregate of the
subscription price of the total number of shares of Common Stock so
offered for subscription or purchase would purchase at such current
market price and the denominator shall be the number of shares of Common
Stock outstanding at the close of business on the date fixed for such
determination plus the number of shares of Common Stock so offered for
subscription or purchase, such reduction to become effective immediately
after the opening of business on the day following the date fixed for
such determination. In the event that all of the shares of Common Stock
subject to such rights, options or warrants have not been issued when
such rights, options or warrants expire, then the Conversion Price shall
promptly be readjusted to the Conversion Price which would then be in
effect had the adjustment upon the issuance of such rights, options or
warrants been made on the basis of the actual number of shares of Common
Stock issued upon the exercise of such rights or warrants. For the
purposes of this paragraph (b), the number of shares of Common Stock at
any time outstanding shall not include shares held in the treasury of the
Company but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of shares of Common Stock. The
antidilution provisions of this Section 14 shall not apply to grants of
options under the Company's Incentive Stock Plans.
29
(c) In case the outstanding shares of Common Stock shall be
subdivided into a greater number of shares, the Conversion Price in
effect at the opening of business on the day following the day upon which
such subdivision becomes effective shall be proportionately reduced, and,
conversely, in case outstanding shares of Common Stock shall be combined
into a smaller number of shares, the Conversion Price in effect at the
opening of business on the day following the day upon which such
combination becomes effective shall be proportionately increased, such
reduction or increase, as the case may be, to become effective
immediately after the opening of business on the day following the day
upon which such subdivision or combination becomes effective. (d) In case
the Company shall, by dividend or otherwise, distribute to all or
substantially all holders of shares of Common Stock evidences of
indebtedness or assets of the Company (including cash or securities or
other property, but excluding any (i) rights, options or warrants
referred to in paragraph (b) of this Section 14.4 and (ii) any dividend
or distribution referred to in paragraph (a) of this Section 14.4), the
Conversion Price shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately
prior to the close of business on the day fixed for the determination of
stockholders entitled to receive such distribution by a fraction of which
the numerator shall be the current market price per share (determined as
provided in paragraph (g) of this Section 14.4) of Common Stock on the
date fixed for such determination less the amount or then fair market
value as determined by the Board of Directors (whose determination shall
be conclusive and described in a Board Resolution filed with the Trustee)
of the cash or portion of the assets or evidences of indebtedness so
distributed allocable to one share of Common Stock and the denominator
shall be such current market price per share of Common Stock, such
adjustment to become effective immediately prior to the opening of
business on the day following the date fixed for the determination of
stockholders entitled to receive such distribution.
(e) In case the Company shall issue or sell any shares of
Common Stock or securities convertible into or exercisable for Common
Stock, in any case for a consideration per share of Common Stock less
than the current market price at the time of such issuance or sale, the
Conversion Price shall be reduced by multiplying the Conversion Price in
effect immediately prior to such issuance or sale by a fraction, (A) the
numerator of which shall be (i) the number of shares of Common Stock
outstanding on a fully diluted basis immediately prior to the transaction
plus (ii) the number of additional shares of Common Stock on a fully
diluted basis that would have been issued or sold in the transaction had
the issuance or sale occurred at the current market price and (B) the
denominator of which shall be the number of shares of Common Stock
outstanding on a fully diluted basis immediately after such transaction.
For purposes of this subparagraph (e) of this Section 14.4, the issuance
or sale shall be deemed to occur on the earlier of (x) the date on which
the Company shall enter into a binding contract for the issuance or sale
of such shares of Common Stock or convertible securities and (y) the date
of the actual issuance or sale of such
30
securities. The issuance of Common Stock on conversion or exercise of
convertible securities outstanding prior to the date hereof shall not
give rise to any adjustment of the Conversion Price under this
subparagraph (e) of this Section 14.4.
(f) In case the shares of Common Stock shall be changed into
the same or a different number of shares of any class or classes of
stock, whether by capital reorganization, reclassification, or otherwise
(other than a subdivision or combination of shares or a stock dividend
described in paragraph (a) or paragraph (c) of this Section 14.4, or a
consolidation, merger or sale of assets described in Section 14.10
hereof), then and in each such event you shall have the right thereafter
to convert the Note into the kind and amount of shares of stock and other
securities and property receivable upon such reorganization,
reclassification or other change, by holders of the number of shares of
Common Stock into which the Note might have been converted immediately
prior to such reorganization, reclassification or change.
(g) For the purpose of any computation under paragraphs (b),
(d) and (e) of this Section 14.4, the current market price per share of
Common Stock on any date shall be deemed to be the average of the Closing
Prices for the 15 consecutive Trading Days selected by the Company
commencing not more than 30 and not less than 20 Trading Days before the
date in question.
(h) No adjustment in the Conversion Price shall be required
unless such adjustment (plus any adjustments not previously made by
reason of this paragraph (h)) would require an increase or decrease of at
least 1% in such price; PROVIDED, HOWEVER, that any adjustments which by
reason of this paragraph (h) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All
calculations under this paragraph (h) shall be made to the nearest cent.
(i) The Company may, but shall not be required to, make such
reductions in the Conversion Price, in addition to those required by
paragraphs (a), (b), (c), (d) and (e) of this Section 14.4, as the
Company's Board of Directors considers to be advisable in order to avoid
or diminish any income tax to any holders of shares of Common Stock
resulting from any dividend or distribution of stock or issuance of
rights or warrants to purchase or subscribe for stock or from any event
treated as such from income tax purposes or for any other reasons. The
Company's Board of Directors shall have the power to resolve any
ambiguity or correct any error in the adjustments made pursuant to this
Section 14.4 and its actions in so doing shall be final and conclusive.
(j) No adjustment in the Conversion Price need be made for
rights to purchase or the sale of the Common Stock pursuant to a Company
plan providing for reinvestment of dividends or interest; PROVIDED,
HOWEVER, that any discount under such plan may not exceed 5% of the
current market price of the Common Stock and such plan is registered
under the Securities Act.
31
14.5. NOTICE OF ADJUSTMENT OF CONVERSION PRICE.
Whenever the Conversion Price is adjusted as herein provided the
Company shall compute the adjusted Conversion Price in accordance with Section
14.4 and shall prepare an Officer's Certificate setting forth the adjusted
Conversion Price and showing in reasonable detail the facts upon which such
adjustment is based and the computation thereof.
14.6. NOTICE OF CERTAIN CORPORATION ACTION.
(a) In case:
(i) the Company shall authorize the granting to all
holders of its shares of Common Stock of rights or warrants
entitling them to subscribe for or purchase any shares of capital
stock of any class or of any other rights; or
(ii) of any reclassification of the shares of Common
Stock, or of any consolidation or merger to which the Company is a
party and for which approval of any stockholders of the Company is
required, or of the sale or transfer of all or substantially all
of the assets of the Company; or
(iii) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company; or
(iv) the Company declares or pays any dividend or
distribution to holders of shares of Common Stock; or
(v) the Company shall take any other corporate action
that could give rise to an adjustment in the Conversion Price in
accordance with Section 14.4 (so long as the disclosure of such
action does not require disclosure of material nonpublic
information);
then the Company shall deliver to you at least 10 days (or 20 days in any
case specified in clause (iii) above) prior to the applicable record date
hereinafter specified, a notice stating (1) the date on which a record is
to be taken for the purpose of such dividend, distribution, rights or
warrants, or, if a record is not to be taken, the date as of which the
holders of shares of Common Stock of record to be entitled to such
dividend, distribution, rights or warrants is to be determined, or (2)
the date on which such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of shares
of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger sale, transfer, dissolution,
liquidation or winding up.
In addition to the foregoing notices, the Company will give notice as
soon as practicable that any of the rights of the holders under Section
14.4 has been
32
invoked for any reason not specified in Sections 14.6(a)(i), (ii), (iii)
or (iv), which notice will describe the event that triggered such rights.
Such notice shall also state whether such transaction will result in any
adjustment in the Conversion Price and, if so, shall state what the
adjusted Conversion Price will be and when it will become effective.
Neither the failure to give the notice required by this Section 14.6, nor
any defect therein shall affect the sufficiency of the notice or the
legality or validity of any such dividend, distribution, right, warrant,
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution or winding-up. Notwithstanding the foregoing, the Company has
no obligation to disclose to any holders any material nonpublic
information concerning the Company or any of its Subsidiaries.
(b) In case the Company or any Affiliate of the Company shall
propose to engage in a "Rule 13e-3 Transaction" (as defined in Rule 13e-3
under the Securities Exchange Act of 1934, as amended) the Company shall,
no later than the date on which any information with respect to such Rule
13e-3 Transaction is first required to be given to you pursuant to such
Rule 13e-3, cause to be mailed to you a copy of all information required
to be given to you pursuant to such Rule 13e-3. The information required
to be given under this paragraph shall be in addition to and not in lieu
of any other information required to be given by the Company pursuant to
this Section 14.6 or any other provision of this Agreement.
14.7. TAXES ON CONVERSIONS.
The Company will pay any and all stamp or similar taxes that may
be payable in respect of the issuance or delivery of shares of Common Stock on
conversion of all or any portion of the Note pursuant hereto. The Company shall
not, however, be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of shares of Common Stock in a
name other than you to be converted.
14.8. FRACTIONAL SHARES.
No fractional shares or scrip representing fractional shares shall
be issued upon the conversion of the Note. If any such conversion would
otherwise require the issuance of a fractional share an amount equal to such
fraction multiplied by the current market price per share of Common Stock
(determined as provided in paragraph (g) of Section 14.4 hereof) on the day of
conversion shall be paid in cash by the Company.
14.9. PROVISIONS IN CASE OF CONSOLIDATION, MERGER OR SALE OF ASSETS.
In case of any consolidation of the Company with, or merger of the
Company into, any other corporation or trust, or in case of any merger of
another corporation or trust into the Company (other than a merger which does
not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock of the Company), or in case of any sale,
transfer or other disposition of all or
33
substantially all of the assets of the Company, the corporation or trust formed
by such consolidation or resulting from such merger or which acquires such
assets, as the case may be, shall agree that you shall have the right
thereafter, during the period the Note shall be convertible as specified in
Section 14.1 hereof to convert such Note only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale or transfer by a holder of the number of shares of Common Stock of the
Company into which the Note might have been converted immediately prior to such
consolidation, merger, sale or transfer, assuming such holder of Common Stock
(i) is not a Person with which the Company consolidated or into which the
Company merged or which merged into the Company or to which such sale or
transfer was made, as the case may be (a "Constituent Person"), or an Affiliate
of a Constituent Person and (ii) failed to exercise his rights of election, if
any, as to the kind or amount of securities, cash and other property receivable
upon such consolidation, merger, sale or transfer (provided that if the kind or
amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer is not the same for each share of Common
Stock held immediately prior to such consolidation, merger, sale or transfer by
other than a Constituent Person or an Affiliate thereof and in respect of which
such rights of election shall not have been exercised ("non-electing share"),
then for the purpose of this Section 14.9 the kind and amount of securities,
cash and other property receivable upon such consolidation, merger, sale or
transfer by each non-electing share shall be deemed to be the kind and amount so
receivable per share by a plurality of non-electing shares).
14.10. COVENANT TO RESERVE SHARES.
The Company covenants that it will at all times reserve and keep
available, free from preemptive rights, out of its authorized shares of Common
Stock, solely for the purpose of issuance upon conversion of the Note as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of the Note. The Company covenants that all shares of Common
Stock which shall be so issuable shall be, when issued in accordance with the
Note and this Agreement, duly and validly issued and fully paid and
nonassessable.
15. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.
All representations and warranties contained herein shall survive
the execution and delivery of this Agreement and the Note, the purchase by you
of the Note or interest therein and the payment of the Note. Subject to the
preceding sentence, this Agreement and the Note embodies the entire agreement
and understanding between you and the Company and supersede all prior agreements
and understandings relating to the subject matter hereof.
34
16. AMENDMENT AND WAIVER.
16.1. REQUIREMENTS.
Subject to Section 20.7(d), this Agreement and the Note may be
amended, and the observance of any term hereof or of the Note may be waived
(either retroactively or prospectively), with (and only with) the written
consent of the Company and the Majority Lenders.
16.2. BINDING EFFECT, ETC.
No course of dealing between the Company and you nor any delay in
exercising any rights hereunder or under the Note shall operate as a waiver of
any of your rights. As used herein, the term "THIS AGREEMENT" and references
thereto shall mean this Agreement as it may from time to time be amended or
supplemented.
17. NOTICES.
All notices and communications provided for hereunder shall be in
writing and sent (a) by telecopy if the sender on the same day sends a
confirming copy of such notice by a recognized overnight delivery service
(charges prepaid), or (b) by registered or certified mail with return receipt
requested (postage prepaid), or (c) by a recognized overnight delivery service
(with charges prepaid). Any such notice must be sent:
(i) if to you or your nominee, to you or it at c/o
Angelo, Gordon & Co. to the attention of David Roberts, or at such
other address as you or it shall have specified to the Company in
writing,
(ii) if to the company, to the Company at its address set
forth at the beginning hereof to the attention of the Chief
Financial Officer, or at such other address as the Company shall
have specified to you in writing.
Notices under this Section 17 will be deemed given only when actually received.
18. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including,
without limitation, (a) consents, waivers and modifications that may hereafter
be executed, (b) documents received by you at the Closing (except the Note), and
(c) financial statements, certificates and other information previously or
hereafter furnished to you, may be reproduced by you by any photographic,
photostatic, microfilm, microcard, miniature photographic or other similar
process and you may destroy any original document so reproduced. The Company
agrees and stipulates that, to the extent permitted by applicable law, any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding (whether or not the original is in
existence and whether or not such reproduction was made by you in the regular
course of business) and any enlargement, facsimile or further reproduction of
such reproduction shall likewise be admissible in evidence. This Section 18
shall not prohibit the Company
35
or you from contesting any such reproduction to the same extent that it could
contest the original, or from introducing evidence to demonstrate the inaccuracy
of any such reproduction.
19. CONFIDENTIAL INFORMATION.
For the purposes of this Section 19, "Confidential Information"
means material, nonpublic information delivered to you by or on behalf of the
Company or any Subsidiary in connection with the transactions contemplated by or
otherwise pursuant to this Agreement, PROVIDED that such term does not include
information that (a) was publicly known or otherwise known to you prior to the
time of such disclosure, (b) subsequently becomes publicly known through no act
or omission by you or any person acting on your behalf, (c) otherwise becomes
known to you other than through disclosure by the Company or any Subsidiary or
(d) constitutes financial statements delivered to you under Section 7.1 that are
otherwise publicly available. You will maintain the confidentiality of such
Confidential Information in accordance with procedures adopted by you in good
faith to protect confidential information of third parties delivered to you,
provided that you may deliver or disclose Confidential Information to (i) your
directors, officers, managers, employees, agents, attorneys and affiliates of
each of them (to the extent such disclosure reasonably relates to the
administration of the investment represented by your Note), (ii) your officers,
directors, employees, managers, financial advisors and other professional
advisors who agree to hold confidential the Confidential Information
substantially in accordance with the terms of this Section 19, (iii) any federal
or state regulatory authority having jurisdiction over you, or (iv) any other
Person to which such delivery or disclosure is determined by your counsel to be
necessary (w) to effect compliance with any law, rule, regulation or order
applicable to you, (x) in response to any subpoena or other legal process, (y)
in connection with any litigation to which you are a party or (z) if an Event of
Default has occurred and is continuing, but solely to the extent your counsel
reasonably determines to be necessary or appropriate in the enforcement or for
the protection of the rights and remedies under your Note and this Agreement. If
you or any of your representatives or affiliates are requested or required (by
oral questions, interrogatories, requests for information or documents,
subpoena, civil investigative demand, any informal or formal investigation by
any government or governmental agency or authority or other process) to disclose
any Confidential Information, you will provide the Company with prompt written
notice of any such request or requirement (including the terms of, and
circumstances surrounding, such request) so that the Company or any of its
Subsidiaries may seek an appropriate protective order or other appropriate
remedy and/or waive compliance with the provisions of this Agreement, the party
subject to such request will disclose only that portion of the Confidential
Information which it is advised by counsel is legally required and will exercise
reasonable efforts to obtain reliable assurance that confidential treatment will
be accorded the Confidential Information. The obligations provided in this
Section 19 shall survive termination of this Agreement and repayment or
conversion of the Note.
36
20. MISCELLANEOUS.
20.1. SUCCESSORS AND ASSIGNS.
All covenants and other agreements contained in this Agreement by
or on behalf of any of the parties hereto bind and inure to the benefit of their
respective successors and permitted assigns whether so expressed or not.
20.2. PAYMENTS DUE ON NON-BUSINESS DAYS.
Anything in this Agreement or the Note to the contrary
notwithstanding, any payment of principal of or interest on the Note that is due
on a date other than a Business Day shall be made on the next Succeeding
Business Day without including the additional days elapsed in the computation of
the interest payable on such next succeeding Business Day.
20.3. SEVERABILITY.
Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall (to the full extent permitted by law) not invalidate or
render unenforceable such provision in any other jurisdiction.
20.4. CONSTRUCTION.
Each covenant contained herein shall be construed (absent express
provision to the contrary) as being independent of each other covenant contained
herein, so that compliance with any one covenant shall not (absent such an
express contrary provision) be deemed to excuse compliance with any other
covenant. Where any provision herein refers to action to be taken by any Person,
or which such Person is prohibited from taking, such provision shall be
applicable whether such action is taken directly or indirectly by such Person.
20.5. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each
of which shall be an original but all of which together shall constitute one
instrument. Each counterpart may consist of a number of copies hereof, each
signed by less than all, but together signed by all, of the parties hereto.
20.6. GOVERNING LAW.
This Agreement shall be construed and enforced in accordance with,
and the rights of the parties shall be governed by, the law of the State of New
York excluding choice-of-law principles of the law of such State that would
require the application of the laws of a jurisdiction other than such State.
37
20.7. ASSIGNMENTS AND RESTRICTIONS ON TRANSFERS.
(a) The Company may not assign any of its rights or obligations
hereunder or under the Note without your prior consent; PROVIDED,
HOWEVER, that the Company may assign any of its rights or obligations
hereunder pursuant to a merger or other transaction permitted under
Section 10.2 hereof.
(b) Except as otherwise permitted by this Section 20.7(b) the
Note issued under this Agreement, including each Note issued upon the
transfer or exchange of any Note, shall be stamped or otherwise imprinted
with a legend in the following form:
"This Note has not been registered under the Securities Act of
1933, as amended (the "Act") or any other applicable securities
law and may not be transferred in the absence of such registration
or an exemption therefrom under the Act and compliance with any
other applicable securities laws. This Note may be transferred
only in compliance with the conditions specified in the Note
Purchase Agreement referred to in this Note, a complete and
correct copy of the form of which is available for inspection at
the principal office of Riddell Sports Inc., c/o Varsity Spirit
Corporation, 2525 Horizon Lake, Memphis, Tennessee 38133.
(c) So long as the following provisions of this Section 20.7(c)
are complied with, you may assign to any transferee any of your interest
in the Notes, PROVIDED, that any such partial assignment shall be in an
amount at least equal to $60,000 and an integral multiple of 12,000.
(i) In connection with any transfer of any Note which is
not registered under an effective registration statement under the
Securities Act, the holder thereof shall provide the Company with
confirmation in a manner reasonably satisfactory to the Company
that such transfer does not require registration under the
Securities Act or the qualification of an indenture under the
Trust Indenture Act of 1939, as amended. Such holder shall provide
the Company if reasonably requested with an opinion of counsel
reasonably satisfactory to the Company and experienced in
rendering opinions on matters of United States Federal securities
law to the effect of the foregoing and such other written
information and representation as the Company may reasonably
request, and each transferee shall have agreed in writing to be
bound by all the restrictions on transfer of the Notes contained
in this Section 20.7(c).
(ii) No Note shall be transferred unless, prior to such
transfer, the proposed transferee shall confirm in writing to the
Company the accuracy as to such proposed transferee of at least
one or more of the representations set out in Sections
20.7(c)(iii) or 20.7(c)(iv) and, if such representation requires
such proposed transferee to identify to the
38
Company the name of one or more "employee benefit plans" (as such
term is defined in subsection 20.7(f), the Company shall be
reasonably satisfied that such transfer does not involve a
transaction which is subject to the prohibitions of Section 406 of
ERISA or in connection with which a tax would be imposed pursuant
to Section 4975 of the Code, and the Company shall confirm such
satisfaction in writing to such proposed transferee.
(iii) one or more of the following representations will
satisfy Section 20.7(c)(ii):
(A) "You represent that (1) you are purchasing
the Note for your own account or for one or more separate
accounts maintained by you or for the account of one or
more affiliated institutional investors on whose behalf you
have authority to make this representation for investment
and not with a view to the distribution thereof or with any
present intention of distributing or selling any portion or
the Note, PROVIDED that the disposition of your -------- or
their property shall at all times be within your or their
control and (2) you (and each Person on whose behalf you
are acting hereunder) are an institutional "accredited
investor" within the meaning of Rule 501(a) under the
Securities Act. You understand that the Note has not been
registered under the Securities Act and may be resold only
if registered pursuant to the provisions thereof or
pursuant to an exemption from registration thereunder and
in accordance with any other applicable securities laws and
the provisions of Section 20.7(c) hereof;
(B) "You represent that one or more of the
following statements is individually or collectively, as
the case may be, an accurate representation as to the
source of all the funds to be used by you to pay the
purchase price or portion of the Note purchased by you
hereunder:
(1) if you are an insurance company, all or
a part of such funds constitute assets allocated to
a general asset account (within the meaning of the
Department of Labor ("DOL") regulations under ERISA
and the DOL Interpretive Bulletin 75-2, 29 C.F.R.
2509 75-2 (Nov. 13, 1986)), maintained by you, which
is not a separate account (within the meaning of
ERISA and the regulations thereunder); or
(2) if you are an insurance company, to the
extent that any part of such funds constitutes
assets allocated to any separate account maintained
by you, (x) such separate account is a "pooled
separate account" within
39
the meaning of Prohibited Transaction Class
Exemption ("PTE") 90-1, in which case you have
disclosed to the Issuer in writing the names of each
employee benefit plan whose assets in such separate
account exceed 10% of the total assets of such
account as of the date of such purchase (and for the
purposes of this subsection (b) , all employee
benefit by the same employer or employee
organization are deemed to be a single plan), and
every relevant requirement of PTE 90-1 specifically
applicable to you which is required to be satisfied
as of the date of such purchase will be satisfied in
all material respects as of such date of purchase or
(y) such separate account contains only the assets
of a specific employee benefit plan, complete and
accurate information as to the identity of which you
have delivered to the Issuer in writing; or
(3) if you are a "qualified professional
asset manager" or "QPAM" (within the meaning of Part
V of Prohibited Transaction Class Exemption 84-14
(the "QPAM Exemption")) of such funds which
constitute assets of an "investment fund" (within
the meaning of Part V of the QPAM exemption) managed
by you, every relevant requirement of the QPAM
Exemption specifically applicable to you which is
required to be satisfied as of the date of such
purchase will be satisfied in all material respects
as of the date of such purchase; or
(4) if you are other than an insurance
company or a QPAM, all or a portion of such funds
consists of funds which do not constitute "plan
assets" of any employee benefit plan and the
remaining portion, if any, of such funds consists of
funds which may be deemed to constitute "plan
assets" of one or more specific employee benefit
plans, complete and accurate information as to the
identity of each of which you have delivered to the
Issuer in writing.
As used in this section 20.7(c)(iii), the term "employee benefit
plan" shall mean any employee benefit plan subject to Section 406
of ERISA and any employee benefit plan or individual retirement
account subject to Section 4975 of the Code, the term "separate
account" shall have the meaning assigned to it in section 3 of
ERISA and the term "plan assets" shall have the meaning assigned
to it in section 2510.3-101 of the Department of Labor regulations
under ERISA.
(iv) In the event of an assignment of any portion of the
Note in accordance with the above, you shall identify the assignee
and the amount
40
of Note assigned and the assignee shall execute an appropriately
completed counterpart of this Agreement (as then in effect), and
the assignee shall be bound to this Agreement as if an original
party hereto and shall have, to the extent of such assignment
(unless otherwise provided in such assignment), the obligations,
rights and benefits of a lender hereunder holding the Note (or
portions thereof) assigned to it (in addition to the portion, if
any, theretofore held by such assignee). In connection with the
assignment by you of all or any portion of your interest in the
Note to another Person, upon request of you or such Person, the
Company will execute and deliver a Note or Notes in substantially
the form of Exhibit A hereto, as appropriate (as such form of Note
may have been amended, endorsed, modified, extended, exchanged, or
renewed), dated the day after the last day through which interest
shall have been paid on the Note, payable to the order of such
Person in an aggregate principal amount equal to the portion of
the Note so assigned and otherwise duly completed, and the
assigning lender shall make a notation on related Note held by it
as to the principal amount of the Note so assigned. In the event
of any assignment pursuant to this Section 20.7 (c), as used in
this Agreement, the term "Note" shall include any Note delivered
to such assignee and the term "you" shall include such assignee
(except that provisions specifying the principal amount of the
Note owned or acquired by such assignee or any other holder shall
be deemed to refer to the principal amount of the Note so acquired
by such holder).
(d) Notices, written instruments, waivers or consents pursuant
to Section 11 (notice of Event of Default) ; Section 12 (notice of
acceleration); Section 16.1 (amendments/waivers) and 20.7 (assignment)
are of no force and effect or validity unless evidenced by an instrument
in writing signed by the Majority Lenders; PROVIDED, HOWEVER, that any
modification or waiver changing the date fixed for payment of principal
or interest on the Note, or reducing the amount of payment of principal
of, interest on, redemption price, Repurchase Price or Conversion Price
of the Note, or amending the other provisions of Section 14 in a manner
adverse to the holders or amending this Section 20.7(d) or the definition
of "Majority Lenders" or releasing the Subordinated Guaranty in full
shall not be effective against any holder affected thereby unless
contained in an instrument in writing signed by such holders.
20.8. LOST NOTE.
Upon receipt by the Company of evidence satisfactory to it of the
loss, theft, destruction or mutilation of the Note, and (in case of loss, theft
or destruction) of indemnity satisfactory to it (any holder's undertaking to be
satisfactory indemnity in case of loss, theft or destruction of any Note owned
by such holder), and upon reimbursement to the Company of all reasonable
expenses incidental thereto, and upon surrender and cancellation of such Note,
if mutilated, the Company will pay any unpaid principal and interest then or
theretofore due and payable on the Note so lost, stolen, destroyed or
41
mutilated, and will deliver in lieu thereof a new Note in the remaining unpaid
principal amount thereof and carrying the same rights to interest (unpaid and to
accrue).
20.9. REGISTRATION, TRANSFER AND EXCHANGE OF THE NOTE.
The Company will keep at its principal office a register in which
it will provide for the registration and registration of transfer of the Note,
at its own expense (excluding transfer taxes). If the Note is surrendered at
said office or at the place of payment named in the Note for registration of
transfer or exchange (accompanied in the case of registration of transfer of a
registered Note by written instrument of transfer in form satisfactory to the
Company duly executed by or on behalf of the holder) the Company, at its
expense, will deliver in exchange one or more new Notes in any denominations
(multiples of $1,000) as requested by the holder, for the aggregate unpaid
principal amount. Each such new Note shall be payable to such person as such
holder may request. Any Note issued in a transfer or exchange shall carry the
same rights to interest (unpaid and to accrue) carried by the Note or Notes so
transferred or exchanged so that there will not be any loss or gain of interest
on the Note or Notes surrendered.
20.10. EQUITABLE RELIEF.
It is understood and agreed that the Company and its Subsidiaries
will be irreparably injured by a breach of Section 19 of this Agreement by you
or your respective representatives or affiliates, that money damages would not
be a sufficient remedy for any such breach and that the Company and its
Subsidiaries shall be entitled to equitable relief, including injunctive relief
and specific performance, as a remedy for any such breach (which shall not be
the exclusive remedy for breach of this agreement). You agree to waive, and to
instruct your representatives to waive, any requirement for the securing or
posting of any bond in connection with such remedy.
20.11. EXPENSES.
The Company shall pay Angelo, Gordon & Co. on demand and upon
delivery of invoices or other evidence of such expenses, as reimbursement for
reasonable legal fees and expenses of it and its counsel, Akin, Gump, Strauss,
Hauer & Feld LLP, incurred in negotiating this Agreement and the Note. The
Company shall also pay the reasonable costs and expenses of one counsel
representing you and all other holders of the Note in connection with any
amendment of or waiver to the terms of this Agreement; PROVIDED, that the
Company is delivered invoices and other evidences of such expenses.
42
If you are in agreement with the foregoing, please sign the
accompanying counterpart of this Agreement and return it to the Company,
whereupon the foregoing shall become a binding agreement between you and the
Company
Very truly yours,
Riddell Sports Inc.
By: /s/ John Nichols
------------------------------
Name: John Nichols
Title: Chief Financial Officer
The foregoing is hereby agreed to as of the date thereof.
Silver Oak Capital, L.L.C.
By: /s/ Michael L. Gordon
--------------------------------------------
Name: Michael L. Gordon
Title: Authorized Signatory
43
SCHEDULE A
DEFINED TERMS
As used herein, the following terms have the respective meanings
set forth below or set forth in the Section hereof following such term:
"AFFILIATE" means, at any time, and with respect to any Person,
(a) any other Person that at such time directly or indirectly through one or
more intermediaries Controls, or is Controlled by, or is under common Control
with, such first Person, and (b) any Person beneficially owning or holding,
directly or indirectly, 10% or more of any class of voting or equity interests
of the Company or any Subsidiary or any corporation of which the Company and its
Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly,
10% or more of any class of voting or equity interests. As used in this
definition, "CONTROL" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.
Unless the context otherwise clearly requires, any reference to an "Affiliate"
is a reference to an Affiliate of the Company.
"AFFILIATE TRANSACTION" means any transaction or group of related
transactions (including without limitation the purchase, lease, sale or exchange
of properties of any kind or the rendering of any service) with any Affiliate
(other than the Company or another wholly-owned Subsidiary) and other than any
payments which are salaries, director's fees, bonuses, stock options issued
under the Company's Incentive Stock Option Plans, expense reimbursement or other
payments of a similar nature. A transaction which would be a Change of Control
but for the fact that it is with a Permitted Holder shall not be deemed to be an
Affiliate Transaction.
"BANK OF AMERICA LOAN AGREEMENT" means that certain Amended and
Restated Loan, Guaranty and Security Agreement, dated as of April 20, 1999, by
and among Bank of America, N.A., the lenders named therein, the borrowers named
therein and the guarantors named therein, as same has been and may in the future
be amended from time to time.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a
day on which commercial banks in New York City are required or authorized to be
closed.
"CAPITAL LEASE" means, at any time, a lease with respect to which
the lessee is required concurrently to recognize the acquisition of an asset and
the incurrence of a liability in accordance with GAAP.
"CHANGE OF CONTROL" means an event or series of events by which
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) other than a Permitted Holder is or becomes the "beneficial owner"
(as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a
person shall be deemed to have "beneficial ownership" of all shares that any
such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or
indirectly, of more than 30% of the total voting power of all classes of capital
stock then outstanding of the Company normally entitled to vote in elections of
directors ("Voting Shares"), provided that the Permitted Holders "beneficially
own" (as so defined) a lesser percentage of the Voting Shares than such other
person and do not have the right or ability by voting power, contract or
otherwise to elect or designate for election a majority of the Board of
Directors of the Company; (ii) the Company consolidates with or merges into
another corporation or conveys, transfers, or transfers or leases all or
substantially all of its assets to any person, or any corporation consolidates
with or merges into the Company, in either event pursuant to a transaction in
which the outstanding Voting Shares of the Company are changed into or exchanged
for cash, securities or other property, other than any such transaction between
the Company and a wholly-owned Subsidiary; or (iii) on the date, the individuals
who at the beginning of the two-year period immediately preceding such date
constituted the Company's Board of Directors (together with any new directors
whose election by the Company's Board of Directors, or whose nomination for
election by the Company's shareholders, was approved by a vote of at least 66
2/3% of the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
directors then in office.
"CLOSING" is defined in Section 3.
"CLOSING DATE" is defined in Section 3.
"CLOSING PRICE" means with respect to the shares of the Company's
Common Stock on any day, (i) the closing price of the Company's Common Stock as
reported by the National Market System of the National Association of Securities
Dealers automated quotation system ("NASDAQ") on such day, or, (ii) if there
were no sales on such day, the average of the bid and asked prices at the end of
such day or, (iii) if there was no bidding on such day, then the last closing
price reported on NASDAQ, or (iv) if the Company's Common Stock is not traded on
the NASDAQ market, the closing price on the national securities exchange on
which the shares of such stock are listed or admitted to trading or, if such
shares are not listed or admitted to trading on any national securities
exchange, the average of the last reported closing bid and asked prices as
furnished by any New York Stock Exchange member firm selected from time to time
by the Company for that purpose.
"CODE" means the Internal Revenue Code of 1986, as amended from
time to time, and the rules and regulations promulgated thereunder from time to
time.
"COMMON STOCK" means the Company's Common Stock, par value $0.01
per share.
"COMPANY" means Riddell Sports Inc., a Delaware corporation.
"CONFIDENTIAL INFORMATION" is defined in Section 19.
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"CONVERSION PRICE" initially means $4.42 per share or, in case an
adjustment of such price has taken place pursuant to the provisions of Section
14.4 hereof, then at the price as last adjusted.
"DEFAULT" means an event or condition the occurrence or existence
of which would, with the lapse of time or the giving of notice or both, become
an Event of Default.
"ENVIRONMENTAL LAWS" means any and all Federal, state, local, and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or
governmental restrictions relating to pollution and the protection of the
environment or the release of any materials into the environment, including but
not limited to those related to hazardous substances or wastes, air emissions
and discharges to waste or public systems.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time, and the rules and regulations promulgated
thereunder from time to time in effect.
"ERISA AFFILIATE" means any trade or business (whether or not
incorporated) that is treated as a single employer together with the Company
under section 414 of the Code.
"EVENT OF DEFAULT" is defined in Section 11.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"EXISTING NOTE" is defined in Section 2.
"GAAP" means generally accepted accounting principles as in effect
from time to time in the United States of America.
"GOVERNMENTAL AUTHORITY" means
(a) the government of
(i) the United States of America or any State or other
political subdivision thereof, or
(ii) any jurisdiction in which the Company or any
Subsidiary conducts all or any part of its business,
or which asserts jurisdiction over any properties of
the Company or any subsidiary, or
(b) any entity exercising executive, legislative, judicial,
regulatory or administrative functions of, or pertaining to, any such
government.
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"GUARANTORS" means Varsity Spirit Corporation International Logos,
Inc., Varsity/Intropa Tours, Inc., and Varsity USA Inc., Tennessee corporations;
Varsity Spirit Fashions and Supplies, Inc., a Minnesota corporation;
Varsity.com, Inc., a Delaware corporation; and all future Subsidiaries of the
Company and its Subsidiaries pursuant to Section 9.7 hereof.
"GUARANTY" means, with respect to any Person, any obligation
(except the endorsement in the ordinary course of business of negotiable
instruments for deposit or collection) of such Person guaranteeing or in effect
guaranteeing any indebtedness, dividend or other obligation of any other Person
in any manner, whether directly or indirectly, including (without limitation)
obligations incurred through an agreement, contingent or otherwise, by such
Person:
(a) to purchase such indebtedness or obligation or any property
constituting security therefor;
(b) to advance or supply funds (i) for the purchase or payment
of such indebtedness or obligation, or (ii) to maintain any working
capital or other balance sheet condition or any income statement
condition of any other Person or otherwise to advance or make available
funds for the purchase or payment of such indebtedness or obligation;
(c) to lease properties or to purchase properties or services
primarily for the purpose of assuring the owner of such indebtedness or
obligation of the ability of any other Person to make payment of the
indebtedness or obligation; or
(d) otherwise to assure the owner of such indebtedness or
obligation against loss in respect thereof.
In any computation of the indebtedness or other liabilities of the
obligor under any Guaranty, the indebtedness or other obligations that
are the subject of such Guaranty shall be assumed to be direct
obligations of such obligor.
"HOLDER" or "HOLDER" means, with respect to any Note, the Person
in whose name such Note is registered in the register maintained by the Company
pursuant to Section 20.9.
"INCENTIVE STOCK OPTION PLANS" shall mean the Company's 1991 Stock
Option Plan, as amended from time to time, and each successor or supplemental
plan to such plan pursuant to which the Company may from time to time grant
stock options (including Incentive Stock Options (as defined in Sections 421 and
422A of the Code)) to its directors, key employees and consultants or other
employees as compensation or incentive for providing services to the Company or
its Subsidiaries.
"INDEBTEDNESS" with respect to any Person means, at any time,
without duplication,
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(a) its liabilities for borrowed money and its redemption
obligations in respect of mandatorily redeemable Preferred Stock;
(b) its liabilities for the deferred purchase price of property
acquired by such Person (excluding accounts payable arising in the
ordinary course of business but including all liabilities created or
arising under any conditional sale or other title retention agreement
with respect to any such property);
(c) all liabilities appearing on its balance sheet in
accordance with GAAP in respect of Capital Leases;
(d) all liabilities for borrowed money secured by any Lien with
respect to any property owned by such Person (whether or not it has
assumed or otherwise become liable for such liabilities);
(e) all its liabilities in respect of letters of credit or
instruments serving a similar function issued or accepted for its account
by banks and other financial institutions (whether or not representing
obligations for borrowed money);
(f) Swaps of such Person; and
(g) any Guaranty of such Person with respect to liabilities of
a type described in any of clauses (a) through (f) hereof.
Indebtedness of any Person shall include all obligations of such Person of the
character described in clauses (a) through (g) to the extent such Person remains
legally liable in respect thereof notwithstanding that any such obligation is
deemed to be extinguished under GAAP.
"INTEREST PAYMENT DATE" means May 1 and November 1, commencing
November 1, 2001.
"LIEN" means, with respect to any Person, any mortgage, lien,
pledge, charge, security interest or other encumbrance, or any interest or title
of any vendor, lessor, lender or other secured party to or of such Person under
any conditional sale or other title retention agreement or Capital Lease, upon
or with respect to any property or asset of such Person (including in the case
of stock, stockholder agreements, voting trust agreements and all similar
arrangements).
"LITIGATION DEBT" means any and all notes (other than the Note),
guarantees, debentures, bonds and other debt securities and other indebtedness
created, incurred, assumed or suffered to exist, evidenced by a note or other
written obligation, to satisfy in full or part any and all awards, judgments,
settlements or other dispositions, fines or similar amounts (including without
limitation, legal fees) arising out of any litigation, arbitration or other
judicial or administrative proceeding or threatened proceeding in which the
Company or any of its Subsidiaries, is or is threatened to be made a party
(collectively "Actions") or to obtain any appeal bond or injunctive relief bond
in connection with any Action.
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"MAJORITY LENDERS" means at any time Persons holding more than 50%
of the aggregate outstanding principal amount of the Note (excluding Notes held
by the Company or any Affiliate)
"MATERIAL" means material in relation to the business, operations,
affairs, financial condition, assets, properties, or prospects of the Company
and its Subsidiaries taken as a whole.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (a)
the business, operations, affairs, financial condition, assets, prospects or
properties of the Company and its Subsidiaries taken as a whole, or (b) the
ability of the Company to perform its obligations under this Agreement and the
Note or (c) the validity or enforceability of this Agreement, the Registration
Rights Agreement or the Note. .
"MERGER AGREEMENT" shall mean that certain Agreement and Plan of
Merger, dated as of May 5, 1997, by and among the Company, Varsity Spirit
Corporation and certain other parties named therein.
"MLC" means M.L.C. Partners Limited Partnership, a Delaware
limited partnership, and any successor to such entity.
"MULTIEMPLOYER PLAN" means any Plan that is a "multiemployer plan"
(as such term is defined in section 4001(a)(3) of ERISA).
"NOTE" means $7,500,000 aggregate principal amount of the
Company's 4.10% Convertible Subordinated Note due November 1, 2007, and
including any such notes issued pursuant to Section 14.2 or an assignment
permitted under Section 20 hereof.
"OFFICER'S CERTIFICATE" means a certificate of a Senior Financial
Officer or of any other officer of the Company whose responsibilities extend to
the subject matter of such certificate.
"ORIGINAL EFFECTIVE DATE" means October 30, 1996.
"PBGC" means the Pension Benefit Guaranty Corporation referred to
and defined in ERISA or any successor thereto.
"PERMITTED HOLDERS" means any Person who was a partner or
affiliate of MLC, or any Person who is or was a member of a "group" with MLC for
purposes of Rule 13-d(3) under the Securities Exchange Act of 1934, as amended.
"PERMITTED LIENS" means (i) Liens for taxes not delinquent or for
taxes being contested in good faith by appropriate proceedings or as to which
adequate financial reserves have been established on the books and records of
the Company or the appropriate Subsidiary; (ii) Liens (other than any Lien
imposed by ERISA) created and maintained in the ordinary course of business of
the Company or any of its Subsidiaries which are not material in the aggregate,
and which could not reasonably be expected to
A-6
have a Material Adverse Effect; (iii) Liens of the Company or any of its
Subsidiaries affecting real property which constitute minor survey exceptions or
defects or irregularities in title, minor encumbrances, easements or
reservations of, or rights of others for, rights of way, sewers, electric lines,
telegraph and telephone lines and other similar purposes, or zoning or other
restrictions as to the use of such real property; and (iv) Liens set forth on
Schedule 5.15 hereto.
"PERSON" means an individual, partnership, corporation, limited
liability company, association, trust, unincorporated organization, or a
government or agency or political subdivision thereof.
"PLAN" means an "employee benefit plan" (as defined in section
3(3) of ERISA) that is or, within the preceding five years, has been established
or maintained, or to which contributions are or, within the preceding five
years, have been made or required to be made, by the Company or any ERISA
Affiliate or with respect to which the Company or any ERISA Affiliate may have
any liability.
"PREFERRED STOCK" means any class of capital stock of a
corporation that is preferred over any other class of capital stock of such
corporation as to the payment of dividends or the payment of any amount upon
liquidation or dissolution of such corporation.
"PRIME RATE" means the rate designated by Bank of America, N.A.
(or the Company's other principal lender) from time to time as its prime or
reference rate in the United States of America, such rate to change as and when
such designated rate changes, which rate may not be the lowest rate charged by
to any of its customers.
"PROHIBITED TRANSACTION" shall mean any transaction involving any
Plan which is proscribed by Section 406 of ERISA or Section 4975 of the Code.
"PROPERTY" or "PROPERTIEs" means, unless otherwise specifically
limited, real or personal property of any kind, tangible or intangible, choate
or inchoate.
"QPAM EXEMPTION" means Prohibited Transaction Class Exemption 8414
issued by the United States Department of Labor.
"RECORD DATE" means 15 days before each Interest Payment Date.
"REGISTRATION RIGHTS AGREEMENT" means that agreement between the
Company and the Holders in the form of Exhibit 4.8 hereto.
"REPURCHASE DATE" shall have the meaning specified in Section 8.5
hereof.
"REPURCHASE EVENT" means a Change of Control unless all of the
consideration in the transaction giving rise to such Change of Control to the
holders of Common Stock consists of cash and securities that are, or immediately
upon issuance will be, listed on a national securities exchange or quoted on the
Nasdaq National Market, or a
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combination of cash and such securities, and the aggregate fair market value of
such consideration (which, in the case of such securities, shall be equal to the
average of the daily Closing Price of such securities during the ten consecutive
Trading Days commencing with the sixth Trading Day following consummation of
such transaction) is at least 105% of the conversion price of the Note in effect
on the date immediately preceding the closing date of such transaction.
"REPURCHASE OFFER" shall have the meaning specified in Section 8.6
hereof.
"REPURCHASE PRICE" shall have the meaning specified in Section 8.5
hereof.
"RESPONSIBLE OFFICER" means any Senior Financial Officer and any
other officer of the Company with responsibility for the administration of the
relevant portion of this agreement
"SECURITIES ACT" means the Securities Act of 1933, as amended from
time to time.
"SENIOR FINANCIAL OFFICER" means the chief financial officer,
principal accounting officer, treasurer or comptroller of the Company.
"SENIOR INDEBTEDNESS" means the principal of and premium, if any,
interest, charges and fees on the following, whether outstanding at the date
hereof or hereafter created, incurred, assumed or suffered to exist:
(a) Indebtedness, whether secured or unsecured, or partially
secured and partially unsecured, evidenced by obligations under the Bank
of America Loan Agreement, and any extension, refunding, supplement,
restructuring, replacement (including without limitation any full or
partial replacement or supplement involving another lender and an
increase to the aggregate principal amount), refinancing, renewal,
amendment (including without limitation an amendment increasing the
aggregate principal amount) or other modification of any kind thereto
(collectively, "Renewals");
(b) Indebtedness that would appear on the consolidated balance
sheet of the company (prepared in accordance with GAAP) as short or long
term Indebtedness or that would appear in the notes to such balance sheet
as a Guaranty of short or long term Indebtedness of any Subsidiary that
has been incurred in consideration of cash advanced after the date hereof
to the Company or any wholly-owned Subsidiary;
(c) any and all other Indebtedness, notes (other than the
Note), guarantees, debentures, bonds and other debt securities and other
indebtedness, and any and all obligations to advance funds to, or
purchase assets, property or services from, any other Person (but
excluding trade debt and accounts payable arising in the ordinary course
of business) evidenced by a note or other written
A-8
obligation, in each case whether secured or unsecured, or partially
secured and partially unsecured, created, incurred, assumed, or suffered
to exist, in connection with the purchase or lease of any assets
(including without limitation securities) of any other Person by the
Company or any of its Subsidiaries; and
(d) any and all Litigation Debt, provided, however, that so
long as (i) at least $3,750,000 aggregate principal amount of the Note is
outstanding, and (ii) Angelo, Gordon Co. owns or controls at least 50% of
the outstanding principal amount of the Note either directly or through
its ownership of the membership interests or similar capital or equity
interests in Silver Oak or otherwise, then the aggregate principal amount
of any Litigation Debt at any one time outstanding which may be Senior
Indebtedness shall not exceed $2,000,000.
The term "Senior Indebtedness" shall also mean and include,
insofar as it relates to indebtedness for borrowed money from institutions which
in the ordinary course of their business loan money, the costs and expenses, if
any, reasonably incurred by holders of Senior Indebtedness in negotiating and
consummating such indebtedness, amendments, modification, replacement,
supplement, renewals, extensions, restructurings, refinancings or refundings of
Senior Indebtedness or the enforcement or collection of Senior Indebtedness,
including legal fees (including without limitation the reasonable estimate of
the allocable cost of in-house legal counsel), to the extent the Company or any
of its Subsidiaries is obligated therefor. Notwithstanding anything to the
contrary in the foregoing, Senior Indebtedness shall not mean indebtedness of
the Company to any Subsidiary for money borrowed or advances from such
Subsidiary other than a guarantee or assumption of the indebtedness of any
Subsidiary which would otherwise constitute Senior Indebtedness. The term
"Senior Indebtedness" shall not include (i) any Indebtedness outstanding as of
the date hereof other than that under the Bank of America Loan Agreement; (ii)
Indebtedness that is expressly junior or subordinate to any other Indebtedness;
(iii) any liability for federal, state or local taxes payable; or (iv) trade
payables.
"SILVER OAK" means Silver Oak Capital, L.L.C.
"STOCK PURCHASE AGREEMENT" means that certain Stock Purchase
Agreement, dated as of April 27, 2001, by and between the Company and Riddell
Acquisition Sub, Inc. (now known as Riddell Sports Group, Inc.) (the "Buyer"),
pursuant to which the Company sold to the Buyer all of the issued and
outstanding capital stock of Riddell, Inc., All American Sports Corporation,
Ridmark Corporation, RHC Licensing Corporation, MacMark Corporation, Proacq
Corp. and Equilink Licensing Corporation, as well as certain additional assets
of the Company and its affiliates.
"SUBORDINATED GUARANTY" means that Subordinated Guaranty from the
Guarantors in favor of the Holders in the form of Exhibit 4.9 hereto.
"SUBSIDIARY" means, as to any Person, any corporation, association
or other business entity in which such Person or one or more of its Subsidiaries
owns sufficient equity or voting interests to enable it or them (as a group)
ordinarily, in the
A-9
absence of contingencies, to elect a majority of the directors (or Persons
performing similar functions) of such entity, and any partnership or joint
venture if more than a 50% interest in the profits or capital thereof is owned
by such Person or one or more of its Subsidiaries (unless such partnership can
and does ordinarily take major business actions without the prior approval of
such Person or one or more of its Subsidiaries). Unless the context otherwise
clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary
of the Company.
"SWAPS" means, with respect to any Person, payment obligations
with respect to interest rate swaps, currency swaps and similar obligations
obligating such Person to make payments, whether periodically or upon the
happening of a contingency. For the purposes of this Agreement, the amount of
the obligation under any Swap shall be the amount determined in respect thereof
as of the end of the then most recently ended fiscal quarter of such Person,
based on the assumption that such Swap had terminated at the end of such fiscal
quarter, and in making such determination, if any agreement relating to such
Swap provides for the netting of amounts payable by and to such Person
thereunder or if any such agreement provides for the simultaneous payment of
amounts by and to such Person, then in each such case, the amount of such
obligation shall be the net amount so determined.
"TRADING DAY" means any day other than any day on which securities
are not traded on the applicable securities exchange or in the applicable
securities market.
"VARSITY EMPLOYEES" shall mean individuals employed by Varsity
Spirit Corporation as of May 5, 1997.
A-10
SCHEDULE 5.3
DISCLOSURE
Riddell Sports Group, Inc. ("RSG"), a company affiliated with
Lincolnshire Management, Inc. ("Lincolnshire"), acquired the Riddell team sports
division of the Company on June 22, 2001, pursuant to the terms of the Stock
Purchase Agreement. On July 24, 2001, the Company received a letter from RSG
accompanying a funded debt calculation, which asserted that RSG was owed
$300,000 as an adjustment of purchase price as a result of a $300,000 payment
made by RSG to Silver Oak in connection with the release of certain guaranties
from the entities acquired by RSG. At the closing of the transactions
contemplated by the Stock Purchase Agreement, RSG had acknowledged in writing to
the Company and to Silver Oak that the $300,000 payment was not being paid or
reimbursed by the Company. The Company believes that, notwithstanding its
acknowledgement, RSG, under orders from Lincolnshire, is asserting the $300,000
adjustment in an effort to be reimbursed by the Company for the payment RSG made
to Silver Oak.
The Company intends to formally challenge the $300,000 adjustment in
accordance with the terms of the Stock Purchase Agreement. The Company believes
that the adjustment claimed by RSG is completely unwarranted. Under the terms of
the Stock Purchase Agreement, unless RSG withdraws its claim for the $300,000
adjustment, the matter will be submitted to an arbitrator for resolution. It is
currently anticipated that the dispute will be resolved no later than
mid-September 2001.
SCHEDULE 5.4
ORGANIZATION AND OWNERSHIP OF SHARES OF SUBSIDIARIES
-------- ------------------------- ------------------ ------------------------------------ ------------------------
PERCENTAGE OF ISSUED
JURISDICTION OF AND OUTSTANDING SHARES
NAME OF SUBSIDIARY ORGANIZATION AUTHORIZED CAPITAL STOCK OWNED
-------- ------------------------- ------------------ ------------------------------------ ------------------------
1. Varsity Spirit Tennessee 1,000 shares of common stock, par 100% Owned by Riddell
Corporation value $0.01 per share Sports Inc.
-------- ------------------------- ------------------ ------------------------------------ ------------------------
Varsity Spirit Fashions 50,000 shares of common stock, par 100% Owned by Varsity
2. & Supplies, Inc. Minnesota value $0.01 per share Spirit Corporation
-------- ------------------------- ------------------ ------------------------------------ ------------------------
International Logos, 100% Owned by Varsity
3. Inc. Tennessee 1,000 shares of common stock Spirit Corporation
-------- ------------------------- ------------------ ------------------------------------ ------------------------
Varsity/Intropa Tours, 100% Owned by Varsity
4. Inc. Tennessee 10,000 shares of common stock Spirit Corporation
-------- ------------------------- ------------------ ------------------------------------ ------------------------
100% Owned by Varsity
5. Varsity USA, Inc. Tennessee 10,000 shares of common stock Spirit Corporation
-------- ------------------------- ------------------ ------------------------------------ ------------------------
6. Varsity.com, Inc. Delaware 1,000 shares of common stock, par 100% Owned by Riddell
value $1.00 per share Sports Inc.
-------- ------------------------- ------------------ ------------------------------------ ------------------------
A-2
SCHEDULE 5.5
COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC.
Please refer to Schedule 5.3.
A-3
SCHEDULE 5.7
LITIGATION; OBSERVANCE OF AGREEMENTS, STATUTES AND ORDERS
Please refer to Schedule 5.3.
A-4
NEITHER THIS NOTE NOR THE COMMON STOCK INTO WHICH IT MAY BE CONVERTED HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY OTHER SECURITIES
LAWS, AND NEITHER MAY BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS SO
REGISTERED OR UNLESS SOLD PURSUANT TO AN EXEMPTION THEREFROM. THIS NOTE MAY BE
TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THE NOTE
PURCHASE AGREEMENT REFERRED TO IN THIS NOTE, A COMPLETE AND CORRECT COPY OF THE
FORM OF WHICH IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF RIDDELL
SPORTS INC., C/O VARSITY SPIRIT CORPORATION, 2525 HORIZON LAKE, MEMPHIS,
TENNESSEE 38133.
4.10% CONVERTIBLE SENIOR SUBORDINATED NOTE DUE NOVEMBER 1, 2007
$7,500,000 August 16, 2001
FOR VALUE RECEIVED, the undersigned, Riddell Sports Inc. (herein
called the "Company"), a corporation organized and existing under the laws of
the State of Delaware, hereby promises to pay to Silver Oak Capital, L.L.C., or
permitted, registered assigns, the principal sum of SEVEN MILLION FIVE HUNDRED
THOUSAND DOLLARS on November 1, 2007, with interest (computed on the basis of a
360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the
rate of 4.10% per annum from May 1, 2001, payable semiannually, on the 1st day
of May and 1st day of November in each year (each such date, an "Interest
Payment Date"), commencing with November 1, 2001, until the principal hereof
shall have become due and payable, and (b) to the extent permitted by law on any
overdue payment (including any overdue prepayment) of principal, any overdue
payment of interest, payable semiannually as aforesaid (or, at the option of the
registered holder hereof, on demand), at a rate per annum from time to time
equal to 2% over the rate of interest publicly announced by Bank of America,
N.A. from time to time in Memphis, Tennessee as its `base" or "prime" rate.
Payments of principal of and interest on this Note are to be made
in lawful money of the United States of America by wire transfer of immediately
available funds to the New York City Bank account specified by you or such other
place as you or your permitted, registered assign shall have designated by
written notice.
The Company will make required prepayments of principal on the
dates and in the amounts specified in the Note Purchase Agreement referred to
below. This Note is also subject to optional prepayment, in whole or from time
to time in part, at the times and on the terms specified in the Note Purchase
Agreement.
If an Event of Default, as defined in the Note Purchase Agreement,
occurs and is continuing, the principal of this Note may be declared or
otherwise become due and
payable in the manner, at the price and with the effect provided in the Note
Purchase Agreement.
The Company shall pay interest on the Note (except defaulted
interest) to the Persons who are the registered holders of the Note at the close
of business on the Record Date immediately preceding the Interest Payment Date.
The Company shall deliver any such interest payment to the Person in whose name
this Note is registered at the close of business on the Record Date for such
interest, which shall be the April 15 or October 15 (whether or not a Business
Day), as the case may be, next preceding such Interest Payment Date.
You may convert all or any portion of the Note into shares of
Common Stock of the Company at any time. If the Note is called for redemption,
you may convert it at any time before the close of business on the last Business
Day prior to the date fixed for such redemption. The initial Conversion Price is
$4.42 per share, subject to adjustment in certain events. To determine the
number of shares issuable upon conversion of the Note, divide the principal
amount to be converted by the Conversion Price in effect on the conversion date.
The Company will deliver a check for any fractional share.
To convert the Note, you must (i) complete and sign the Conversion
Notice attached to the Note, (ii) surrender the Note to the Company, (iii)
furnish appropriate endorsements and transfer documents if required by the
Company and (iv) pay any transfer or similar tax if required. No adjustment is
to be made on conversion for interest accrued hereon or for dividends on shares
of Common Stock issued on conversion; PROVIDED, HOWEVER, that if the Note (other
than any portion called for redemption) is surrendered for conversion after the
Record Date for a payment of interest and on or before the Interest Payment
Date, then, notwithstanding such conversion, the interest falling due to such
Interest Payment Date will be paid to the Person in whose name the Note is
registered at the close of business on such Record Date and any Note surrendered
for conversion during the period from the close of business on any Record Date
to the opening of business on the corresponding Interest Payment Date must be
accompanied by payment of an amount equal to the interest payable on such
Interest Payment Date. You may convert a portion of a Note if the portion is at
least $60,000 principal amount and an integral multiple of 12,000.
If the Company is a party to a consolidation or merger or a
transfer, lease or other disposition of all or substantially all of its assets,
the right to convert the Note into shares of Common Stock may be changed into a
right to convert it into securities, cash or other assets of the Company or
another Person.
The Indebtedness evidenced by this Note is subordinate to all
Senior Indebtedness of the Company. To the extent and in the manner provided in
the Note Purchase Agreement, Senior Indebtedness must be paid before any payment
may be made to you. In addition, under certain circumstances, upon the
occurrence of an Event of Default, you may be prohibited from accelerating the
obligations of the Company under
2
the Note. You, by accepting the same agree to and shall be bound by such
provisions.
In addition to all other rights of Senior Indebtedness described
in the Note Purchase Agreement, the Senior Indebtedness shall continue to be
Senior Indebtedness and entitled to the benefit of the subordination provisions,
irrespective of any amendment, modification or waiver of any term of any
instrument relating to the Senior Indebtedness or extension or renewal of the
Senior Indebtedness.
This Note is subject to the terms and conditions of the Note
Purchase Agreement dated August 16, 2001 between the Company and Silver Oak
Capital, L.L.C., as amended from time to time, and in the event of any
inconsistency between this Note and the Note Purchase Agreement, the terms of
the Note Purchase Agreement shall control. Terms not defined herein have the
meaning set forth in the Note Purchase Agreement.
This Note is guaranteed to the extent set forth in that
Subordinated Guaranty dated as of the date hereof from the Company's
Subsidiaries in favor of the holder.
This Note shall be construed and enforced in accordance with, and
the rights of the parties shall be governed by, the law of the State of New York
excluding choice-of-law principles of the law of such State that would require
the application of the laws of a jurisdiction other than such State.
RIDDELL SPORTS INC.
By: /s/ John Nichols
--------------------------------
Name: John Nichols
Title: Chief Financial Officer
3
FORM OF ASSIGNMENT
I or we assign this Note to
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type name, address and zip code of assignee)
Please insert Social Security or other identifying number of
assignee _______________________________________________________________________
and irrevocably appoint ________________ agent to transfer this Note on the
books of the Company. The agent may substitute another to act for him.
Dated: ________________ Signed: x______________________________________________
x______________________________________________
x______________________________________________
x______________________________________________
Signatures guaranteed: THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE.
IF IT IS LOST, STOLEN OR DESTROYED, THE CORPORATION MAY REQUIRE A BOND OF
INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
CONVERSION NOTICE
To convert this Note into shares of common stock, par value $.01
per share, of the Company, check the box: [ ]
To convert only part of this Note, state the principal amount you
want to be converted (which must be a minimum of $[ ] or any multiple
thereof): $______________
If you want the certificate made out in another person's name,
fill in the form below:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type other person's name, address and zip code)
Please insert Social Security or other identifying number of other
person: _____________________
Dated: ________________ Signed: x______________________________________________
x______________________________________________
x______________________________________________
x______________________________________________
Signatures guaranteed: THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
Riddell Sports Inc.
By:__________________________________________
[Title]
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 8.5 of the Note Purchase Agreement, check the box: [ ]
If you want to elect to have only part of this Note purchased by
the Company pursuant to Section 8.5 of the Note Purchase Agreement, state the
amount you want to be purchased (which must be a minimum of $1,000 or any
multiple thereof): $______________
Dated: ________________ Signed: x______________________________________________
x______________________________________________
x______________________________________________
x______________________________________________
Signatures guaranteed: THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as
of August 16, 2001, by and between Riddell Sports Inc., a Delaware corporation
(the "Company"), and Silver Oak Capital, L.L.C., a Delaware limited liability
corporation (the "Purchaser").
WHEREAS, pursuant to a Note Purchase Agreement, dated as of the
date hereof (the "Purchase Agreement"), by and among the Company and the
Purchaser, the Company is issuing to the Purchaser its 4.10% Convertible
Subordinated Note due November 1, 2007 in the principal amount of $7,500,000;
WHEREAS, the Note is convertible at any time in whole or in part
into shares of the Company's Common Stock, par value $0.01 per share (the
"Common Stock");
WHEREAS, in order to induce the Purchaser to enter into the
Purchase Agreement, the Company has agreed to provide the registration rights
set forth in this Agreement.
NOW, THEREFORE, the parties to this Agreement hereby agree as
follows:
1. CERTAIN DEFINITIONS.
(a) Capitalized terms used but not defined herein shall have
the meanings given such terms in the Purchase Agreement.
(b) The term "Shares" shall refer to the shares of Common Stock
of the Company issued or issuable on conversion of the Note.
(c) The term "Holder" or "Holders" shall refer to each of (i)
the Purchaser, (ii) each successor or assignee of Purchaser's rights hereunder
who has received such rights in accordance with the Purchase Agreement and (iii)
each transferee or assignee of all or a portion of the Note or the Shares who
has received such interest in accordance with the Purchase Agreement to the
extent the Purchaser shall specify such person pursuant to this clause (iii) as
a Holder.
(d) The term "Majority Holders" shall mean, as of any date of
determination, Holders of not less than a majority of the Restricted Shares at
such date.
(e) The term "Restricted Share" shall refer to each Share until
the date on which such Share (i) has been registered under the Securities Act of
1933, as amended (the "Act") and disposed of pursuant to a registration
statement, (ii) is distributed to the public pursuant to Rule 144 under the Act
or is saleable pursuant to Rule 144(k) under the Act or (iii) is transferred
otherwise in accordance with the Act such that the holder
thereof has shares of Common Stock that may be freely and publicly resold
without registration or limitation.
2. DEMAND REGISTRATIONS.
(a) The Holders may at any time after the date hereof request
(a "Demand") registration under the Securities Act (a "Demand Registration") of
the offer and sale of the Restricted Shares, which Demand shall specify the
number of Restricted Shares requested to be registered and the intended method
of distribution; and the Company shall, as promptly as practicable following
such Demand file with the Securities and Exchange Commission (the "Commission")
and thereafter shall use its best efforts to cause to be declared effective a
registration statement (a "Registration Statement") on an appropriate form under
the Act, relating to the offer and sale of the Restricted Shares by the Holders
in accordance with the method of distribution so specified; PROVIDED, that:
(i) Any Demand must be made by a Holder in writing on behalf of
the Majority Holders;
(ii) The Company will not be obligated to effect more than three
(3) Demand Registrations. A registration will not count as one of such
three Demand Registrations until it has become effective and been
maintained effective for the offer and sale of the Restricted Shares as
hereinafter provided for a period of 270 days (or such shorter period as
shall terminate at such time as all Shares included therein have been
sold thereunder or such Shares cease to be Restricted Shares); and
(iii) If the intended method of distribution is an underwritten
offering, (A) the Company will not be obligated to conduct or pay the
expenses of more than two (2) roadshows relating to the offer of the
Restricted Shares; (B) the Company will not be obligated to conduct or
pay the expenses of any such roadshow unless there is included in such
Registration Statement on behalf of the Holders and any other holders
participating in such registration in accordance with Section 2(b), at
least 500,000 shares of Common Stock (as adjusted to reflect any stock
splits, combinations, recapitalizations, reclassifications or
reorganizations affecting the Shares after the date hereof); and (C) the
Company will have no obligation to conduct or pay expenses in connection
with a roadshow relating to a Demand Registration for the offer of the
Restricted Shares that occurs within 12 months after an earlier roadshow
that the Company has conducted and for which the Company has paid
expenses and that relates to a Demand Registration for the offer of the
Restricted Shares.
(b) The Company will give prompt notice to each Holder of
Restricted Shares of a Demand under Section 2(a) and will include in such Demand
Registration on a pro rata basis all Restricted Shares requested to be included
on the part of the Holders. The Company will not include in any Demand
Registration any securities which are not Restricted Shares without the prior
written consent of the Holders of a majority of the
2
Restricted Shares requested to be included in such registration (such consent
not to be unreasonably withheld) unless the Demand Registration takes the form
of a firm commitment underwritten offering. If the Demand Registration takes the
form of a firm commitment underwritten offering and the lead underwriter of the
offering advises the Company that the total number of securities requested to be
included in such offering exceeds the total number of securities which can be
sold, there shall be included in such offering the amount of securities which in
the opinion of the lead underwriter can be sold, and such securities shall be
allocated (x) first to the holders of Restricted Shares and (y) next among the
Company and such other holders of securities that have requested inclusion in
such registration pro rata based upon the number of securities sought to be
registered, or on such other basis as may be agreed upon among the Company, such
lead underwriter and such other securityholders.
(c) The Company will give prompt notice to each Holder of
Restricted Shares of any proposed registration (other than in connection with a
registration on Form S-8 or S-4 or any successor or similar form) by the Company
of its securities for its own account, and permit the Holders to request that
such registration include the Restricted Shares of the Holders, except that, if
the Registration takes the form of a firm commitment underwritten offering and
the lead underwriter of the offering advises the Company that the total number
of securities requested to be included in such offering exceeds the total number
of securities which can be sold, there shall be included in such offering the
amount of securities which in the opinion of the lead underwriter can be sold,
and such securities shall be allocated (x) first to the Company and (y) next
among the holders of Restricted Shares that have requested inclusion in such
registration and such other securityholders who have exercised piggyback
registration rights pro rata based upon the number of securities sought to be
registered, or on such other basis as may be agreed upon among the Company, such
underwriter, the Holders of Restricted Shares and such other securityholders.
(d) The Company will give prompt notice to each Holder of
Restricted Shares of any proposed registration (other than in connection with a
registration on Form S-8 or S-4 or any successor or similar form) by the Company
of securities for the account of other securityholders exercising demand
registration rights, and permit the Holders to request that such registration
include the Restricted Shares of the Holders, except that, if the Registration
takes the form of a firm commitment underwritten offering and the lead
underwriter of the offering advises the Company that the total number of
securities requested to be included in such offering exceeds the total number of
securities which can be sold, there shall be included in such offering the
amount of securities which in the opinion of the lead underwriter can be sold,
and such securities shall be allocated (x) first to such other securityholders
who have exercised demand registration rights and (y) next among the Company and
the holders of Restricted Shares that have requested inclusion in such
registration pro rata based upon the number of securities sought to be
registered, or on such other basis as may be agreed upon among the Company, such
lead underwriter and the Holders of Restricted Shares.
(e) It is understood that, except to the extent provided in
Section 2(i) or Section 7, nothing in this Agreement shall preclude the Company
from filing any
3
registration statement for the sale of shares for its own account or for the
account of any other securityholders, but that the filing of such registration
statement shall not affect the obligations of the Company to effect a Demand
Registration pursuant to a Demand under Section 2(a) and to otherwise comply
with its obligations hereunder in respect of such Demand by the Holders.
(f) The Company will ensure that (i) the Registration Statement
and any amendment thereto and any prospectus forming part thereof and any
supplement thereto complies in all material respects with the Act and the rules
and regulations thereunder, (ii) the Registration Statement and any amendment
thereto does not, when it becomes effective, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (iii) the prospectus
forming part of the Registration Statement, and any supplement to such
prospectus, does not, at any time the same is used in connection therewith,
include an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
Company shall have no responsibilities with respect to the adequacy of the
information required to be provided to it pursuant to Section 3(l).
(g) If (i) the Registration Statement is not filed with the
Commission on or prior to 30 days after a Demand made in accordance with Section
2(a), (ii) the Company has not responded to all of the questions ("Questions")
posed by the Commission regarding the Registration Statement within 10 days of
receipt of the Questions from the Commission, (iii) the Registration Statement
is not declared effective within 120 days of the Demand, or (iv) after a
Registration Statement is declared effective, such Registration Statement
thereafter ceases to be effective or such Registration Statement or the related
prospectus ceases to be usable (during a Blackout Period (as hereinafter defined
in Section 3(i)) or otherwise) for its intended purpose for a period of more
than 45 consecutive days (each such event referred to in clauses (i) through
(iv), a "Registration Default"), then commencing on the day following the date
on which such Registration Default occurs, the Company agrees to pay to each
Holder of Restricted Shares, during the first 90-day period immediately
following the occurrence of such Registration Default, liquidated damages by way
of additional interest on the Note (the "Special Interest") in an amount equal
to 0.50% per annum of the principal amount of the Note. The amount of Special
Interest payable to each Holder shall increase by an additional 0.25% per annum
during each 90-day period thereafter during which such Registration Default or
any other Registration Default shall continue, but shall in no event exceed
1.00% per annum. A Registration Default shall cease, and Special Interest shall
cease to be payable with respect to such Registration Default (1) upon the
filing of the Registration Statement, in the case of clause (i) above, (2) upon
receipt by the Commission of the responses to the Questions, in the case of
clause (ii) above, (3) when the Registration Statement becomes effective or
usable in the case of clauses (iii) and (iv) above. Notwithstanding the
foregoing to the contrary, (I) the amount of Special Interest payable shall not
increase because more than one Registration Default have occurred and are
pending and (II) a Holder of Restricted Shares who is not entitled to the
benefits of a Demand Registration (e.g., such Holder has not elected to include
Restricted Shares in
4
such Registration Statement) shall not be entitled to Special Interest with
respect to a Registration Default that pertains to a Registration Statement. All
Special Interest shall be paid to Holders in the same manner and at the same
time as payments of interest made pursuant to the Note.
(h) The Company shall not be required to include in the
Registration Statement Restricted Shares of a Holder if such Holder fails to
provide the information required to be provided by it, if any, pursuant to
Section 3(l).
(i) The Company will not grant to any person the right to cause
the Company to register any equity securities of the Company held by such person
or enter into any other agreement, in either case if compliance by the Company
on a timely basis with its obligations under this Agreement would constitute a
breach of or default under any such other agreement.
3. REGISTRATION PROCEDURES. In connection with any Demand
Registration, the Company will comply with the following provisions:
(a) The Company shall use its best efforts to keep the
Registration Statement continuously effective in order to permit the prospectus
forming part thereof to be usable by the Holders for a period of nine (9) months
from the date such Registration Statement becomes effective or such shorter
period that will terminate when all of the Shares covered by the Registration
Statement have been sold pursuant to the Registration Statement or all Shares
cease to be Restricted Shares; provided, that if the Company shall give any
Suspension Notice (as such is defined herein in Section 3(c)) under Section
3(c)(ii) - (v), such nine month period shall be extended by the number of days
during such period from and including the date of the giving of such Suspension
Notice to and including the date when each seller of Common Stock covered by the
applicable Registration Statement shall have received (x) the copies of the
supplemental or amended prospectus contemplated by Section 3(i) (if an amended
or supplemental prospectus is required) or (y) the Advice (if no amended or
supplemental prospectus is required).
For purposes of this Section 3(a), the Company shall be deemed not
to have used its best efforts to keep the Registration Statement effective
during the requisite period if it voluntarily takes any action that would result
in Holders of Shares covered thereby not being able to offer and sell such
Shares pursuant to the Registration Statement during that period, unless such
action is an event described in Section 3(c)(v) or Section 3(d) below or such
action is required by applicable law or, to the extent required by applicable
law, if it shall fail promptly to take such action as is reasonably necessary to
permit such prospectus to once again be so usable.
(b) The Company shall furnish to each Holder included in the
registration, prior to the filing thereof with the Commission, a copy of the
Registration Statement and each amendment thereof and each supplement, if any,
to the prospectus included therein and shall use its best efforts to reflect in
each such document, when so filed with the Commission, such comments as such
Holder reasonably may propose.
5
(c) The Company shall advise each Holder included in the
registration and, if requested by a Holder, confirm such advice in writing
(which advice pursuant to clauses (ii) (v) hereof shall be accompanied by an
instruction (a "Suspension Notice") to suspend the use of any prospectus until
the requisite changes have been made):
(i) when the Registration Statement and any amendment thereto
has been filed with the Commission and when the Registration Statement or
any post effective amendment thereto has become effective;
(ii) of any request by the Commission for amendments or
supplements to the Registration Statement or the prospectus included
therein or for additional information;
(iii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose;
(iv) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the shares of Common
Stock for sale in any jurisdiction or the initiation or threatening of
any proceeding for such purpose; and
(v) of the happening of any event that represents a fundamental
change in the information set forth or incorporated by reference in the
Registration Statement or that otherwise requires the making of any
changes in the Registration Statement or the prospectus or the filing of
any reports under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") so that, as of such date, the statements therein are not
misleading and do not omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
Each Holder agrees that, upon receipt of any Suspension Notice of
the Company pursuant to paragraphs (ii) through (v) of Section 3(c) hereof, such
Holder will discontinue disposition of such shares pursuant to the Registration
Statement until such Holder's receipt of copies of the supplemental or amended
prospectus contemplated by Section 3(i) hereof, or until advised in writing (the
"Advice") by the Company that the use of the applicable prospectus may be
resumed.
(d) The Company will use its reasonable efforts to obtain the
withdrawal of any order suspending the effectiveness of the Registration
Statement at the earliest possible time.
(e) The Company will furnish to each Holder of Shares included
within the coverage of the Registration Statement, without charge, copies of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, and, if a Holder so requests in writing, all
exhibits (including those incorporated by reference) in such number as such
Holder may reasonably request from time to time.
6
(f) The Company will deliver to each Holder of Shares included
within the coverage of the Registration Statement, without charge, as many
copies of the prospectus (including each preliminary prospectus) included in the
Registration Statement and any amendment or supplement thereto as such Holder
may reasonably request; and the Company consents to the use of the prospectus or
any amendment or supplement thereto by each of the selling Holders of Common
Stock in connection with the offering and sale of the Common Stock covered by
the prospectus or any amendment or supplement thereto.
(g) Prior to any public offering of Common Stock pursuant to
the Registration Statement, the Company will use its best efforts to register or
qualify or cooperate with the Holders and their respective counsel in connection
with the registration or qualification of such securities for offer and sale
under the securities or blue sky laws of such jurisdictions as such counsel
reasonably requests in writing on behalf of such Holders and do any and all
other acts or things necessary or advisable to enable the offer and sale in such
jurisdictions of the shares of Common Stock covered by the Registration
Statement; PROVIDED, HOWEVER, that the Company will not be required to qualify
generally to do business in any jurisdiction where it is not then so qualified
or to take any action which would subject it to general service of process or to
taxation in any such jurisdiction where it is not then so subject.
(h) The Company will cooperate with each Holder to facilitate
the timely preparation and delivery of certificates representing shares of
Common Stock to be sold pursuant to the Registration Statement free of any
restrictive legends and registered in such names as the Holder may request in
writing prior to sales of Common Stock pursuant to the Registration Statement.
(i) Upon the occurrence of any event contemplated by paragraphs
(ii) through (v) of Section 3(c) hereof during the period for which the Company
is required to maintain an effective Registration Statement, the Company will
prepare a post-effective amendment to the Registration Statement or a supplement
to the related prospectus or file any other required document as soon as
practicable so that, as thereafter delivered to purchasers of the Common Stock,
the prospectus will not include an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading, and will
comply with the Act and the rules promulgated thereunder; PROVIDED HOWEVER THAT,
if the Company determines in its reasonable good faith judgment that the filing
of any such post-effective amendment or supplement or other document would
interfere with any announced or imminent material financing, acquisition,
disposition, corporate reorganization or other material transaction of a similar
type involving the Company or would require the disclosure of information that
is not then in the best interests of the Company to disclose, then the Company
may, subject to the provisions of Section 2(g), delay such filing for such
period as would terminate at the earliest time at which the Company determines
that such disclosure could be made without unduly interfering with the interests
of the Company. The period of any such delay is referred to herein as a
"Blackout Period". In no event may any Blackout Period exceed 90 days from the
date of the Suspension Notice, and the Company shall not be permitted to impose
more than one
7
Blackout Period in any calendar year. The Company shall give prompt notice to
the Holder of the termination of any Suspension Notice or Blackout Period.
(j) The Company will prepare and deliver in a timely manner,
but in no event later than two business days prior to the consummation of a sale
of shares of Common Stock certificates representing Restricted Shares to be sold
and not bearing any restrictive legends.
(k) The Company will comply with all applicable rules and
regulations of the Commission and will make generally available to its security
holders as soon as practicable but in any event not later than eighteen (18)
months after the effective date of the applicable Registration Statement an
earnings statement satisfying the provisions of Section 11(a) of the Act or Rule
158 promulgated thereunder.
(l) The Company may require each Holder of Shares to be sold
pursuant to the Registration Statement to furnish to the Company such
information regarding such Holder, the shares of Common Stock beneficially owned
by the Holder and the intended method of distribution of Shares as the Company
may from time to time reasonably require for inclusion in the Registration
Statement, and the Company may exclude from such registration the shares of
Common Stock of any Holder that fails to furnish such information within a
reasonable time after receiving such request.
(m) The Company shall enter into such customary agreements
(including, if requested, an underwriting agreement in customary form) and take
all such other action, if any, as Holders of a majority of the Shares being sold
or the managing underwriters (if any) shall reasonably request in order to
facilitate the disposition of the Shares pursuant to the Registration Statement;
PROVIDED, HOWEVER, that the Company shall have no obligation to pay any
discounts or underwriting commission attributable to Restricted Shares sold for
the account of Holders, or any expenses of the underwriters other than those
customarily reimbursed by sellers of securities, including (A) fees and expenses
of filings and counsel in connection with the qualification of the Shares for
offering and sale under state securities laws, (B) fees and expenses of filings
and counsel incident to securing any required review by the National Association
of Securities Dealers, Inc. of the terms of the underwriting and (C) other
expenses in the event that the underwriting agreement is terminated after its
execution but prior to closing of the sale thereunder. The Company agrees that,
in connection with an underwritten registration, it will enter into an
underwriting agreement in customary form that will contain applicable
indemnification provisions similar to those contained in Section 5 hereof,
providing for general indemnification by the Company of the underwriters and for
indemnification by the Holders of the underwriters that is limited to losses
derived from misstatements or omissions made in reliance upon and in conformity
with written information furnished to the Company by such Holder expressly for
use therein.
(n) The Company, if requested by Holders of a majority of the
Shares being sold, or the managing underwriters (if any) in connection with the
Registration Statement, shall use its best efforts to cause (i) its counsel to
deliver an opinion relating to the Registration Statement and the Common Stock,
in customary form addressed to such
8
Holders and the managing underwriters (if any), thereof as of the effective date
of such Registration Statement and the closing of any underwriting; (ii) its
officers to execute and deliver all customary documents and certificates
requested by Holders of a majority of the Shares being sold or the managing
underwriters (if any), including an underwriting agreement containing customary
representations, agreements and indemnification on the part of the Company; and
(iii) its independent public accountants to provide a comfort letter in
customary form, subject to receipt of appropriate documentation as contemplated,
and only if permitted, by Statement of Auditing Standards No. 72.
(o) The Company will use its best efforts to cause the shares
of Common Stock covered by the Registration Statement to be listed on each
securities exchange, if any, or NASDAQ on which similar securities issued by the
Company are then listed, if so requested by Holders of a majority of shares of
Common Stock covered by the Registration Statement, or by the managing
underwriters (if any).
4. REGISTRATION EXPENSE. The Company will bear all expenses
incurred in connection with the performance of its obligations under this
Agreement, including without limitation filing fees, printing costs, and
(subject to the provisions of Section 2(a)(iii)) the costs and expenses of a
roadshow or other management presentations to investors relating to the Company,
but not the underwriting commissions or discounts associated with the sale of
Restricted Shares, and the Company will reimburse the Holders for the reasonable
fees (not exceeding $10,000), disbursements and expenses of counsel (and any
local counsel as reasonably required) chosen by the Holders of a majority of the
shares of Common Stock to be sold pursuant to a Registration Statement acting
for the Holders in connection therewith.
5. INDEMNIFICATION.
(a) The Company shall indemnify and hold harmless each of the
Holders of Common Stock to be included in such registration against any losses,
claims, damages or liabilities, joint or several, to which such Holder may
become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement under which such shares of
Common Stock were registered under the Act, or any preliminary, final or summary
prospectus contained therein or furnished by the Company to any such Holder, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
the Company shall reimburse such Holder for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such action or claim as such expenses are incurred; PROVIDED, HOWEVER, that the
Company shall not be liable to any such person in any such case to the extent
that any such loss, claim, damage or liability (or actions in respect there of)
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in the Registration Statement, or
preliminary, final or summary prospectus, or amendment or supplement thereto, in
9
reliance upon and in conformity with written information furnished to the
Company by, or on behalf of, such person expressly for use in connection
therewith.
(b) Each Holder agrees, as a condition to including any shares
of Common Stock in the Registration Statement filed pursuant to Section 2 hereof
and to entering into any underwriting agreement with respect thereto, severally
and not jointly, to (i) indemnify and hold harmless the Company and all other
Holders against any losses, claims, damages or liabilities to which the Company
or such other Holders may become subject under the Act, the Exchange Act, or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement, or
any preliminary, final or summary prospectus contained therein or furnished by
the Company to any such Holder, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by such Holder expressly for use in connection
therewith and (ii) reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such action or claim as such expenses are incurred; PROVIDED, HOWEVER, that
no such Holder shall be required to undertake liability to any person under this
Section 5(b) for any amounts in excess of the dollar amount of the proceeds to
be received by such Holder from the sale of such Holder's Common Stock pursuant
to such registration.
(c) Promptly after receipt by an indemnified party under
Sections 5(a) or 5(b) hereof written notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against an indemnifying party pursuant to the indemnification provisions of or
contemplated by this Section 5, notify such indemnifying party in writing of the
commencement of such action; but the omission so to notify the indemnifying
party shall not relieve it from any liability which it may have to any
indemnified party other than under the indemnification provisions of or
contemplated by Sections 5(a) or 5(b) hereof. In case any such action shall be
brought against any indemnified party and it shall notify an indemnifying party
of the commencement thereof, such indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party, and, after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, such indemnifying party shall not be liable to such
indemnified party for any legal expenses of other counsel or any other expenses,
in each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation. Such
indemnifying party shall not enter into any settlement with a party without
obtaining an unconditional release of each indemnified party with respect to any
and all claims against each indemnified party. An indemnified party shall not
enter into any settlement without the consent of the indemnifying party which
shall not be unreasonably withheld.
10
(d) Each party hereto agrees that, if for any reason the
indemnification provisions contemplated by Sections 5(a) or 5(b) are unavailable
to or insufficient to hold harmless an indemnified party in respect of any
losses, claims, damages or liabilities (or actions in respect thereof) referred
to therein, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is appropriate
to reflect the relative fault of the indemnifying party and the indemnified
party in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified party shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact relates to
information supplied by such indemnifying party or by such indemnified party,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The parties hereto
agree that it would not be just and equitable if contributions pursuant to this
Section 5(d) were determined by pro rata allocation (even if the Holders or any
agents or underwriters or all of them were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 5(d). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages, or
liabilities (or actions in respect thereof) referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 5(d), no Holder shall
be required to contribute any amount in excess of the amount by which the dollar
amount of the proceeds received by such Holder from the sale of any shares of
Common Stock (after deducting any fees, discounts and commissions applicable
thereto) exceeds the amount of any damages which such Holder has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission, and no underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Common
Stock underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Holders' and any underwriters' obligations in this
Section 5(d) to contribute shall be several in proportion to the principal
amount of Common Stock registered or under-written, as the case may be, by them
and not joint.
(e) The obligations of the Company under this Section 5 shall
be in addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each officer, director and
partner of each Holder, agent and underwriter and each person, if any, who
controls any Holder, agent or underwriter within the meaning of the Act; and the
obligations of the Holders and any underwriters contemplated by this Section 5
shall be in addition to any liability which the respective Holder or underwriter
may otherwise have and shall extend, upon the same term and
11
conditions, to each officer and director of the Company and to each person, if
any, who controls the Company within the meaning of the Act.
6. UNDERWRITTEN REGISTRATIONS. If any of the Restricted Shares
covered by the Registration Statement are to be sold in an underwritten
offering, the Company shall have the right to select the lead investment banker
or lead manager that will administer the offering, subject to the consent of the
Holders of a majority of such Restricted Shares included in such offering, which
consent will not be unreasonably withheld, and the Holders of a majority of such
Restricted Shares included in such offering will have the right to select one or
more coinvestment bankers or co-lead managers to administer the offering,
subject to consent of the Company, which consent will not be unreasonably
withheld.
No person may participate in any underwritten registration
hereunder unless such person (i) agrees to sell such person's Restricted Shares
on the basis reasonably provided in any underwriting arrangements approved by
the persons entitled hereunder to approve such arrangements and (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements.
7. HOLDBACK AGREEMENT. The Company agrees, if so requested by
the managing underwriters of any underwritten offering, (i) not to effect any
sale or distribution of its equity securities, or any securities convertible
into or exchangeable or exercisable for such securities, during the seven days
prior to and during the 90-day period beginning on the effective date of any
underwritten Demand Registration (except as part of such underwritten
registration or pursuant to registrations on Form S-4 or S-8 or any successor
form) and (ii) to use its best efforts to cause each executive officer, director
and any affiliate of the Company to agree not to effect any sale or distribution
(including sales pursuant to Rule 144) of any such securities during such period
(except as part of such underwritten registration, if otherwise permitted),
unless the underwriters managing the registered public offering otherwise agree.
8. MISCELLANEOUS.
(a) AMENDMENTS AND WAIVERS. The provisions of this Agreement
may not be amended, modified or supplemented, and waivers or consents to
departures from the provisions hereof may not be given, unless the Company has
obtained the written consent of Holders of a majority of the Shares.
Notwithstanding the foregoing, a waiver or consent to depart from the provisions
hereof with respect to a matter that relates exclusively to the rights of the
Holders whose Shares are being sold pursuant to the Registration Statement and
that does not directly or indirectly affect the rights of other Holders may be
given by Holders of a majority of the Shares being sold by such Holders pursuant
to the Registration Statement.
(b) NOTICES. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand-delivery, first-class
mail, telex, telecopier, or air courier guaranteeing overnight delivery: (i) if
to a Holder, at the most
12
current address given by such Holder to the Company in accordance with the
provisions of this Section 8(b), which, with respect to the Purchaser shall
initially be: Silver Oak Capital, L.L.C., c/o Angelo, Gordon & Co., L.P., 245
Park Avenue, 26th Floor, New York, New York 10167, ATTENTION: David Roberts
(Telecopy: (212) 867-5436); and (ii) if to the Company: Riddell Sports Inc., c/o
Varsity Spirit Corporation, 2525 Horizon Lake, Memphis, Tennessee 38133,
ATTENTION: John Nichols (Telecopy: (901) 387-4356). All such notices and
communications shall be deemed to have been duly given: when delivered by hand,
if personally delivered; three business days after being delivered to a next-day
air courier; when answered back, if faxed; and when receipt is acknowledged by
the recipient's telecopier machine, if telecopied.
(c) SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of and be enforceable by the parties hereto and
their respective successors and assigns.
(d) COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same instrument.
(e) GOVERNING LAW. This Agreement shall be governed by the laws
of the State of New York (regardless of the laws that might otherwise govern
under applicable principles of conflicts of law) as to all matters, including
but not limited to matters of validity, construction, effect, performance and
remedies.
(f) HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(g) SEVERABILITY. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law. If any term, provision,
covenant or restriction of this Agreement is held by a court of competent
jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions set forth herein shall remain in
full force and effect and shall in no way be affected, impaired or invalidated,
and the parties hereto shall use their reasonable efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such term, provision, covenant or restriction that may be
hereafter declared invalid, illegal, void or unenforceable.
13
IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first above written.
RIDDELL SPORTS INC.
By: /s/ John Nichols
------------------------------
Name: John Nichols
Title: Chief Financial Officer
SILVER OAK CAPITAL, L.L.C.
By: /s/ Michael L. Gordon
------------------------------
Name: Michael L. Gordon
Title: Authorized Signatory
14
SUBORDINATED GUARANTY
This Subordinated Guaranty, dated as of August 16, 2001 (the "Guaranty") by
Varsity Spirit Corporation, International Logos, Inc., Varsity/Intropa Tours,
Inc. and Varsity USA, Inc., Tennessee corporations; Varsity.com, Inc., a
Delaware corporation; and Varsity Spirit Fashions & Supplies, Inc., a Minnesota
corporation (collectively, the "Present Guarantors") and all wholly-owned
subsidiaries of the Company and its subsidiaries hereafter formed who execute
this Subordinated Guaranty or counterpart thereto (collectively, the "Future
Guarantors") (the Present Guarantors and the Future Guarantors are referred to
herein collectively as, the "Guarantors"), in favor of Silver Oak Capital,
L.L.C. (the "Purchaser").
Whereas, the Present Guarantors are the wholly-owned direct or indirect
subsidiaries of Riddell Sports Inc., a Delaware corporation (the "Borrower").
Whereas, the Borrower has previously issued to the Purchaser a 4.10% Convertible
Subordinated Note due November 1, 2004 in the aggregate principal amount of $7.5
million (the "Existing Note").
Whereas, the Borrower has entered into a Note Purchase Agreement dated August
16, 2001 (the "Purchase Agreement") with the Purchaser providing for the
Existing Note to be exchanged and discharged in full by the issuance of a new
4.10% Convertible Subordinated Note due November 1, 2007 (the "Note") in the
aggregate principal amount of $7.5 million to the Purchaser.
Whereas, in as an inducement to the Purchaser to purchase the Note, the Present
Guarantors have agreed to issue this Subordinated Guaranty.
Whereas, Section 9.6 of the Purchase Agreement requires the Future Guarantors to
be bound by this Subordinated Guaranty.
1. CERTAIN DEFINITIONS.
Section 1.01 Capitalized terms used but not defined herein shall have the
meanings given such terms in the Purchase Agreement.
Section 1.02 The term "Holder" or "Holders" shall refer to each of (i)
the Purchaser, (ii) each permitted successor or assignee of Purchaser's rights
and (iii) each permitted transferee or assignee of all or a portion of the Note
to the extent the Purchaser shall specify such person pursuant to this clause
(iii) as a Holder.
2. THE GUARANTEE.
Each Guarantor hereby jointly and severally guarantees to each Holder and
their respective successors and permitted assigns the prompt payment in full
when due (whether at stated maturity, by acceleration, required repurchase or
otherwise) of the principal of and interest on the Note held by each Holder and
all other amounts from time to time owing to the Holders by the Borrower under
the Purchase Agreement and under the Note, in each case strictly in accordance
with the terms thereof (such obligations being herein collectively called the
"Guaranteed Obligations"). Each Guarantor hereby further jointly and severally
agrees that if the Borrower shall fail to pay in full when due (whether at
stated maturity, by acceleration, required repurchase or otherwise) any of the
Guaranteed Obligations, such Guarantor will promptly pay the same, without any
demand or notice whatsoever, and that in the case of any extension of time of
payment or renewal of any of the Guaranteed Obligations, the same will be
promptly paid in full when due (whether at extended maturity, by acceleration or
otherwise) in accordance with the terms of such extension or renewal.
3. OBLIGATIONS UNCONDITIONAL.
The obligations of each Guarantor under Section 2 hereof are absolute and
unconditional, irrespective of (i) the value, genuineness, validity, regularity
or enforceability of the obligations of the Borrower under this Guaranty, the
Purchase Agreement, the Note or any other agreement or instrument referred to
herein or therein, (ii) any substitution, release or exchange of any other
guarantee of or security for any of the Guaranteed Obligations (iii) the absence
of any action to enforce the Purchase Agreement or the Note, (iv) any waiver or
consent by the Holder with respect to any provisions of the Purchase Agreement
or the Note, (v) any modification or amendment of, or supplement of, the
Guaranty, Purchase Agreement, Note or any other agreements or instruments
referred to herein or therein or (vi) the recovery of any judgment against the
Borrower or any action to enforce such judgment, and, to the fullest extent
permitted by applicable law, irrespective of any other circumstance whatsoever
that might otherwise constitute a legal or equitable discharge or defense of a
surety or guarantor, it being the intent of this Section 3 that the obligations
of the Guarantors hereunder shall be absolute and unconditional under any and
all circumstances. Without limiting the generality of the foregoing, it is
agreed that the occurrence of any one or more of the following shall not impair
the liability of any Guarantor hereunder, which shall remain absolute and
unconditional as described above:
(A) at any time or from time to time, without notice to any
Guarantor, the time for any performance of or compliance with any
of the Guaranteed Obligations shall be extended, or such
performance or compliance shall be waived;
(B) any of the acts mentioned in any of the provisions of this
Guaranty, the Purchase Agreement or the Note or any other
agreement or instrument referred to herein or therein shall be
done or omitted; or
(C) the maturity of any of the Guaranteed Obligations shall be
accelerated, or any of the Guaranteed Obligations shall be
modified, supplemented or amended in any respect, or any right
under this Guaranty, the Purchase Agreement or the Note or any
other agreement or instrument referred to herein or therein shall
be waived or any other guarantee of any of the Guaranteed
Obligations or any security therefor shall be released or
exchanged in whole or in part or otherwise dealt with.
Each Guarantor hereby expressly waives diligence, presentment, demand of
payment, filing of claims with a court in the event of insolvency or bankruptcy
of the Borrower, protest, notices and all demands whatsoever, any requirement
that any Holder exhaust any right, power or remedy or proceed against the
Borrower under the Purchase Agreement or the Note or any other agreement or
instrument referred to herein or therein, or against any other Person under any
2
other guarantee of, or security for, any of the Guaranteed Obligations and
covenants that its Guaranteed Obligations will not be discharged except by
complete performance by the Borrower or another Guarantor of such Guaranteed
Obligations.
4. REINSTATEMENT.
The obligations of each Guarantor under this Guaranty shall be
automatically reinstated if and to the extent that for any reason any payment by
or on behalf of the Borrower in respect of the Guaranteed Obligations is
rescinded or must be otherwise restored by any holder of any of the Guaranteed
Obligations, whether as a result of any proceedings in bankruptcy or
reorganization or otherwise.
5. SUBROGATION.
Each Guarantor hereby waives all rights of subrogation,
contribution, reimbursement and indemnity and all other rights that such
Guarantor would have against the Borrower at any time as a result of any payment
in respect of its Guaranteed Obligations (whether contractual, under the
Bankruptcy Code, or otherwise).
6. REMEDIES.
Each Guarantor agrees that, as between such Guarantor and the
Holders, the obligations of the Borrower under the Purchase Agreement and the
Note may be declared to be forthwith due and payable as provided in the Purchase
Agreement (and shall be deemed to have become automatically due and payable in
the circumstances provided in the Purchase Agreement) for purposes of the
Guaranty notwithstanding any stay, injunction or other prohibition preventing
such declaration (or such obligations from becoming automatically due and
payable) as against the Borrower and that, in the event of such declaration (or
such obligations being deemed to have become automatically due and payable),
such obligations (whether or not due and payable by the Company) shall forthwith
become due and payable by such Guarantor for purposes of said Section 2 of the
Guaranty.
7. INSTRUMENT FOR THE PAYMENT OF MONEY.
Each Guarantor hereby acknowledges that the guarantee in this
Guaranty constitutes an instrument for the payment of money and consents and
agrees that any Holder, at its sole option, in the event of a dispute by such
Guarantor in the payment of any moneys due hereunder, shall have the right to
bring motion-action under New York CPLR Section 3213.
8. CONTINUING GUARANTEE.
The guarantee in this Guaranty is a continuing guarantee, and
shall apply to all Guaranteed Obligations whenever arising.
9. GENERAL LIMITATION ON GUARANTEE OBLIGATIONS.
In any action or proceeding involving any state corporate law, or
any state or Federal bankruptcy, insolvency, reorganization, fraudulent
conveyance, fraudulent transfer or other law
3
affecting the rights of creditors generally, if the obligations of any Guarantor
under Section 2 hereof would otherwise be held or determined to be void, invalid
or unenforceable, or subordinated to the claims of any other creditors, on
account of the amount of its liability under said Section 2, then,
notwithstanding any other provision hereof to the contrary, the amount of such
liability shall, without any further action by such Guarantor, any Holder or any
other Person, be automatically limited and reduced to the highest amount that is
valid and enforceable and not subordinated to the claims of other creditors as
determined in such action or proceeding.
10. SUBORDINATION.
The obligations of each Guarantor under this Guaranty shall be
junior and subordinated in right of payment to any Senior Indebtedness of such
Guarantor in the same manner and to the same extent as the Note is subordinated
to Senior Indebtedness of the Borrower, pursuant to Section 13 of the Purchase
Agreement.
11. ANTI-LAYERING.
No Guarantor will, directly or indirectly, incur or suffer to
exist any Indebtedness that is subordinate in right of payment to any
Indebtedness of such Guarantor, unless such Indebtedness is PARI PASSU with or
is subordinate in right of payment to such Guarantor's payment obligations under
the Guaranty.
12. REQUIREMENTS.
Subject to the terms of the Purchase Agreement, this Guaranty may
be amended, and the observance of any term hereof may he waived (either
retroactively or prospectively), with (and only with) the written consent of the
Majority Lenders.
13. SUCCESSORS AND ASSIGNS.
The guaranty provided in Section 2 hereof binds and inures to the
benefit of the Holders and each of their respective successors and permitted
assigns.
14. GOVERNING LAW.
This Guaranty shall be construed and enforced in accordance with,
and the rights of the parties shall be governed by, the law of the State of New
York excluding choice-of-law principles of the law of such State that would
require the application of the laws of a jurisdiction other than such State.
15. ASSIGNMENTS AND RESTRICTIONS ON TRANSFERS.
No Guarantor may assign any of its rights or obligations hereunder
or under the Note without the prior consent of the Majority Lenders. The
Purchaser and each Holder shall not transfer any of its rights under the
Guaranty except to the same extent as permitted by Section 20.7 of the Purchase
Agreement.
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IN WITNESS WHEREOF, the undersigned have executed this Subordinated
Guaranty as of the date first above written.
Varsity Spirit Corporation
Varsity Spirit Fashions & Supplies, Inc.
International Logos, Inc.
Varsity/Intropa Tours, Inc.
Varsity USA, Inc.
Varsity.com, Inc.
By: /s/ John Nichols
-------------------------------------
Name: John Nichols
Title: Senior Vice President
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