-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MjkeMDWWmwlZTn2XuAaoBIR+aLedhhtvMQa63tbl81J100jRk3CcXBwhIJ1ZtdDJ mcQ/XGBckcn4FacX7S8U/w== 0000893220-97-000948.txt : 19970515 0000893220-97-000948.hdr.sgml : 19970515 ACCESSION NUMBER: 0000893220-97-000948 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KERR GROUP INC CENTRAL INDEX KEY: 0000055454 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 950898810 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07272 FILM NUMBER: 97604068 BUSINESS ADDRESS: STREET 1: 500 NEW HOLLAND AVENUE CITY: LANCASTER STATE: PA ZIP: 17602 BUSINESS PHONE: 3105562200 MAIL ADDRESS: STREET 1: 1840 CENTURY PARK EAST CITY: LOS ANGELES STATE: CA ZIP: 90067 FORMER COMPANY: FORMER CONFORMED NAME: KERR GLASS MANUFACTURING CORP DATE OF NAME CHANGE: 19920518 10-Q 1 KERR GROUP, INC. FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1997 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------- Commission File Number 1 - 7272 ------------------------- KERR GROUP, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-0898810 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 New Holland Avenue, Lancaster, PA 17602 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (717) 299-6511 --------------------------- - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last year. 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 1934 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 --- --- The number of shares of Registrant's Common Stock, $.50 par value, outstanding as of April 30, 1997 was 3,933,095. -1- 2 KERR GROUP, INC. INDEX Page No. -------- Part I. Financial Information Item 1. Financial Statements Condensed Balance Sheets - March 31, 1997 and December 31, 1996 3 - 4 Condensed Statements of Earnings (Loss) - Three Months Ended March 31, 1997 and 1996 5 Condensed Statements of Cash Flows - Three Months Ended March 31, 1997 and 1996 6 Notes to Condensed Financial Statements 7 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 12 Part II. Other Information 13 -2- 3 KERR GROUP, INC. Condensed Balance Sheets As of March 31, 1997 and December 31, 1996 (in thousands except per share data)
(Unaudited) (Audited) March 31, December 31, Assets 1997 1996 - ------ ----------- ----------- Current assets Cash and cash equivalents $ 5,080 $ 9,107 Receivables-primarily trade accounts, less allowance for doubtful accounts of $376 at March 31, 1997 and $287 at December 31, 1996 14,552 9,710 Inventories Raw materials and work in process 5,995 6,702 Finished goods 7,545 8,034 --------- -------- Total inventories 13,540 14,736 Prepaid expenses and other current assets 731 31 --------- -------- Total current assets 33,903 33,584 --------- -------- Property, plant and equipment, at cost 100,794 99,148 Accumulated depreciation and amortization (62,242) (60,258) --------- -------- Net property, plant and equipment 38,552 38,890 --------- -------- Deferred income tax asset 0 0 Goodwill and other intangibles, net of amortization of $2,316 at March 31, 1997 and $2,749 at December 31, 1996 6,025 5,682 Other assets 7,531 7,370 --------- -------- $ 86,011 $ 85,526 ========= ========
See accompanying notes to condensed financial statements. -3- 4 KERR GROUP, INC. Condensed Balance Sheets As of March 31, 1997 and December 31, 1996 (in thousands except per share data)
(Unaudited) (Audited) March 31, December 31, Liabilities and Stockholders' Equity 1997 1996 - ------------------------------------ -------- -------- Current liabilities Short-term debt $ 50,900 $ 50,900 Accounts payable 8,914 7,373 Accrued expenses 5,613 5,622 -------- -------- Total current liabilities 65,427 63,895 -------- -------- Accrued pension liability 14,475 13,935 Other long-term liabilities 3,937 4,394 Stockholders' equity Preferred Stock, 487 shares authorized and issued, liquidation value of $21.70 per share at March 31, 1997 and $21.28 per share at December 31, 1996 9,748 9,748 Common Stock, $ .50 par value per share, 20,000 shares authorized, 4,226 shares issued 2,113 2,113 Additional paid-in capital 27,239 27,239 Retained earnings (accumulated deficit) (21,770) (20,640) Treasury Stock, 293 shares at cost (6,913) (6,913) Excess of additional pension liability over unrecognized prior service cost, net of tax benefits (8,245) (8,245) -------- -------- Total stockholders' equity 2,172 3,302 -------- -------- $ 86,011 $ 85,526 ======== ========
See accompanying notes to condensed financial statements. -4- 5 KERR GROUP, INC. Condensed Statements of Earnings (Loss) for the Three Months Ended March 31, 1997 and 1996 (in thousands except per share data)
(Unaudited) Three Months Ended March 31, ------------------------- 1997 1996 -------- -------- Net sales $ 28,732 $ 25,096 Cost of sales 21,957 22,144 -------- -------- Gross profit 6,775 2,952 Research and development expenses 433 490 Plant administrative expenses 1,309 1,486 Selling and warehouse expenses 2,145 2,086 General corporate expenses 2,323 2,907 Restructuring costs 0 7,500 Financing costs 533 0 Interest expense, net 1,162 1,259 -------- -------- Loss from continuing operations before income taxes (1,130) (12,776) Provision (benefit) for income taxes 0 (5,110) -------- -------- Loss from continuing operations (1,130) (7,666) Discontinued operations: Gain on sale of discontinued operations 0 1,564 Loss from discontinued operations 0 (133) -------- -------- Net earnings related to discontinued operations 0 1,431 -------- -------- Net loss (1,130) (6,235) Preferred stock dividends 207 207 -------- -------- Net loss applicable to common stockholders $ (1,337) $ (6,442) ======== ======== Net earnings (loss) per common share, primary and fully diluted: From continuing operations $ (0.34) $ (2.00) From discontinued operations 0.00 0.36 -------- -------- Net loss $ (0.34) $ (1.64) ======== ========
See accompanying notes to condensed financial statements. -5- 6 KERR GROUP, INC. Condensed Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996 (in thousands)
(Unaudited) Three Months Ended March 31, ------------------------- 1997 1996 -------- --------- Cash flows provided (used) by operations Continuing operations: - --------------------------------------------------------------- Loss from continuing operations $(1,130) $ (7,666) Add (deduct) noncash items included in loss from continuing operations Expenses associated with restructuring 0 4,500 Payments associated with restructuring (860) (1,188) Expenses associated with financing 533 0 Depreciation and amortization 2,128 2,556 Change in deferred income taxes 0 (2,130) Change in total pension liability, net 540 15 Other, net 53 (92) Changes in operating working capital Receivables (4,842) (752) Inventories 1,196 648 Other current assets (749) 150 Accounts payable 1,429 385 Accrued expenses (135) (1,304) Cash flow provided (used) by discontinued operations 557 (3,932) ------- -------- Cash flow provided (used) by operations (1,280) (8,810) ------- -------- Cash flows provided (used) by investing activities - -------------------------------------------------- Continuing operations: Capital expenditures (1,715) (231) Other, net (611) 260 Discontinued operations: Capital expenditures 0 (234) Proceeds from sale of assets of Consumer Products Business 0 14,417 Other, net 0 (55) ------- -------- Cash flow provided (used) by investing activities (2,326) 14,157 ------- -------- Cash flows provided (used) by financing activities - -------------------------------------------------- Repayment of short-term debt 0 (4,000) Payments associated with financing (421) 0 Dividends paid 0 (207) ------- -------- Cash flow provided (used) by financing activities (421) (4,207) ------- -------- Cash and cash equivalents - ------------------------- Increase (decrease) during the period (4,027) 1,140 Balance at beginning of the period 9,107 3,904 ------- -------- Balance at end of the period $ 5,080 $ 5,044 ======= ========
See accompanying notes to condensed financial statements -6- 7 KERR GROUP, INC. Notes to Condensed Financial Statements (Unaudited) 1) General The condensed financial statements represent the accounts of Kerr Group, Inc. (referred to as the Company). In the opinion of management, the accompanying condensed financial statements contain all adjustments (consisting of only normal recurring accruals and certain non-recurring accruals for restructuring charges as described below) necessary to present fairly the financial position of the Company as of March 31, 1997, and the results of operations for the three months ended March 31, 1997 and 1996, and changes in cash flows for the three months ended March 31, 1997 and 1996. The results of operations for the first three months of 1997 are not necessarily indicative of the results to be expected for the full year. Fully diluted earnings per common share reflect when dilutive, 1) the incremental common shares issuable upon the assumed exercise of outstanding stock options, and 2) the assumed conversion of the Class B, Series D Preferred Stock and the elimination of the related dividends. The calculation of fully diluted net earnings (loss) per common share for the three months ended March 31, 1997 and 1996 was not dilutive. The Company has not declared a dividend on its Class B, Series D Preferred Stock since the first quarter of 1996. The cumulative amount of undeclared dividends as of March 31, 1997 is $829,000. Under accounting rules, such dividends are not accrued until declared, however, for financial reporting purposes the amount of such dividends are shown on the face of the income statement as a deduction to arrive at net earnings (loss) applicable to common stockholders. Under the terms of the Company's $8,500,000 working capital facility, the Company is not permitted to declare or pay any dividends on its preferred stock. Certain reclassifications have been made to prior years' financial statements to conform to the 1997 presentation. 2) Financing The Company has been in default with respect to financial covenants under loan agreements related to its $50,900,000 of unsecured debt since March 7, 1997. The Company has had discussions with the owners of the unsecured debt regarding a waiver of the defaults and the purchase of the debt by the Company. The funds for the purchase would be provided by a senior secured loan and a subordinated loan which the Company is negotiating with institutional lenders. There can be no assurance that the Company will be able to reach a definitive agreement with the owners of the unsecured debt. If the financial restructuring is not consummated or subsequent waiver of financial covenants and the extension of the maturity date of the unsecured Note are not obtained, the holders of the institutional indebtedness would be entitled to exercise certain remedies, including the acceleration of the outstanding debt. However, the Company believes that the financial restructuring will be consummated. The accompanying condensed financial statements have been prepared on the basis of such belief of the Company. -7- 8 During April 1997, the Company entered into an $8,500,000 revolving credit agreement, secured by accounts receivable, for a one-year term. Borrowings will bear interest at 3% above the prime rate and the lending institution will receive warrants to purchase 95,000 shares of the Company's common stock at a purchase price of $0.50 per share. The facility replaces an accounts receivable sales agreement under which the purchaser was not providing advances because the Company had been in default with respect to financial covenants under loan agreements for $50,900,000 of unsecured debt since March 7, 1997. The grant of the lien on receivables and any borrowings under the new facility constitute additional defaults under the existing loan agreements. During the three month period ended March 31, 1997 the Company incurred costs of $533,000 for professional fees related to its refinancing efforts consisting of i) fees paid to the Company's advisors in its negotiations with lenders and ii) certain fees associated with prospective lenders. 3) Receivables Receivables as of March 31, 1997 and December 31, 1996, as shown on the accompanying Condensed Balance Sheets, have been reduced by net proceeds of $0 and $3,861,000, respectively, from advances pursuant to the sale of receivables under the Company's Accounts Receivable Agreement. 4) Income Taxes During the quarter ended March 31, 1997, the Company recorded a charge of $441,000 to provide a valuation reserve against its deferred income tax asset. The increase in the valuation reserve eliminated the tax benefit the Company would have generated during the first quarter of 1997, and was provided due to the uncertainty related to the Company's financing. During the third and fourth quarters of 1996, a valuation reserve was provided to eliminate the tax benefit recorded during the first quarter of 1996. 5) Restructuring During the first quarter of 1996, the Company recorded a pretax loss of $7,500,000 for certain costs associated with the restructuring of the Company, which included moving the corporate headquarters from Los Angeles, California to Lancaster, Pennsylvania and relocating the wide-mouth jar operations from Santa Fe Springs, California to Bowling Green, Kentucky. The pretax loss consisted of reserves for i) severance, workers' compensation and insurance continuation costs of $3,000,000, ii) costs associated with subleasing the two facilities of $2,300,000, iii) asset retirements of $1,600,000 and iv) other costs of $600,000. During the first quarter of 1997, the Company made cash payments related to such reserves for i) costs associated with terminating the leases of facilities of $611,000, ii) severance pay and related costs of $195,000, and iii) other costs of $54,000. During the first quarter of 1996, the Company made cash payments related to such reserves for severance pay and related costs of $1,188,000. The ultimate required amount of the reserves related to the restructuring is expected to approximate the original estimate. 6) Discontinued Operations During the first quarter of 1996, the Company sold the manufacturing assets of the Consumer Products Business for a purchase price of $14,417,000. The Company recorded a pretax gain of $2,607,000 ($1,564,000 after-tax) in connection with this sale. This pretax gain has been reduced by $5,800,000 of reserves for i) retiree health care and pension expenses of $3,800,000, ii) severance pay, workers' compensation claims and insurance continuation costs of $1,000,000, iii) professional fees of $500,000, iv) asset retirements of $300,000, and v) other costs of $200,000. -8- 9 During the first quarter of 1997, the Company made cash payments related to such reserves for severance pay and related costs of $110,000. During the first quarter of 1996, the Company made cash payments related to such reserves for i) professional fees of $36,000, and ii) other costs of $3,000. The ultimate required amount of the reserves related to the disposal of the Consumer Products Business is expected to approximate the original estimate. The gain on the sale and the results of the Consumer Products Business have been reported separately as a component of discontinued operations in the Condensed Statements of Earnings (Loss). -9- 10 KERR GROUP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three Months Ended March 31, 1997 and 1996 Results of Operations Continuing Operations Net sales for the three months ended March 31, 1997 were $28,732,000 as compared to $25,096,000 for the three months ended March 31, 1996, an increase of $3,636,000 or 14%. The increase in net sales for the three months ended March 31, 1997 over the comparable period in 1996 was due primarily to higher unit sales, as well as improved pricing of prescription packaging and pharmaceutical packaging. Cost of sales for the three months ended March 31, 1997 were $21,957,000 as compared to $22,144,000 for the three months ended March 31, 1996, a decrease of $187,000 or 1%. The decrease in cost of sales for the quarter in spite of higher unit sales was primarily due to lower manufacturing costs which were partially due to higher production levels which reduced unit costs. Gross profit as a percent of net sales for the three months ended March 31, 1997 increased to 24% as compared to 12% for the three months ended March 31, 1996 due primarily to improved pricing of prescription packaging and pharmaceutical packaging and secondarily to lower manufacturing costs, which were partially due to higher production levels. Research and development, selling, warehouse, general and administrative expenses decreased $759,000 or 11% during the three months ended March 31, 1997, as compared to the same period in 1996, due primarily to lower costs resulting from the restructuring of the Company. During the three month period ended March 31, 1997, the Company incurred costs of $533,000 for professional fees in connection with its refinancing efforts consisting of i) fees paid to the Company's advisors in its negotiations with lenders and ii) certain fees associated with prospective lenders. During the first quarter of 1996, the Company recorded a pretax loss of $7,500,000 for certain costs associated with the restructuring of the Company, which included moving the corporate headquarters from Los Angeles, California to Lancaster, Pennsylvania and relocating the wide-mouth jar operations from Santa Fe Springs, California to Bowling Green, Kentucky. The pretax loss consisted of reserves for i) severance, workers' compensation and insurance continuation costs of $3,000,000, ii) costs associated with subleasing the two facilities of $2,300,000, iii) asset retirements of $1,600,000 and iv) other costs of $600,000. The ultimate required amount of the reserves related to the restructuring is expected to approximate the original estimate. The relocations of the corporate headquarters and the wide-mouth jar manufacturing operation have been completed. The restructuring resulted in annualized pretax cost savings of approximately $6,500,000. Net interest expense decreased $97,000 during the three month period ended March 31, 1997 as compared to the same period in 1996, primarily as a result of lower levels of short-term financing. The loss before income taxes decreased $11,646,000 during the three months ended March 31, 1997 as compared to the same period in 1996, due primarily to i) the $7,500,000 pretax loss in 1996 related to the restructuring, ii) improved pricing of prescription packaging and pharmaceutical packaging and iii) lower manufacturing costs. In addition, lower corporate expenses as a result of the restructuring and higher unit sales of prescription packaging and pharmaceutical packaging improved 1997 results. -10- 11 The benefit for income taxes decreased $5,110,000 during the three months ended March 31, 1997 as compared to the same period in 1996, primarily as a result of lower pretax losses. In addition, during the first quarter of 1997, the Company recorded an income tax charge of $441,000 to increase the valuation reserve against the Company's net deferred income tax asset. The increase in the valuation reserve eliminated the tax benefit the Company would have generated during the first quarter of 1997, and was provided due to the uncertainty related to the Company's financing. During the third and fourth quarters of 1996, a valuation reserve was provided to eliminate the tax benefit recorded during the first quarter of 1996. Discontinued Operations During the first quarter of 1996, the Company sold the manufacturing assets of the Consumer Products Business for a purchase price of $14,417,000. The Company recorded a pretax gain of $2,607,000 ($1,564,000 after-tax) in connection with this sale. This pretax gain has been reduced by $5,800,000 of reserves for i) retiree health care and pension expenses of $3,800,000, ii) severance pay, workers' compensation claims and insurance continuation costs of $1,000,000, iii) professional fees of $500,000, iv) asset retirements of $300,000, and v) other costs of $200,000. The ultimate required amount of the reserves related to the disposal of the Consumer Products Business is expected to approximate the original estimate. Recently Issued Accounting Pronouncements In the first quarter of 1997, the Financial Accounting Standards Board adopted Statement No. 128, Earnings per Share (FASB No. 128) and Statement No. 129, Disclosure of Information about Capital Structure (FASB No. 129). FASB No. 128 simplifies the computation of earnings per common share by replacing primary and fully diluted presentations with the new basic and diluted disclosures. FASB No. 129 establishes standards for disclosing information about an entity's capital structure. These statements will be adopted by the Company effective December 31, 1997. Liquidity and Capital Resources During the first quarter of 1997, the Company used its existing cash balances to reduce the level of advances under the Company's Accounts Receivable Facility by $3,861,000 and fund cash costs of the restructuring of $860,000. During the first quarter of 1996, the principal source of cash was $14,417,000 received from the sale of the manufacturing assets of the Consumer Products Business. The principal uses of cash were to fund i) pretax losses, ii) net debt retirements of $4,000,000 and iii) increased operating working capital requirements of $3,821,000 related to the seasonal increase in inventories and receivables of the Consumer Products Business, which is presented as discontinued operations in the accompanying financial statements. The Company has not declared a dividend on its Class B, Series D Preferred Stock since the first quarter of 1996. The cumulative amount of undeclared dividends as of March 31, 1997 was $829,000. Under accounting rules, such dividends are not accrued until declared, however, for financial reporting purposes the amount of such dividends are shown on the face of the income statement as a deduction to arrive at net earnings (loss) applicable to common stockholders. Furthermore, since the third quarter of 1990, the Company has not declared any dividends on its Common Stock. Under the terms of the Company's $8,500,000 working capital facility, the Company is not permitted to declare or pay any dividends on its preferred or common stock. The ratio of current assets to current liabilities at both March 31, 1997 and December 31, 1996 was 0.5. The ratio of current assets to current liabilities is less than 1.0 due to the classification of the Company's outstanding Senior Notes as a current liability because the Company is in default of certain financial covenants. The ratio of total debt to total capitalization increased to 96% at March 31, 1997 from 94% at December 31, 1996 due to lower stockholders' equity. -11- 12 The Company has been in default with respect to financial covenants under loan agreements related to its $50,900,000 of unsecured debt since March 7, 1997. The Company has had discussions with the owners of the unsecured debt regarding a waiver of the defaults and the purchase of the debt by the Company. The funds for the purchase would be provided by a senior secured loan and a subordinated loan which the Company is negotiating with institutional lenders. There can be no assurance that the Company will be able to reach a definitive agreement with the owners of the unsecured debt. If the financial restructuring is not consummated or subsequent waiver of financial covenants and the extension of the maturity date of the unsecured Note are not obtained, the holders of the institutional indebtedness would be entitled to exercise certain remedies, including the acceleration of the outstanding debt. However, the Company believes that the financial restructuring will be consummated. The accompanying condensed financial statements have been prepared on the basis of such belief of the Company. During April 1997, the Company entered into an $8,500,000 revolving credit agreement, secured by accounts receivable, for a one-year term. Borrowings will bear interest at 3% above the prime rate and the lending institution will receive warrants to purchase 95,000 shares of the Company's common stock at a purchase price of $0.50 per share. The facility replaces an accounts receivable sales agreement under which the purchaser was not providing advances because the Company had been in default with respect to financial covenants under loan agreements for $50,900,000 of unsecured debt since March 7, 1997. The grant of the lien on receivables and any borrowings under the new facility constitute additional defaults under the existing loan agreements. At March 31, 1997, the Company had unused sources of liquidity consisting of cash and cash equivalents of $5,080,000, a tax net operating loss carryforward of $28,300,000, a minimum tax credit carryforward of $1,068,000 and other tax credit carryforwards of $417,000. The Company believes that its financial resources, including i) borrowings available under the Company's one-year $8,500,000 working capital facility entered into in April 1997, ii) the $3,669,000 of cash received in April from the sale of real estate in Santa Ana, California and iii) other internally generated funds, are adequate to meet its foreseeable needs, subject to the consummation of the financial restructuring. Disclosure Regarding Forward Looking Statements Portions of the Quarterly Report on Form 10-Q include forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although the Company believes that the expectations reflected in such forward looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. -12- 13 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a. Exhibits 10.1 Loan and Security Agreement by and between Madeleine L.L.C. as Lender and Kerr Group, Inc. as Borrower, dated as of April 18, 1997 10.2 Kerr Group, Inc. Common Stock Purchase Warrant, dated April 18, 1997 10.3 Registration Agreement by and among Kerr Group, Inc. and Madeleine L.L.C., et al, dated as of April 18, 1997 11.1 Statement re: Computation of Per Common Share Earnings (Loss). 27.1 Financial Data Schedule. b. Reports on Form 8-K There were no reports filed on Form 8-K for the three months ended March 31, 1997. 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. KERR GROUP, INC. May 13, 1997 By /s/ D. Gordon Strickland ------------------------------------ D. Gordon Strickland President, Chief Executive Officer May 13, 1997 By /s/ Geoffrey A. Whynot ------------------------------------ Geoffrey A. Whynot Vice President, Finance Chief Financial Officer -13- EX-10.1 2 LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.1 LOAN AND SECURITY AGREEMENT BY AND BETWEEN MADELEINE L.L.C. AS LENDER AND KERR GROUP, INC. AS BORROWER DATED AS OF APRIL 18, 1997 2 TABLE OF CONTENTS
Page ---- SECTION 1. DEFINITIONS................................................................................ 1 SECTION 2. THE CREDIT FACILITY........................................................................ 16 2.1 Revolving Loans....................................................................... 16 2.2 Prepayment of Revolving Loans......................................................... 17 2.3 Reduction of Commitment............................................................... 18 2.4 Availability Reserves................................................................. 18 SECTION 3. INTEREST AND FEES.......................................................................... 18 3.1 Interest.............................................................................. 18 3.2 Closing Fee........................................................................... 19 3.3 Administrative Fee.................................................................... 19 3.4 Unused Line Fee....................................................................... 19 3.5 Fees Earned and Non-Refundable........................................................ 19 3.6 Payments.............................................................................. 19 3.7 Charges to the Loan Account........................................................... 20 SECTION 4. CONDITIONS PRECEDENT....................................................................... 20 4.1 Conditions Precedent to the Initial Revolving Loan.................................... 20 4.2 Conditions Precedent to all Revolving Loans........................................... 23 SECTION 5. GRANT OF SECURITY INTEREST................................................................. 24 SECTION 6. COLLECTION AND ADMINISTRATION.............................................................. 25 6.1 Borrower's Loan Account............................................................... 25 6.2 Collection of Accounts................................................................ 25 6.3 Payments.............................................................................. 26 6.4 Use of Proceeds....................................................................... 27 6.5 Lender not Liable..................................................................... 27 SECTION 7. COLLATERAL REPORTING AND COVENANTS......................................................... 27 7.1 Collateral Reporting.................................................................. 27 7.2 Accounts Covenants.................................................................... 28 7.3 Power of Attorney..................................................................... 29 7.4 Right to Cure......................................................................... 30 7.5 Access to Premises.................................................................... 30
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SECTION 8. REPRESENTATIONS AND WARRANTIES............................................................. 31 8.1 Corporate Existence, Power and Authority; Capitalization; Subsidiaries................ 31 8.2 Financial Statements; No Material Adverse Change...................................... 31 8.3 Chief Executive Office; Collateral Locations.......................................... 32 8.4 Priority of Liens; Title to Properties................................................ 32 8.5 Tax Returns........................................................................... 32 8.6 Litigation............................................................................ 33 8.7 Compliance with Other Agreements and Applicable Laws.................................. 33 8.8 Environmental Compliance.............................................................. 33 8.9 Employee Benefits..................................................................... 34 8.10 Bank Accounts......................................................................... 35 8.11 Dissolution of Santa Fe Plastics Corporation.......................................... 35 8.12 Accuracy and Completeness of Information.............................................. 36 8.13 Survival of Warranties; Cumulative.................................................... 36 8.14 Governmental Approvals................................................................ 36 8.15 Permits, Etc.......................................................................... 36 8.16 Financing Statements.................................................................. 36 8.17 Representations and Warranties Regarding Accounts..................................... 37 8.18 Credit and Collection Policy.......................................................... 37 SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS......................................................... 37 9.1 Maintenance of Existence.............................................................. 38 9.2 New Chief Executive Office or Collateral Locations.................................... 38 9.3 No Changes............................................................................ 38 9.4 Further Assurances.................................................................... 38 9.5 Blocked Accounts...................................................................... 38 9.6 Compliance with Laws, Regulations, Etc................................................ 39 9.7 Payment of Taxes and Claims........................................................... 40 9.8 Insurance............................................................................. 40 9.9 Financial Statements and Other Information............................................ 40 9.10 Sale of Assets, Consolidation, Merger, Dissolution, Etc............................... 42 9.11 Encumbrances.......................................................................... 43 9.12 Indebtedness.......................................................................... 45 9.13 Loans, Investments, Guarantees, Etc................................................... 46 9.14 Dividends and Redemptions............................................................. 47 9.15 Transactions with Affiliates.......................................................... 47 9.16 Additional Bank Accounts.............................................................. 47 9.17 Compliance with ERISA................................................................. 47 9.18 Minimum EBITDA........................................................................ 49 9.19 Costs and Expenses.................................................................... 49
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SECTION 10. EVENTS OF DEFAULT AND REMEDIES............................................................. 49 10.1 Events of Default..................................................................... 49 10.2 Remedies.............................................................................. 52 SECTION 11. ISSUANCE OF EQUITY INTERESTS TO LENDER..................................................... 53 11.1 Authorization and Issuance of Capital Stock........................................... 54 11.2 Securities Act Matters............................................................... 54 11.3 Certain Taxes......................................................................... 54 11.4 Cancellation and Issuance............................................................. 55 SECTION 12. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW............................... 55 12.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver................. 55 12.2 Waiver of Notices..................................................................... 57 12.3 Amendments and Waivers................................................................ 57 12.4 Waiver of Counterclaims............................................................... 57 12.5 Indemnification....................................................................... 57 SECTION 13. TERM OF AGREEMENT; MISCELLANEOUS........................................................... 58 13.1 Term.................................................................................. 58 13.2 Notices............................................................................... 59 13.3 Partial Invalidity.................................................................... 59 13.4 Successors............................................................................ 59 13.5 Confidentiality....................................................................... 61 13.6 Entire Agreement...................................................................... 61 13.7 Records............................................................................... 62 13.8 Acknowledgments....................................................................... 62
-3- 5 INDEX TO EXHIBITS AND SCHEDULES Exhibit A Information Certificate Exhibit B Form of Registered Note Exhibit C Form of Notice of Borrowing Exhibit D Form of Warrant Exhibit E Form of Registration Agreement Exhibit F Form of Borrowing Base Report Exhibit G Form of Blocked Account Agreement Schedule 1 Projections Schedule 8.1 Capitalization / Equity Rights Schedule 8.4 Existing Liens Schedule 8.6 Litigation Schedule 8.7 Existing Defaults Schedule 8.8 Environmental Matters Schedule 8.9 Pension Matters Schedule 8.10 Bank Accounts Schedule 9.10 Licenses of Intellectual Property Schedule 9.12 Existing Indebtedness Schedule 9.13 Existing Loans, Advances and Guarantees 6 LOAN AND SECURITY AGREEMENT This Loan and Security Agreement dated as of April 18, 1997 is entered into by and between Madeleine L.L.C., a New York limited liability company ("Lender"), and Kerr Group, Inc., a Delaware corporation ("Borrower"). W I T N E S S E T H: WHEREAS, Borrower has requested that Lender agree to make revolving credit loans from time to time to Borrower in the aggregate principal amount not to exceed $8,500,000 at any time outstanding, the proceeds of which are to be used for working capital purposes; and WHEREAS, Lender is willing to make such revolving credit loans, subject to the creation of a perfected, first priority security interest in favor of Lender in respect of, among other things, all receivables and related property of Borrower and the other terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS All terms used herein which are defined in Article 1 or Article 9 of the Uniform Commercial Code (as defined herein) shall have the meanings given therein unless otherwise defined in this Agreement. All references to the plural herein shall also mean the singular and to the singular shall also mean the plural unless the context otherwise requires. All references to Borrower and Lender pursuant to the definitions set forth in the recitals hereto, or to any other person herein, shall include their respective successors and assigns. The words "hereof", "herein", "hereunder", "this Agreement" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not any particular provision of this Agreement and as this Agreement now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. The word "including" when used in this Agreement shall mean "including, without limitation". An Event of Default shall exist or continue or be continuing until such Event of Default is waived in accordance with Section 12.3 or is cured in a manner satisfactory to Lender. Any accounting term used herein unless otherwise defined in this Agreement shall have the meanings customarily given to such term in accordance with GAAP. For purposes of this Agreement, the following terms shall have the respective meanings given to them below: 7 "Accounts" shall mean all present and future rights of Borrower to payment for goods sold or leased or for services rendered, which are not evidenced by instruments or chattel paper, and whether or not earned by performance. "Administrative Fee" shall mean a non-refundable fee of $5,000 per calendar month, which shall be earned and payable monthly in arrears to Lender in accordance with Section 3.3. "Affiliate" shall mean, with respect to a specified Person, a partnership, corporation or any other person which directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with such Person, and without limiting the generality of the foregoing, includes (a) any Person which beneficially owns or holds five (5%) percent or more of any class of voting securities of such Person or other equity interests in such Person, (b) any Person of which such Person beneficially owns or holds five (5%) percent or more of any class of voting securities or in which such Person beneficially owns or holds five (5%) percent or more of the equity interests and (c) any director or officer of such Person. For the purposes of this definition, the term "control" (including with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. In no event shall Lender or any Affiliate of Lender be considered an Affiliate of Borrower or any of its Subsidiaries. "Availability Reserves" shall mean, as of any date of determination, such amounts as Lender may from time to time establish and revise in good faith reducing the amount of Revolving Loans which would otherwise be available to Borrower under the lending formula(s) provided for herein: (a) to reflect events, conditions, contingencies or risks that, as determined by Lender in good faith, adversely affect or could reasonably be expected to adversely affect either (i) the Accounts, (ii) the business or financial condition of Borrower or any Obligor or (iii) the security interest or other rights of Lender in the Collateral (including the enforceability, perfection and priority of Lender's security interest therein), or (b) to reflect Lender's good faith belief that any collateral report or financial information furnished by or on behalf of Borrower or any Obligor to Lender is or may have been incomplete, inaccurate or misleading in any material respect or (c) in respect of any state of facts which Lender determines in good faith constitutes an Event of Default or could reasonably be expected, with notice or passage of time or both, to constitute an Event of Default. Without limiting the generality of the foregoing, Lender may establish a credit reserve, a volume rebate reserve, and reserves in respect of returns, discounts, claims, credits and allowances. The amount of any Availability Reserves established by Lender shall have a reasonable relationship to the event, condition or other matter which is the basis for such reserve, as determined in good faith by Lender. "Bank of Boston Note" shall mean the Amended and Restated Commercial Promissory Note, dated January 5, 1996, issued by Borrower, payable to The First National Bank of Boston and in the original principal amount of $10,000,000. -2- 8 "Bankruptcy Code" shall mean Title 11 of the United States Code, as from time to time amended. "Blocked Account Agreement" shall have the meaning set forth in Section 6.2. "Blocked Accounts" shall have the meaning set forth in Section 6.2. "Borrower" shall mean Kerr Group, Inc., a Delaware corporation, and its successors and assigns. "Borrowing Base" shall mean, as of any date of determination thereof, the lowest of the following: (i) seventy (70%) percent of the Net Amount of Eligible Accounts, MINUS any Availability Reserves, (ii) fifty (50%) percent of the Net Amount of Accounts generated during the two (2) calendar month period prior to such date of determination, and (iii) fifty (50%) percent of the actual cash collected by Borrower in respect of Accounts during the two (2) calendar month period prior to such date of determination. "Borrowing Base Report" shall mean any report of Borrower as to the Borrowing Base, in substantially the form attached hereto as Exhibit F. "Business Day" shall mean any day other than a Saturday, Sunday, or other day on which commercial banks are authorized or required to close under the laws of the State of New York or the Commonwealth of Pennsylvania. "Capital Stock" shall mean any and all shares, interest, participations or other equivalents (however designated) of corporate stock or partnership interests and any options or warrants with respect to any of the foregoing. "Capitalized Lease Obligations" means obligations for the payment of rent for any real or personal property under leases or agreements to lease that, in accordance with GAAP, have been or should be capitalized on the books of the lessee and, for purposes hereof, the amount of any such obligation shall be the capitalized amount thereof determined in accordance with GAAP. "Cash Equivalents" shall mean, at any time, (a) any evidence of Indebtedness with a maturity of one (1) year or less issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof; provided, that, the full faith and credit of the United States of America is pledged in support thereof; (b) certificates of deposit or bankers' acceptances with a maturity of one (1) year or less of any financial institution that is a member of the Federal Reserve System having combined capital and surplus and -3- 9 undivided profits of not less than $250,000,000; (c) commercial paper (including variable rate demand notes) with a maturity of one (1) year or less issued by a corporation (except an Affiliate of Borrower) organized under the laws of any State of the United States of America or the District of Columbia and rated at least A-1 by Standard & Poor's Ratings Service, a division of The McGraw-Hill Companies, Inc. or at least P-1 by Moody's Investors Service, Inc.; (d) repurchase obligations with a term of not more than thirty (30) days for underlying securities of the types described in clause (a) above entered into with any bank meeting the qualifications specified in clause (b) above; (e) repurchase agreements and reverse repurchase agreements relating to marketable direct obligations issued or unconditionally guaranteed by the United States of America or issued by any governmental agency thereof and backed by the full faith and credit to the United States of America, in each case maturing within one (1) year or less from the date of acquisition; provided, that, the terms of such agreements comply with the guidelines set forth in the Federal Financial Agreements of Depository Institutions with Securities Dealers and Others, as adopted by the Comptroller of the Currency on October 31, 1985; and (f) investments in money market funds and mutual funds which invest substantially all of their assets in securities of the types described in clauses (a) through (e) above. "Change of Control" shall mean (a) a transaction or series of transactions whereby any Person or group within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder acquires beneficial ownership (within the meaning of Rule 13d-3 of the SEC under the Securities Exchange Act of 1934), directly or indirectly, of securities of Borrower (or other securities convertible into such securities) representing twenty (20%) percent of the combined voting power of all securities of Borrower entitled to vote in the election of directors (a "Controlling Person") or (b) at any time, a majority of Borrower's directors are individuals who were not in office on the date hereof, or initially nominated by directors who were in office on the date hereof, or by successor directors elected or appointed upon the initial nomination of such directors or successor directors, provided, that, (A) a Person or group shall not be a Controlling Person if such Person or group holds voting power in good faith and not for the purpose of circumventing the effect of the occurrence of a Change of Control as an agent, bank, broker, nominee, trustee, or holder of revocable proxies given in response to a solicitation pursuant to the Securities Exchange Act of 1934, for one or more beneficial owners who do not individually, or, if they are a group acting in concert, as a group, have the voting power specified in the previous sentence, (B) Lender and any of its assignees shall not be a Controlling Person by reason merely of the exercise of any rights granted to it under the Financing Agreements, and (C) neither The Gabelli Funds, Inc. nor Wynnefield Partners Small Cap Value, L.P. shall be a Controlling Person. "Closing Date" shall mean the date on which the conditions set forth in Section 4.1 are satisfied or waived and the initial Revolving Loan is funded. "Closing Fee" shall mean the fee set forth in Section 3.2. "Code" shall mean the Internal Revenue Code of 1986, as the same now exists or may from time to time hereafter be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. -4- 10 "Collateral" shall have the meaning set forth in Section 5. "Commitment" means the commitment of Lender to make Revolving Loans to Borrower in the aggregate principal amount not to exceed the Revolving Loan Limit at any time. "Commitment Letter" shall mean the letter dated April 8, 1997, from Lender to Borrower and accepted by Borrower. "Common Stock" shall have the meaning set forth in the Warrant. "Credit and Collection Policy" shall mean those credit and collection policies of Borrower relating to the Accounts as in effect immediately prior to the Closing Date. "Default" shall mean any condition, occurrence or event which, after notice, lapse of time or both, would constitute an Event of Default. "Disposition" shall mean any transaction, or series of related transactions, pursuant to which Borrower or any of its Subsidiaries sells, assigns, transfers or otherwise disposes of any Property (whether now owned or hereafter acquired) to any other Person, in each case whether or not the consideration therefor to be received by Borrower or any of its Subsidiaries consists of cash, securities or the swap or exchange of assets owned by the acquiring Person. "EBITDA" shall mean, as to any Person, with respect to any period, an amount equal to: (a) the Net Income of such Person and its Subsidiaries for such period on a consolidated basis determined in accordance with GAAP (exclusive of any gains from extraordinary items), plus (b) depreciation, amortization and other non-cash charges (including, but not limited to, imputed interest and deferred compensation) for such period (to the extent deducted in the computation of Net Income), all in accordance with GAAP, plus, (c) Interest Expense for such period (to the extent deducted in the computation of Net Income), plus (d) charges for federal, state, local and foreign income taxes, plus (e) all extraordinary losses and unusual losses related to costs associated with the transaction contemplated by this Agreement and negotiations with lenders and potential lenders in connection with the Refinancing, minus (f) all non-cash revenues and non-cash income items (to the extent counted in the computation of Net Income), minus (g) all income (and plus all charges, up to the amount of such income) attributable to any Subsidiary of Borrower, if and to the extent such income was not distributed to Borrower in cash. "Eligible Accounts" shall mean Accounts created by Borrower which are and continue to be acceptable to Lender based on the criteria set forth below. In general, Accounts shall be Eligible Accounts if: (a) such Accounts arise from the actual and bona fide sale and delivery of goods by Borrower or rendition of services by Borrower in the ordinary course of its business which transactions are arm's length transactions and are completed in accordance with the terms and provisions contained in any documents related thereto; -5- 11 (b) such Accounts are not unpaid more than the lesser of (i) sixty (60) days after the original due date for them or (ii) ninety (90) days after the date of the original invoice for Accounts arising other than from sales to retail drug stores or drug wholesalers, and one hundred six (106) days after the date of the original invoice for Accounts arising from sales to retail drug stores or drug wholesalers; (c) such Accounts are payable in U.S. dollars and otherwise comply with the terms and conditions contained in Sections 7.2(c) and 8.17 of this Agreement; (d) such Accounts do not arise from sales on consignment, guaranteed sale, sale and return, sale on approval, or other terms under which payment by the account debtor may be conditional or contingent; (e) the chief executive office or other principal office of the account debtor with respect to such Accounts is located in the United States of America, or, at Lender's option, if either: (i) the account debtor has delivered to Borrower an irrevocable letter of credit issued or confirmed by a bank satisfactory to Lender and payable only in the United States of America and in U.S. dollars, sufficient to cover such Account, in form and substance satisfactory to Lender and, if required by Lender, the original of such letter of credit has been delivered to Lender or Lender's agent and the issuer thereof notified of the assignment of the proceeds of such letter of credit to Lender, or (ii) such Account is subject to credit insurance payable to Lender issued by an insurer and on terms and in an amount acceptable to Lender, or (iii) such Account is otherwise acceptable in all respects to Lender (subject to such lending formula with respect thereto as Lender may determine); (f) such Accounts do not consist of progress billings, bill and hold invoices or retainage invoices, except as to bill and hold invoices, if Lender shall have received an agreement in writing from the account debtor, in form and substance satisfactory to Lender, confirming the unconditional obligation of the account debtor to take the goods related thereto and pay such invoice; (g) the account debtor with respect to such Accounts (i) does not hold any Indebtedness of Borrower, (ii) is not a supplier or a creditor of Borrower, and (iii) has not asserted a counterclaim, defense or dispute and does not have, and does not engage in transactions which may give rise to, any right of setoff against such Accounts (but the portion of the Accounts of such account debtor in excess of the amount at any time and from time to time owed by Borrower to such account debtor or claimed owed by such account debtor may be deemed Eligible Accounts); (h) such Accounts do not arise from the sale of molds, dies, jigs and other tooling; (i) there are no facts, events or occurrences which would impair the validity, enforceability or collectibility of such Accounts (including, without limitation, an unresolved dispute) or reduce the amount payable or delay payment thereunder (provided, that, -6- 12 as to facts, events or occurrences which reduce the amount payable under such Account, the amount payable thereunder as so reduced may be deemed Eligible Accounts); (j) such Accounts are subject to the first priority, valid and perfected security interest of Lender, subject to no other Lien (and are not evidenced by a promissory note, instrument or chattel paper unless Lender has a first priority, valid and perfected security interest therein), and any goods giving rise thereto are not, and were not at the time of the sale thereof, subject to any Liens except those permitted in this Agreement; (k) neither the account debtor nor any officer or employee of the account debtor with respect to such Accounts is an officer, employee or other Affiliate of Borrower; (l) the account debtors with respect to such Accounts are not any foreign government, the United States of America, any State, political subdivision, department, agency or instrumentality thereof, unless, if the account debtor is the United States of America, any State, political subdivision, department, agency or instrumentality thereof, (i) the amount of all such Accounts shall not constitute, in the aggregate, more than three (3%) percent of the Eligible Accounts of Borrower, and (ii) at any time promptly upon Lender's request, if the account debtor is the United States of America, any State, political subdivision, department, agency or instrumentality thereof, Borrower shall comply in all respects with the Federal Assignment of Claims Act of 1940, as amended, or any state or local equivalent, as the case may be, in a manner reasonably satisfactory to Lender with respect to such Account, and take such other actions as Lender may reasonably require to perfect and protect the interests of Lender therein; (m) such Accounts are not owed by an account debtor that is insolvent or involved in any case or proceeding, whether voluntary or involuntary, under any bankruptcy, reorganization, arrangement, insolvency, adjustment of debt, dissolution, liquidation or similar law of any jurisdiction; (n) there are no proceedings or actions which are threatened or pending against the account debtors with respect to such Accounts which might result in any material adverse change in any such account debtor's financial condition; (o) such Accounts of a single account debtor or its Affiliates do not constitute more than fifteen (15%) percent of all otherwise Eligible Accounts (but the portion of the Accounts not in excess of such percentage may be deemed Eligible Accounts); (p) such Accounts are not owed by an account debtor who has Accounts which (i) are unpaid more than the lesser of sixty (60) days after the original due date for them or ninety (90) days after the date of the original invoice for Accounts arising other than from sales to retail drug stores or drug wholesalers and one hundred six (106) days after the date of the original invoice for Accounts arising from sales to retail drug stores or drug wholesalers, and (ii) constitute more than fifty (50%) percent of the total outstanding dollar amount of Accounts of such account debtor; -7- 13 (q) such Accounts are not owed by an account debtor in respect of which a credit loss (i) has been recognized by Borrower or (ii) has been reserved against by Borrower unless Lender determines (in its reasonable discretion) that all other Accounts of such account debtor constitute "Eligible Accounts" (it being understood that the general bad debt reserve established by Borrower with respect to Accounts shall not be deemed to be a reserve for purposes of this clause (q)) ; (r) such Accounts are owed by account debtors whose total indebtedness to Borrower does not exceed the credit limit with respect to such account debtors as determined by Borrower from time to time in the ordinary course of business, to the extent such credit limits are satisfactory to Lender (but the portion of the Accounts not in excess of such credit limit which is satisfactory to Lender may be deemed Eligible Accounts); and (s) such Accounts are owed by account debtors deemed creditworthy at all times by Lender, as determined by Lender in good faith. General criteria for Eligible Accounts may be established and revised from time to time by Lender in good faith based on an event, condition or other circumstance arising after the date hereof, or existing on the date hereof to the extent Lender has no written notice thereof from Borrower, which adversely affects or could reasonably be expected to adversely affect the Accounts in the good faith determination of Lender. Any Accounts which are not Eligible Accounts shall nevertheless be part of the Collateral. "Employee Plan" shall mean an employee benefit plan (other than a Multiemployer Plan) covered by Title IV of ERISA and maintained for employees of Borrower or of any of its ERISA Affiliates. "Environmental Laws" shall mean any and all present and future foreign, Federal, State and local laws (including common law), rules, regulations, codes, licenses, permits (including any conditions imposed therein), authorizations, judicial or administrative decisions, injunctions, orders, decrees or agreements between Borrower and any Governmental Authority, in each case as now or hereafter in effect, (a) relating to pollution and the protection, preservation or restoration of the environment (including air, soil, water vapor, surface water, ground water, drinking water, drinking water supply, surface land, subsurface land, plant and animal life, wetlands or any other natural resource), or to human health, (b) relating to the exposure to, or the use, storage, recycling, treatment, generation, manufacture, processing, distribution, transportation, handling, labeling, production, emission, release or disposal, or threatened release, of Hazardous Materials, or (c) relating to record keeping, notification, disclosure and reporting requirements respecting Hazardous Materials. The term "Environmental Laws" includes, without limitation, (i) the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Federal Superfund Amendments and Reauthorization Act, the Federal Water Pollution Control Act of 1972, the Federal Clean Water Act, the Federal Clean Air Act, the Federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal -8- 14 Insecticide, Fungicide and Rodenticide Act, the Federal Safe Drinking Water Act of 1974, and, insofar as it addresses exposure to Hazardous Materials, the Occupational Safety and Health Act of 1970 (ii) applicable state counterparts to such laws, (iii) any other federal, state, local or municipal laws, statutes, regulations, rules or ordinances imposing liability or establishing standards of conduct for protection of the environment and (iv) any common law or equitable doctrine that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of or exposure to any Hazardous Materials. "Equipment" shall mean all of Borrower's now owned and hereafter acquired equipment, machinery, computers and computer hardware and software (whether owned or licensed), vehicles, tools, furniture, fixtures, all attachments, accessions and property now or hereafter affixed thereto or used in connection therewith, and substitutions and replacements thereof, wherever located. "ERISA" shall mean the United States Employee Retirement Income Security Act of 1974, as the same now exists or may hereafter from time to time be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto and any successor statute of similar import, and regulations thereunder, in each case as in effect from time to time. References to sections of ERISA shall be construed also to refer to any successor sections. "ERISA Affiliate" shall mean any person required to be aggregated with Borrower or any of its Subsidiaries under Sections 414(b), 414(c), 414(m) or 414(o) of the Code. "Exit Fee" shall have the meaning set forth in Section 13.1. "Event of Default" shall mean the occurrence or existence of any event or condition described in Section 10.1. "Financing Agreements" shall mean, collectively, this Agreement, the Registered Note, the Warrant, the Registration Agreement, the Blocked Account Agreements and all notes, guarantees, security agreements and other agreements, documents and instruments now or at any time hereafter executed and/or delivered by Borrower or any Obligor in connection with this Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time as set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board which are applicable to the circumstances as of the date of determination consistently applied, except that, for purposes of Sections 9.18 hereof, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the preparation of the audited financial statements delivered to Lender prior to the date hereof. -9- 15 "Governmental Authority" shall mean any nation or government, any federal, state, city, town, municipality, county, local or other political subdivision thereof or thereto and any department, commission, board, bureau, instrumentality, agency or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and includes, without limitation, the SEC, the NYSE and other similar securities or commodities exchanges. "Hazardous Materials" shall include any element, compound or chemical that is or becomes defined, listed or otherwise classified as a contaminant, pollutant, toxic pollutant, toxic or hazardous substance, extremely hazardous substance or chemical, hazardous waste, special waste or solid waste under any Environmental Law, including, but not limited to, hydrocarbons (including petroleum), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, polychlorinated biphenyls, pesticides, herbicides, sewage, sludge, industrial slag, solvents and/or any other similar substances, materials, or wastes and any substance exhibiting a hazardous waste characteristic including, but not limited to, corrosivity, ignitability, toxicity or reactivity, and asbestos containing materials. "Indebtedness" shall mean, with respect to any Person, (a) all indebtedness or other obligations of such Person for borrowed money or for the deferred purchase price of property or services (other than trade credit for goods and services acquired in the ordinary course of business on customary trade terms not overdue), (b) all Capitalized Lease Obligations of such Person, (c) all obligations and liabilities of such Person under direct or indirect guarantees in respect of, and contingent or other obligations of such Person to purchase or otherwise acquire or to otherwise assure a creditor against loss in respect of, indebtedness or other obligations of any other Person for borrowed money or for the deferred purchase price of property or services or Capitalized Lease Obligations of any other Person, (d) all indebtedness or other obligations of any other Person for borrowed money or for the deferred purchase price of property or services secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in any property owned by such Person, (e) all obligations of such Person in respect of letters of credit and bankers' acceptances, (f) liabilities incurred under Title IV of ERISA (other than under Section 4007 of ERISA) with respect to any plan (other than a Multiemployer Plan) covered by Title IV of ERISA and maintained for employees of such Person or any of its ERISA Affiliates, (g) withdrawal liability incurred under ERISA by such Person or any of its ERISA Affiliates to any Multiemployer Plan and (h) the net liabilities of such Person under all interest rate swap, interest rate collar, interest rate cap, interest rate floor, forward rate agreements, commodity swaps or other agreements or arrangements designed to protect against fluctuations in interest rates or currency, commodity or equity values, each calculated on a basis reasonably satisfactory to Lender and in accordance with accepted practice. "Information Certificate" shall mean the perfection questionnaire of Borrower constituting Exhibit A hereto containing material information with respect to Borrower, its business and assets provided by or on behalf of Borrower to Lender in connection with the preparation of this Agreement and the other Financing Agreements and the financing arrangements provided for herein. -10- 16 "Interest Expense" shall mean, for any period, as to any Person and its Subsidiaries, all of the following as determined in accordance with GAAP: (a) total interest expense, whether paid or accrued (including the interest component of capital lease obligations for such period), including, without limitation, all bank fees, commissions, discounts and other fees and charges owed with respect to letters of credit, but excluding (i) amortization of discount and amortization of deferred financing fees and closing costs paid in cash to lenders and potential lenders in connection with the Refinancing and the transactions contemplated hereby, (ii) interest paid in property other than cash and (iii) any other interest expense not payable in cash, minus (b) any net payments received during such period as interest income received in respect of its investments in cash and Cash Equivalents. "Interest Rate" shall mean a rate equal to the Reference Rate in effect from time to time plus 3% per annum; provided, that, the Interest Rate shall mean a rate equal to the Reference Rate in effect from time to time plus 5% per annum, without notice, for the period (i) from and after the Maturity Date until Lender has received full and final payment of all Obligations (notwithstanding an entry of judgment against Borrower) and (ii) from and after the date of the occurrence of an Event of Default for so long as such Event of Default is continuing. "Inventory" shall mean all of Borrower's now owned and hereafter existing or acquired raw materials, work in process, finished goods and all other inventory of whatsoever kind or nature, wherever located. "L.A. Lease Litigation" shall mean the pending action by the State Teachers Retirement System against Borrower filed on February 11, 1997 in the Superior Court of California, County of Los Angeles, case no. BC165718, in connection with the lease by Borrower of the premises at 1840 Century Park East, Los Angeles, California, and any related or successor litigation brought by the landlord under such lease. "Lien" shall mean any security interest, mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or otherwise), charge against or interest in property to secure payment of a debt or performance of an obligation or other priority or preferential arrangement of any kind or nature whatsoever. "Loan Account" shall have the meaning set forth in Section 6.1. "Material Adverse Effect" shall mean a material adverse effect on any of (a) the operations, business, assets, properties or condition of Borrower and its Subsidiaries taken as a whole, (b) the ability of Borrower or any Obligor to perform any of the obligations of such Person under this Agreement or any of the other Financing Agreements, (c) the legality, validity or enforceability of this Agreement or any of the other Financing Agreements, (d) the rights and remedies of Lender under this Agreement or any of the other Financing Agreements, or (e) the creation, perfection or priority of the lien on any of the Collateral securing the payment of any of the Obligations. -11- 17 "Maturity Date" shall mean the one year anniversary of the Closing Date. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA. "Net Amount of Accounts" shall mean the gross amount of Accounts less (a) sales, excise or similar taxes included in the amount thereof and (b) returns, rebates, offsets, holdbacks, discounts, claims, credits, adjustments and allowances of any nature at any time issued, owing, granted, outstanding, then available or claimed with respect thereto. "Net Amount of Eligible Accounts" shall mean the gross amount of Eligible Accounts less (a) sales, excise or similar taxes included in the amount thereof and (b) returns, rebates, offsets, holdbacks, discounts, claims, credits, adjustments and allowances of any nature at any time issued, owing, granted, outstanding, then available or claimed with respect thereto. "Net Income" shall mean, with respect to any Person, the consolidated net income (loss) of such Person and its Subsidiaries, determined in accordance with GAAP, excluding, however, to the extent included therein, any gain (but not loss), together with any related Provision for Taxes on such gain (but not loss), realized in connection with (a) any sale, lease, conveyance or other disposition of any assets (including, without limitation, dispositions pursuant to sale and leaseback transactions), other than in the ordinary course of business and (b) the sale of any shares of Capital Stock or equivalents, excluding any extraordinary gain (but not loss), together with any related Provision for Taxes on such extraordinary gain (but not loss). "Notice of Borrowing" shall have the meaning set forth in Section 2.1. "NYSE" shall mean the New York Stock Exchange. "Obligations" shall mean the Revolving Loans and all other obligations, liabilities and indebtedness of every kind, nature and description owing by Borrower to Lender and/or its affiliates, including principal, interest, charges, fees, costs and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, whether arising under this Agreement or any other Financing Agreement, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of this Agreement or after the commencement of any case with respect to Borrower under the Bankruptcy Code or any similar statute (including the payment of interest and other amounts which would accrue and become due but for the commencement of such case, whether or not such amounts are allowed or allowable in whole or in part in such case), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, or secured or unsecured. "Obligor" shall mean any guarantor, endorser, acceptor, surety or other person liable on or with respect to the Obligations or who is the owner of any property which is security for the Obligations, other than Borrower. -12- 18 "Operating Account" shall mean the account number 011-935-113-5 of Borrower maintained at Fulton Bank, Lancaster, Pennsylvania. "PBGC" shall mean the Pension Benefit Guaranty Corporation, and its successors and assigns. "Person" or "person" shall mean any individual, sole proprietorship, partnership, corporation (including any corporation which elects subchapter S status under the Code), limited liability company, limited liability partnership, business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity or any government, Governmental Authority or any agency or instrumentality or political subdivision thereof. "Projections" shall mean the Estimated Statement of Earnings, Estimated Cash Flows, Estimated Balance Sheet and Borrowing Base, together with other related statements, a copy of which is attached as Schedule 1 hereto. "Property" shall mean any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible. "Provision for Taxes" shall mean, with respect to a fiscal year of any Person and its Subsidiaries, an amount equal to all taxes imposed on or measured by net income, whether federal, state or local, and whether foreign or domestic, that are paid or payable by such Person and its Subsidiaries in respect of such fiscal year on a consolidated basis in accordance with GAAP. "Real Property" shall mean all now owned and hereafter acquired real property of Borrower, including leasehold interests, together with all buildings, structures, and other improvements located thereon and all licenses, easements and appurtenances relating thereto, wherever located. "Records" shall mean all of Borrower's present and future books of account of every kind or nature, purchase and sale agreements, invoices, ledger cards, bills of lading and other shipping evidence, statements, correspondence, memoranda, credit files, computer programs, computer printouts, and other computer material and records, and other data relating to the Collateral or any account debtor, together with the tapes, disks, diskettes and other data and software storage media and devices, file cabinets or containers in or on which the foregoing are stored (including any rights of Borrower with respect to the foregoing maintained with or by any other person). "Reference Rate" shall mean the rate from time to time publicly announced by Citibank, N.A., or its successors, at its office in New York City, as its base rate or prime rate, whether or not such announced rate is the lowest rate available at such bank. "Refinancing" shall mean the transaction or series of transactions entered into by Borrower and one or more lenders for the purpose of repaying the Senior Notes. -13- 19 "Register" shall have the meaning set forth in Section 13.4. "Registered Loan" shall have the meaning set forth in Section 2.1. "Registered Note" shall mean the promissory note of Borrower, substantially in the form of Exhibit B hereto, made payable to the order of Lender, evidencing the Indebtedness resulting from the making by Lender to Borrower of the Revolving Loans from time to time, in the principal amount equal to the Revolving Loan Limit as in effect on the Closing Date and delivered to Lender pursuant to Section 2.1 and registered as provided in Section 13.4, as such promissory note may be amended, supplemented, restated, modified or extended from time to time pursuant to this Agreement or any other Financing Agreement, and any promissory note or notes issued in exchange or replacement therefor pursuant to this Agreement or any other Financing Agreement. "Registration Agreement" means the Registration Agreement, in the form attached hereto as Exhibit E, by and between Borrower and Lender, with respect to the registration of shares of Common Stock held by Lender, as amended or otherwise modified from time to time. "Reportable Event" shall mean an event described in Section 4043 of ERISA (other than (i) an event not subject to the provision for 30-day notice to the PBGC under the regulations promulgated under such Section and (ii) the dissolution of Santa Fe Plastics Corporation). "Revolving Loans" shall mean the loans made by Lender to or for the benefit of Borrower pursuant to Section 2.1. "Revolving Loan Limit" shall mean $8,500,000, as reduced from time to time pursuant to Sections 2.2 and 2.3. "SEC" shall mean the Securities and Exchange Commission or any other similar or successor agency of the United States of America administering the Securities Exchange Act. "Securities Act" shall mean the Securities Act of 1933, as the same now exists or may hereafter from time to time be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. "Senior Notes" shall mean, collectively, the following: (a) the $41,000,000 9.45% Series A Senior Notes due September 15, 2003, dated as of September 15, 1993, issued by Borrower; (b) the $9,000,000 8.99% Series B Senior Notes due September 15, 1999, dated as of September 15, 1993, issued by Borrower; and (c) the Bank of Boston Note. "Solvent" shall mean, with respect to any Person and as at the date on which a determination of solvency is to be made, that (i) the present fair saleable value of the assets of such Person is, on such date, greater than the total amount of liabilities (including, without -14- 20 limitation, contingent and unliquidated liabilities) of such Person as of such date, (ii) as of such date, such Person is able to pay all liabilities of such Person as such liabilities mature (other than, with respect to Borrower, Borrower's liabilities under the Bank of Boston Note), and (iii) as of such date, such Person does not have unreasonably small capital with which to carry on its business. In computing the amount on contingent or unliquidated liabilities at any time, such liabilities shall be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Subsidiary" shall mean, with respect to any Person, any corporation, limited or general partnership, trust, association or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership, trust, association or other entity (irrespective of whether or not at the time Capital Stock or other ownership interests of any other class or classes of such corporation, partnership or entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. Unless otherwise provided, "Subsidiary" shall be deemed to mean any such corporation, partnership or other entity with respect to Borrower. "Termination Event" shall mean (a) a Reportable Event with respect to any Employee Plan, (b) the withdrawal of Borrower or any of its ERISA Affiliates from an Employee Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (c) the cessation of operations of any facility of Borrower or any of its ERISA Affiliates if, pursuant to Section 4062(e) of ERISA, such cessation causes Borrower or such ERISA Affiliate to be treated as a "substantial employer", (d) the filing of a notice of intent to terminate an Employee Plan or the treatment of an Employee Plan amendment as a termination under Section 4041 of ERISA, (e) the institution of proceedings by the PBGC to terminate an Employee Plan, (f) any event that causes Borrower or any of its ERISA Affiliates to incur liability under Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 4971 or 4975 of the Code, or (g) any other event or condition (other than the dissolution of Santa Fe Plastics Corporation) which could reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Employee Plan. "Uniform Commercial Code" shall mean the Uniform Commercial Code, as in effect on the Closing Date in the State of New York, unless the context requires otherwise. "Warrant" shall mean a Warrant issued by Borrower to Lender for 2% of the issued and outstanding shares of Common Stock of Borrower on a fully diluted basis on the date of such issuance, which may be exercised for $.50 for each share of Common Stock of Borrower, together with all other warrants issued upon transfer, division or combination of, or in substitution for, any thereof. -15- 21 SECTION 2. THE CREDIT FACILITY 2.1 Revolving Loans. (a) Subject to the terms and conditions contained herein, Lender agrees to make Revolving Loans to Borrower from time to time in the aggregate principal amount outstanding not to exceed at any time the lower of (i) the Revolving Loan Limit, and (ii) the Borrowing Base. Any principal amount of a Revolving Loan which is repaid by Borrower may be reborrowed prior to the Maturity Date, subject to the other terms and conditions hereof. (b) Borrower shall give Lender prior telephonic notice (immediately confirmed in writing, in substantially the form of Exhibit C hereto (a "Notice of Borrowing")), not later than 11:00 a.m. (New York City time) two Business Days prior to the proposed borrowing date for each Revolving Loan. Requests received after 11:00 a.m. New York City time on any day shall be deemed to have been made as of the opening of business on the immediately following Business Day. Such Notice of Borrowing shall be irrevocable and shall specify (i) the principal amount of the proposed Revolving Loan, which shall be at least $500,000, (ii) the Borrowing Base and each of the components thereof, and (iii) the proposed borrowing date, which must be a Business Day. Borrower shall be bound to make a borrowing in accordance therewith and Lender shall be required to make the Revolving Loan requested in such Notice of Borrowing in accordance with the terms of this Agreement. Borrower may not borrow more than one Revolving Loan in any one week period. Lender may act without liability upon the basis of written, telecopied or telephonic notice believed by Lender in good faith to be from Borrower (or from any authorized officer thereof designated in a writing purportedly from Borrower to Lender) or, at the discretion of Lender, without notice from Borrower if a Revolving Loan is necessary to satisfy any Obligations, and Borrower hereby waives the right to dispute Lender's actions and record of the terms of any such borrowing, telephonic notice and Notice of Borrowing. Lender will make the proceeds of the Revolving Loan requested in such Notice of Borrowing available to Borrower on the day of the proposed borrowing of such Revolving Loan by causing an amount, in immediately available funds, to be deposited in the Operating Account. All Revolving Loans under this Agreement shall be conclusively presumed to have been made to, and at the request of and for the benefit of, Borrower when deposited to the credit of Borrower or otherwise disbursed or established in accordance with the instructions of Borrower or in accordance with the terms and conditions of this Agreement. (c) Borrower agrees to record the Revolving Loans on the Register referred to in Section 13.4. Revolving Loans recorded on the Register ("Registered Loans") may not be evidenced by a promissory note other than a Registered Note and, upon the registration of any Revolving Loan, any promissory note (other than a Registered Note) evidencing the same shall be null and void and shall be returned to Borrower. Borrower agrees to execute and deliver to Lender the Registered Note in registered form to evidence such Registered Loan and registered as provided in Section 13.4 hereof, dated the Closing Date, payable to Lender and otherwise duly completed. A Revolving Loan once recorded on the Register may not be removed from -16- 22 the Register so long as it remains outstanding and a Registered Note may not be exchanged for a promissory note that is not a Registered Note. (d) Borrower hereby promises (i) to pay to Lender the outstanding principal amount of all Revolving Loans in full on the Maturity Date, and (ii) to pay to Lender interest on all outstanding Revolving Loans at the times and at the rates set forth in Section 3. (e) Lender may, in its discretion, from time to time, upon not less than ten (10) days prior notice to Borrower, (i) reduce the lending formula with respect to Eligible Accounts to the extent that Lender determines in good faith that: (A) the dilution with respect to the Accounts for any reasonable period as determined in good faith by Lender (based on the ratio of (1) the aggregate amount of reductions in Accounts other than as a result of payments in cash to (2) the aggregate amount of total sales) has increased, or (B) the general creditworthiness of account debtors has declined. In determining whether to reduce the lending formula(s), Lender may consider events, conditions, contingencies or risks which are also considered in determining Eligible Accounts or in establishing Availability Reserves. The amount of any reduction in any lending formula by Lender pursuant to this Section 2.1(e) shall have a proportional relationship to the matter described herein which is the basis for such reduction in the good faith determination of Lender. 2.2 Prepayment of Revolving Loans. (a) Borrower shall prepay in whole or in part outstanding Revolving Loans: (i) without limiting any other provision of this Agreement or any other Financing Agreement prohibiting the Disposition of any Property of Borrower or any of its Subsidiaries without Lender's consent, on the first Business Day after the consummation of any Disposition of Property (other than Dispositions of Property expressly permitted by Section 9.10(b) hereof), such prepayment and reduction to be in an amount equal to 100% of the net proceeds received by Borrower or any of its Subsidiaries or any Affiliate thereof from any sale or other disposition of any Property of Borrower or any of its Subsidiaries, the proceeds of any claim made under any insurance policy covering any Property of Borrower or any of its Subsidiaries and the proceeds of any condemnation or similar proceeding with respect to any real property of Borrower or any of its Subsidiaries; (ii) upon the receipt, from time to time, directly or indirectly, by Borrower or any of its Subsidiaries or any Affiliate thereof, of any cash proceeds from any public or private sale or other issuance of any equity securities or options or warrants thereon, such prepayment and reduction to be in an amount not less than 100% of the net cash proceeds thereof; and (iii) not more than 30 days after Lender notifies Borrower that it has determined, in its sole and absolute discretion, that a Change of Control has occurred, such prepayment and reduction be in an amount equal to the aggregate principal amount of all -17- 23 outstanding Revolving Loans, all accrued and unpaid interest thereon, and all other Obligations then due and payable. Each such prepayment shall be accompanied by accrued and unpaid interest on the amount prepaid, and shall automatically and immediately reduce the Revolving Loan Limit by an amount equal to such required prepayment. (b) Borrower shall immediately prepay the outstanding Revolving Loans if at any time the aggregate principal amount of the outstanding Revolving Loans exceeds the Borrowing Base, such prepayment to be in an amount equal to such excess. On each day that any Revolving Loan is outstanding, Borrower shall hereby be deemed to have represented and warranted to Lender that the Borrowing Base calculated as of such day equals or exceeds the aggregate principal amount of all such Revolving Loans outstanding on such day. Each such prepayment shall be accompanied by the payment of accrued interest to the date of such prepayment on the amount prepaid. If the aggregate principal amount of the outstanding Revolving Loans exceeds the Borrowing Base or the Revolving Loan Limit, as the case may be, and Lender does not require any such prepayment, such event shall not limit, waive or otherwise affect any rights of Lender in that circumstance or on any future occasions, and Borrower shall, upon demand by Lender, which may be made at any time or from time to time, immediately repay to Lender the entire amount of any such excess(es) for which payment is demanded. 2.3 Reduction of Commitment. Borrower may, without premium or penalty, reduce the Revolving Loan Limit to an amount (which may be zero) not less than the sum of (i) the aggregate unpaid principal amount of all Revolving Loans then outstanding and (ii) the aggregate principal amount of all Revolving Loans not yet made as to which a Notice of Borrowing has been given by Borrower under Section 2.1 hereof. Each such reduction (i) shall be in an amount which is an integral multiple of $100,000, (ii) shall be made by providing not less than one Business Day's prior written notice to Lender, (iii) shall reduce the Revolving Loan Limit by an amount equal to the amount of such reduction, and (iv) shall be irrevocable. Once reduced the Revolving Loan Limit may not be reinstated. 2.4 Availability Reserves. All Revolving Loans otherwise available to Borrower pursuant to the lending formulas and subject to the Revolving Loan Limit and other applicable limits hereunder shall be subject to Lender's continuing right to establish and revise Availability Reserves. SECTION 3. INTEREST AND FEES 3.1 Interest. (a) Borrower shall pay to Lender interest on the outstanding principal amount of the Revolving Loans and all other non-contingent Obligations at the Interest Rate. All interest accruing hereunder on and after the date of any Event of Default or termination hereof shall be payable on demand and at the rate specified in the definition of "Interest Rate". -18- 24 (b) Interest shall be payable by Borrower to Lender monthly in arrears not later than the first day of each calendar month (commencing May 1, 1997) and on the date all Obligations, other than contingent indemnification obligations not then due and payable, are paid in full and shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed (including the first day but excluding the last day). 3.2 Closing Fee. To induce Lender to enter into this Agreement and to make the Revolving Loans hereunder, Borrower has agreed to pay Lender a Closing Fee equal to $300,000, of which (i) $100,000 has been paid on the date the Commitment Letter was signed and returned to Lender, (ii) $100,000 is payable on the Closing Date, and (iii) $100,000 is payable on the date occurring six months after the Closing Date; provided, however, that Borrower shall not be obligated to pay the installment of the Closing Fee described in Section 3.2(iii) if on or before the date occurring six months after the Closing Date all Obligations, other than contingent indemnification obligations not then due and payable, have been paid in full, the Commitment has been terminated and this Agreement and the other Financing Agreements have been terminated. Any installment of the Closing Fee that has been paid shall in no event be refundable. 3.3 Administrative Fee. Borrower shall pay the Administrative Fee to Lender monthly in arrears from the Closing Date until the date all Obligations (other than contingent indemnification obligations not then due and payable) are paid in full, not later than the first day of each calendar month (commencing May 1, 1997) and on the date all such Obligations are paid in full. 3.4 Unused Line Fee. Borrower shall pay to Lender a nonrefundable line fee on the average daily unused amount of the Revolving Loan Limit, from the Closing Date to but not including the date the Commitment is terminated, calculated for each day at a rate per annum equal to one-half (1/2%) percent per annum, payable quarterly in arrears on the last day of each fiscal quarter (commencing June 30, 1997) and on the date the Commitment is terminated. 3.5 Fees Earned and Non-Refundable. All fees payable to Lender shall be fully earned when due and non-refundable thereafter, regardless of any subsequent occurrence or contingency even if this Agreement is terminated during any period for which advance payment was made. 3.6 Payments. Borrower will make each payment under this Agreement, the Registered Note and the other Financing Agreements (other than the Warrant) not later than 1:00 p.m. (New York City time) on the day when due, in lawful money of the United States of America and in immediately available funds, to Lender at the Loan Account or at such other place as Lender may designate in writing from time to time. All payments received by Lender after 1:00 p.m. (New York City time) on any Business Day will be credited to the Loan Account on the next succeeding Business Day. All payments shall be made by Borrower without defense, set-off or counterclaim to Lender. Whenever any payment to be made under any Financing Agreement shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall in -19- 25 such case be included in the computation of interest or fees, as the case may be, provided that, if any such payment is made by a charge to the Loan Account, such charge may be made by Lender on any day, whether or not a Business Day. Each determination by Lender of an interest rate or fees hereunder shall be conclusive and binding for all purposes in the absence of manifest error. Each change in the rate of interest on Revolving Loans shall take effect simultaneously with the corresponding change in the Reference Rate. Notwithstanding any other provision of this Agreement or any other Financing Agreement, interest paid or becoming due hereunder or under the Registered Note shall in no event exceed the maximum rate permitted by applicable law. 3.7 Charges to the Loan Account. Borrower hereby requests and authorizes Lender to charge Borrower's Loan Account with the amount of all interest, fees, costs, expenses and other Obligations as payment thereof becomes due. Lender is willing and intends to charge the Loan Account for such amounts but reserves the right not to do so at any time for any reason. In such event, Lender may so notify Borrower in writing and demand separate payment of such amount, and the amount so requested shall thereupon be due and payable upon demand. SECTION 4. CONDITIONS PRECEDENT 4.1 Conditions Precedent to the Initial Revolving Loan. Each of the following is a condition precedent to Lender making the initial Revolving Loan hereunder: (a) Lender shall have received, in form and substance satisfactory to Lender, all releases, terminations and such other documents as Lender may request to evidence and effectuate the termination by PNC Bank, National Association of its financing arrangements with Borrower and the termination and release by PNC Bank, National Association of any interest in and to any assets and properties of Borrower and each Obligor, duly authorized, executed and delivered by it, including, but not limited to, (i) Uniform Commercial Code termination statements for all Uniform Commercial Code financing statements previously filed by it or its predecessors, as secured party and Borrower or any Obligor, as debtor and (ii) satisfactions and discharges of any mortgages, deeds of trust or deeds to secure debt by Borrower or any Obligor in favor of such lender, in form acceptable for recording in the appropriate government office; (b) Lender shall have received, in form and substance satisfactory to Lender, evidence of the payment of all amounts currently due and owing to holders of the Senior Notes (other than the Bank of Boston Note); (c) Lender shall have received evidence, in form and substance satisfactory to Lender, that Lender has valid and perfected first priority security interests in and liens upon the Collateral and any other property which is intended to be security for the Obligations or the liability of any Obligor in respect thereof, subject only to the security interests and liens permitted herein or in the other Financing Agreements; -20- 26 (d) all requisite corporate action and proceedings in connection with this Agreement and the other Financing Agreements shall be satisfactory in form and substance to Lender, and Lender shall have received (i) a copy of the Certificate of Incorporation of Borrower and any of its Subsidiaries as then in effect, certified by the Secretary of State of the state of its incorporation, (ii) a copy of the By-Laws of Borrower and any of its Subsidiaries, as then in effect, certified by its Secretary or Assistant Secretary, (iii) a copy of resolutions of the Board of Directors of Borrower, authorizing the execution, delivery and performance of this Agreement, the Registered Note, the Warrant, the Registration Agreement and all other Financing Agreements, the issuance of Common Stock to Lender upon the exercise of the Warrant and any and all related matters, certified by its Secretary or Assistant Secretary as of the Closing Date, together with a certificate of the Secretary or Assistant Secretary of Borrower as to the incumbency and signature of the officers of Borrower executing this Agreement and any and all other Financing Agreements or authorized to act hereunder, together with evidence of the incumbency of such Secretary or Assistant Secretary; and such resolutions and certificate shall remain in full force and effect and shall not have been subsequently amended or modified, and (iv) all other information and copies of all documents, including records of requisite corporate action and proceedings, which Lender may request in connection therewith, such documents where requested by Lender or its counsel to be certified by appropriate corporate officers or Governmental Authorities; (e) no event shall have occurred or condition exist that may have a Material Adverse Effect; (f) Lender shall have received, in form and substance satisfactory to Lender, all consents, waivers, acknowledgments and other agreements from third persons which Lender may deem necessary or desirable in order to permit, protect and perfect its security interests in and liens upon the Collateral or to effectuate the provisions or purposes of this Agreement and the other Financing Agreements; (g) Lender shall have received, in form and substance satisfactory to Lender, such opinion letters of counsel to Borrower with respect to the Financing Agreements and such other matters as Lender may request; (h) the other Financing Agreements and all instruments and documents hereunder and thereunder shall have been duly executed and delivered to Lender, in form and substance satisfactory to Lender; (i) Lender shall have received an executed Officer's Certificate of Borrower, in form and substance satisfactory to Lender, certifying (i) that the representations and warranties contained herein and in the other Financing Agreements are true and correct in all material respects on and as of the date thereof, (ii) that Borrower is in compliance with all of the terms and provisions set forth herein and in the other Financing Agreements, (iii) that Borrower is then Solvent, (iv) no Default or Event of Default has occurred and is then continuing and (v) as to the Borrowing Base Report attached thereto; -21- 27 (j) Lender shall have received (i) tax, judgment, Uniform Commercial Code and other lien searches satisfactory to Lender for all filing or recording offices in all jurisdictions in which Borrower or any Collateral is located, (ii) a release and satisfaction (in form and substance satisfactory to Lender and its counsel) of all liens, lien notices and pending, threatened or potential lien claims disclosed therein or otherwise known to Borrower or Lender and all obligations secured thereby, except liens permitted pursuant to Section 9.11, (iii) acknowledgment copies of financing statements covering the Collateral and naming Lender as secured party, filed in all such filing offices, (iv) delivery to Lender in pledge of all notes and other instruments constituting part of the Collateral, and (v) such assurances as may be satisfactory to Lender and its counsel that Lender holds a duly granted, lawful, attached, perfected and enforceable lien on the Collateral as security for all of the Obligations, and that such Collateral is otherwise free and clear of all prior, parity or junior liens except as permitted under this Agreement; (k) There shall be no order, stay, injunction, writ or other judicial or administrative restraint limiting or prohibiting the consummation of any of the financing arrangements contemplated under this Agreement, the repayment of any of the Obligations, or the performance of any obligation of Borrower under any Financing Agreement, and on the Closing Date, there shall be (i) no litigation, investigation or proceeding (judicial or administrative) pending or overtly threatened against Borrower or any of its Subsidiaries or any of their respective assets, in any manner relating to this Agreement or the financing arrangement contemplated under this Agreement, (ii) no suit, action, investigation or proceeding (judicial or administrative) pending or overtly threatened against Borrower or any of its Subsidiaries or against any of their property which, if adversely determined, could have a Material Adverse Effect and (iii) no suit, action, investigation, proceeding (judicial or administrative) or other enforcement proceeding of any kind shall have been commenced by any holder of a Senior Note against Borrower or any of Borrower's property, and the maturity of any such Senior Note shall not have been accelerated; (l) Borrower shall have delivered to Lender all information necessary for Lender to issue wire transfer instructions on behalf of Borrower for the initial Revolving Loan, including, but not limited to, a Notice of Borrowing and disbursement authorizations in form acceptable to Lender; (m) Borrower shall have executed and delivered to Lender all documents, instruments and agreements which Lender or its counsel may reasonably deem necessary or desirable in order to consummate the lending arrangement contemplated in this Agreement or in order to perform, or to provide reasonable further assurances as to the performance of, any obligation of Borrower under this Agreement or any other Financing Agreement; (n) Borrower shall have prepared, and delivered to Lender, the Projections, in form and substance satisfactory to Lender; (o) Lender shall have received a certificate evidencing the Warrant, substantially in the form of Exhibit D hereto, duly executed by Borrower; and -22- 28 (p) Lender shall have received a Blocked Account Agreement from each Blocked Account bank, in form and substance acceptable to Lender. 4.2 Conditions Precedent to all Revolving Loans. The obligation of Lender to make any Revolving Loan (including the initial Revolving Loan) is subject to the fulfillment, in a manner satisfactory to Lender, of each of the following conditions precedent: (a) Borrower shall have paid all fees, costs, expenses and taxes then payable by Borrower pursuant to Sections 3 and 9.19 and all other fees, costs and expenses then payable to Lender. (b) The following statements shall be true, and Borrower's delivery of a Notice of Borrowing and its acceptance of the proceeds of such Revolving Loan each shall be deemed to be a representation and warranty of Borrower on the date of such Revolving Loan that (i) the representations and warranties contained in Section 8 and in each other Financing Agreement and certificate or other writing delivered by or on behalf of Borrower to Lender pursuant hereto on or prior to the date for such Revolving Loan are correct on and as of such date as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date (in which case such representations and warranties shall be true and correct on and as of such date); (ii) no Default or Event of Default has occurred and is continuing on such date or would result from the making of such Revolving Loan; and (iii) the aggregate amount of all Revolving Loans (after giving effect to the making of such Revolving Loan) shall not exceed the Borrowing Base. (c) The making of such Revolving Loan shall not contravene any law, rule or regulation applicable to Lender or any request, guideline or directive of any Governmental Authority, or expose Lender to any risk of liability. (d) Lender shall have received (i) a Notice of Borrowing in accordance with Section 2.1, and (ii) a Borrowing Base Report at least two but not more than five Business Days before the date for the making of such Revolving Loan, certified by the controller or chief financial officer of Borrower. (e) All proceedings in connection with the making of such Revolving Loan and the other transactions contemplated by this Agreement, and all documents incidental thereto, shall be satisfactory to Lender and Lender's special counsel, and Lender and such special counsel shall have received all such information and such counterpart originals or certified or other copies of such documents as Lender or such special counsel may reasonably request. SECTION 5. GRANT OF SECURITY INTEREST -23- 29 5.1 To secure payment and performance of all Obligations, Borrower hereby grants to Lender a continuing security interest in, a lien upon, and a right of set off against, and hereby assigns to Lender as security, the following property and interests in property of Borrower, whether now owned or hereafter acquired or existing, and wherever located (collectively, the "Collateral"): (a) (i) all Accounts, contract rights, chattel paper, instruments, documents, general intangibles and other obligations of any kind, whether now or hereafter existing, whether now owned or hereafter acquired and whether now or hereafter earned by performance, arising out of or in connection with the sale or lease of goods or the rendering of services; and (ii) all rights now or hereafter existing in and to all credit insurance, guaranties, letters of credit, security agreements, leases and other contracts now or hereafter existing and securing or otherwise relating to any such Accounts, contract rights, chattel paper, instruments, general intangibles or obligations (any and all such Accounts, contract rights, chattel paper, instruments, documents, general intangibles and obligations being hereinafter referred to collectively as the "Receivables", and any and all such credit insurance, guaranties, letters of credit, security agreements, leases and other contracts being hereinafter referred to collectively as the "Related Contracts"); (b) all deposit accounts (general or special) with any bank or other financial institution into which any cash, check, note, draft or other similar type of item of payment that constitutes proceeds of any Receivable or Related Contract may be deposited (including, without limitation, all deposit accounts with PNC Bank, National Association, or any successor thereto, into which any cash, check, note, draft or other similar type of item of payment that constitutes proceeds of any Receivable or Related Contract may be deposited, or any successor or replacement account), all funds on deposit in all such accounts, the balance from time to time in all such accounts, all certificates and instruments representing or evidencing any such account, and all interest, dividends, cash, instruments, securities and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any of the foregoing; (c) the books and records of Borrower relating to any of the foregoing Collateral, including, without limitation, the Records and all customer contracts, sale orders, minute books, ledgers, records, computer programs, software, printouts and other computer materials, customer lists, credit files, correspondence and advertising materials, in each case indicating, summarizing or evidencing such Collateral, together with a non-exclusive license to use the same in the administration and collection of the foregoing Collateral on the terms and conditions set forth in this Agreement; and (d) all products and proceeds of any and all of the foregoing Collateral (including, without limitation, (i) unpaid seller's rights (including all rights of rescission, replevin, reclamation and stopping in transit) with respect to any -24- 30 Inventory, and all Inventory otherwise returned to, repossessed by or reclaimed by Borrower, and (ii) all payments under insurance (whether or not Lender is the loss payee thereof), any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral), in each case, howsoever Borrower's interest therein may arise or appear (whether by ownership, security interest, claim or otherwise). 5.2 Notwithstanding anything to the contrary set forth in Section 5.1 above, the types or items of Collateral described in such Section shall not include any rights or interests in any contract, lease, permit, license, charter or license agreement covering real or personal property, as such, if under the terms of such contract, lease, permit, license, charter or license agreement, or applicable law with respect thereto, the valid grant of a security interest or lien therein to Lender is prohibited and such prohibition has not been or is not waived or the consent of the other party to such contract, lease, permit, license, charter or license agreement has not been or is not otherwise obtained or under applicable law such prohibition cannot be waived; provided, that, the foregoing exclusion shall in no way be construed (a) to apply if any such prohibition is unenforceable under Section 9-318 of the Uniform Commercial Code or other applicable law or (b) so as to limit, impair or otherwise affect Lender's unconditional continuing security interests in and liens upon any rights or interests of Borrower in or to monies due or to become due under any such contract, lease, permit, license, charter or license agreement (including any Accounts). SECTION 6. COLLECTION AND ADMINISTRATION 6.1 Borrower's Loan Account. Lender shall maintain a loan account (the "Loan Account") on its books in which shall be recorded the Revolving Loans and other Obligations and the Collateral, all payments made by or on behalf of Borrower and all other appropriate debits and credits as provided in this Agreement, including fees, charges, costs, expenses and interest. All entries in the Loan Account shall be made in accordance with Lender's customary practices as in effect from time to time. The records of Lender shall be conclusive and binding, in the absence of manifest error. 6.2 Collection of Accounts. (a) Borrower shall establish and maintain, at its expense, blocked accounts or lockboxes and related blocked accounts (in either case, "Blocked Accounts"), as Lender may specify, with such banks as are acceptable to Lender into which Borrower shall promptly deposit and direct its account debtors to directly remit all payments on Accounts and all payments constituting proceeds of Collateral in the identical form in which such payments are made, whether by cash, check or other manner. The banks at which the Blocked Accounts are established shall enter into an agreement, each in the form attached hereto as Exhibit G (each, a "Blocked Account Agreement"), providing that all items received or deposited in the Blocked Accounts are the property of Lender, that the depository bank has no lien upon, or right to setoff against, the Blocked Accounts, the items received for deposit therein, or the funds from time to time on deposit therein and that the depository bank will wire, or otherwise transfer, in -25- 31 immediately available funds, on a daily basis, all funds received or deposited into the Blocked Accounts to such bank account of Lender as Lender may from time to time designate for such purpose. Borrower agrees that all payments made to such Blocked Accounts or other funds received and collected by Lender, whether on the Accounts or as proceeds of Inventory or other Collateral or otherwise shall be the property of Lender. (b) For purposes of calculating interest on the Obligations, such payments or other funds received will be applied (conditional upon final collection) to the Obligations one (1) Business Day following the date of receipt of immediately available funds by Lender in the Loan Account. If no Obligations are outstanding, Lender shall remit such payments or other funds to the Operating Account. (c) Borrower and all of its Affiliates, Subsidiaries, shareholders, directors, employees or agents shall, acting as trustee for Lender, receive, as the property of Lender, any monies, checks, notes, drafts or any other payment relating to and/or proceeds of Accounts or other Collateral which come into their possession or under their control and immediately upon receipt thereof, shall deposit or cause the same to be deposited in the Blocked Accounts, or remit the same or cause the same to be remitted, in kind, to Lender. In no event shall the same be commingled with Borrower's own funds. Borrower agrees to reimburse Lender on demand for any amounts owed or paid to any bank at which a Blocked Account is established or any other bank or Person involved in the transfer of funds to or from the Blocked Accounts arising out of Lender's payments to or indemnification of such bank or Person. The obligation of Borrower to reimburse Lender for such amounts pursuant to this Section 6.2 shall survive the termination or non-renewal of this Agreement. 6.3 Payments. All Obligations shall be payable to the Loan Account as provided in Section 3.6 or such other place as Lender may designate in writing from time to time. Lender may apply payments received or collected from Borrower or for the account of Borrower (including the monetary proceeds of collections or of realization upon any Collateral) to such of the Obligations, whether or not then due, in such order and manner as Lender determines. At Lender's option, all principal, interest, fees, costs, expenses and other charges provided for in this Agreement or the other Financing Agreements may be charged directly to the Loan Account. Borrower shall make all payments to Lender on the Obligations free and clear of, and without deduction or withholding for or on account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts, fees, deductions, withholding, restrictions or conditions of any kind. If after receipt of any payment of, or proceeds of Collateral applied to the payment of, any of the Obligations, Lender is required to surrender or return such payment or proceeds to any Person for any reason, then the Obligations intended to be satisfied by such payment or proceeds shall be reinstated and continue and this Agreement shall continue in full force and effect as if such payment or proceeds had not been received by Lender. Borrower shall be liable to pay to Lender, and does hereby indemnify and hold Lender harmless for the amount of any payments or proceeds surrendered or returned. This Section 6.3 shall remain effective notwithstanding any contrary action which may be taken by Lender in reliance upon such payment or proceeds. This Section 6.3 shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. -26- 32 6.4 Use of Proceeds. Borrower shall use the proceeds of the Revolving Loans provided by Lender to Borrower hereunder only for (i) repayment of all Indebtedness of Borrower to PNC Bank, National Association, if any (ii) payments to each of the persons listed in the disbursement direction letter furnished by Borrower to Lender on or about the date hereof and costs, expenses and fees in connection with the preparation, negotiation, execution and delivery of this Agreement and the other Financing Agreements, (iii) regularly scheduled payments of principal and interest on Senior Notes and other Indebtedness expressly permitted by Section 9.12, and (iv) general operating, working capital and other proper corporate purposes of Borrower not otherwise prohibited by the terms hereof. None of the proceeds will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security or for the purposes of reducing or retiring any Indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause the Revolving Loans to be considered a "purpose credit" within the meaning of Regulation G of the Board of Governors of the Federal Reserve System, as amended. 6.5 Lender not Liable. Lender shall have no obligation whatsoever to perform in any respect any contract or obligation of Borrower and shall have no liability whatsoever for any other debt, liability or obligation of Borrower. SECTION 7. COLLATERAL REPORTING AND COVENANTS 7.1 Collateral Reporting. Borrower shall provide Lender with the following documents in a form satisfactory to Lender: (a) on a regular basis as required by Lender, a schedule of Accounts, credits issued and cash received; (b) on a monthly basis or more frequently as Lender may request, (i) reports of general ledger chargebacks and (ii) agings of accounts payable; (c) upon Lender's request, (i) copies of customer statements and credit memos, remittance advices and reports, and copies of deposit slips and bank statements, and (ii) copies of shipping and delivery documents; (d) agings of accounts receivable on a monthly basis or more frequently as Lender may request; (e) on a weekly basis or more frequently as Lender may request, a Borrowing Base Report; and (f) such other reports as to the Collateral as Lender shall request from time to time. If any of Borrower's records or reports of the Collateral are prepared or maintained by an accounting service, contractor, shipper or other agent, Borrower hereby irrevocably authorizes such service, contractor, shipper or agent to deliver such records, reports, and related documents to Lender and to follow Lender's instructions with respect to further services at any time that an Event of Default exists or has occurred and is continuing. 7.2 Accounts Covenants. (a) Borrower shall notify Lender promptly of: any material delay in Borrower's performance of any of its obligations to any account debtor or the assertion of any claims, offsets, defenses or counterclaims by any account debtor, or any disputes with account debtors, or any settlement, adjustment or compromise thereof involving Accounts in excess of $50,000, and all material adverse information known to Borrower relating to the financial condition of any account debtor obligated on Accounts in the aggregate of more than $50,000. -27- 33 No credit, discount, allowance or extension or agreement for any of the foregoing shall be granted to any account debtor without Lender's consent, except in the ordinary course of Borrower's business in accordance with the Credit and Collection Policy. So long as no Event of Default exists or has occurred and is continuing, Borrower shall settle, adjust or compromise any claim, offset, counterclaim or dispute with any account debtor. At any time that an Event of Default exists or has occurred and is continuing, Lender shall, at its option, have the exclusive right to settle, adjust or compromise any claim, offset, counterclaim or dispute with account debtors or grant any credits, discounts or allowances. (b) Borrower shall promptly report to Lender any return of Inventory by any one account debtor if the inventory so returned in such case has a value in excess of $50,000. At any time that Inventory is returned, reclaimed or repossessed, the Account (or portion thereof) which arose from the sale of such returned, reclaimed or repossessed Inventory shall not be deemed an Eligible Account. In the event any account debtor returns Inventory when an Event of Default exists or has occurred and is continuing, Borrower shall, upon Lender's request, (i) hold the returned Inventory in trust for Lender, (ii) segregate all returned Inventory from all of its other property, (iii) dispose of the returned Inventory solely according to Lender's instructions, and (iv) not issue any credits, discounts or allowances with respect thereto without Lender's prior written consent. (c) With respect to each Account: (i) the amounts shown on any invoice delivered to Lender or schedule thereof delivered to Lender shall be true and complete, (ii) no payments shall be made thereon except payments immediately deposited in or delivered to a Blocked Account pursuant to the terms of this Agreement, (iii) no credit, discount, allowance or extension or agreement for any of the foregoing shall be granted to any account debtor except as reported to Lender in accordance with this Agreement and except for credits, discounts, allowances or extensions made or given in the ordinary course of Borrower's business in accordance with the Credit and Collection Policy, (iv) there shall be no setoffs, deductions, contras, defenses, counterclaims or disputes existing or asserted with respect thereto except as reported to Lender or otherwise permitted in accordance with the terms of Section 7.2(a) of this Agreement, (v) none of the transactions giving rise thereto will violate any applicable State or Federal laws or regulations except where such violation does not adversely affect any of the Accounts, their value, the rights of Lender therein or the ability of Lender to realize thereon, (vi) all documentation relating thereto will be legally sufficient under such laws and regulations and (vii) all such documentation will be legally enforceable in accordance with its terms. (d) Lender shall have the right at any reasonable time or times, in Lender's name or in the name of a nominee of Lender, to verify the validity, amount or any other matter relating to any Account or other Collateral, by mail, telephone, facsimile transmission or otherwise. (e) Borrower shall deliver or cause to be delivered to Lender, with appropriate endorsement and assignment, with full recourse to Borrower, all chattel paper and instruments which Borrower now owns or may at any time acquire immediately upon Borrower's receipt thereof, except as Lender may otherwise agree. -28- 34 (f) Lender may, at any time or times that an Event of Default exists or has occurred and is continuing, (i) notify any or all account debtors that the Accounts have been assigned to Lender and that Lender has a security interest therein and Lender may direct any or all accounts debtors to make payment of Accounts directly to Lender, (ii) extend the time of payment of, compromise, settle or adjust for cash, credit, return of merchandise or otherwise, and upon any terms or conditions, any and all Accounts or other obligations included in the Collateral and thereby discharge or release the account debtor or any other party or parties in any way liable for payment thereof without affecting any of the Obligations, (iii) demand, collect or enforce payment of any Accounts or such other obligations, but without any duty to do so, and Lender shall not be liable for its failure to collect or enforce the payment thereof nor for the negligence of its agents or attorneys with respect thereto and (iv) take whatever other action Lender may deem necessary or desirable for the protection of its interests. At any time that an Event of Default exists or has occurred and is continuing, at Lender's request, all invoices and statements sent to any account debtor shall state that the Accounts and such other obligations have been assigned to Lender and are payable directly and only to Lender and Borrower shall deliver to Lender such originals of documents evidencing the sale and delivery of goods or the performance of services giving rise to any Accounts as Lender may require. 7.3 Power of Attorney. Borrower hereby irrevocably designates and appoints Lender (and all persons designated by Lender) as Borrower's true and lawful attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name, to: (a) at any time a Default or Event of Default exists or has occurred and is continuing (i) demand payment on Accounts or other Collateral, (ii) enforce payment of Accounts by legal proceedings or otherwise, (iii) exercise all of Borrower's rights and remedies to collect any Account or other Collateral, (iv) sell or assign any Account upon such terms, for such amount and at such time or times as Lender deems advisable, (v) settle, adjust, compromise, extend or renew an Account, (vi) discharge and release any Account, (vii) prepare, file and sign Borrower's name on any proof of claim in bankruptcy or other similar document against an account debtor, (viii) notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Lender, and open and dispose of all mail addressed to Borrower, and (ix) do all acts and things which are necessary, in Lender's determination, to fulfill Borrower's obligations under this Agreement and the other Financing Agreements and (b) at any time to (i) take control in any manner of any item of payment or proceeds thereof, (ii) have access to any lockbox or postal box into which Borrower's mail is deposited, (iii) endorse Borrower's name upon any items of payment or proceeds thereof and deposit the same in Lender's account for application to the Obligations, (iv) endorse Borrower's name upon any chattel paper, document, instrument, invoice, or similar document or agreement relating to any Account or any goods pertaining thereto or any other Collateral, (v) sign Borrower's name on any verification of Accounts and notices thereof to account debtors and (vi) execute in Borrower's name and file any Uniform Commercial Code financing statements or amendments thereto. Borrower hereby releases Lender and its officers, employees and designees from any liabilities arising from any act or acts under this power of attorney and in furtherance thereof, whether of omission or commission, except as a result of Lender's own gross negligence or willful misconduct as determined pursuant to a final non-appealable order of a court of competent jurisdiction. -29- 35 7.4 Right to Cure. Lender may, at its option, (a) cure any default by Borrower under any agreement with a third party or pay or bond on appeal any judgment entered against Borrower, (b) discharge taxes, liens, security interests or other encumbrances at any time levied on or existing with respect to the Collateral and (c) pay any amount, incur any expense or perform any act which, in Lender's judgment, is necessary or appropriate to preserve, protect, insure or maintain the Collateral and the rights of Lender with respect thereto. Lender may add any amounts so expended to the Obligations and charge Borrower's account therefor, such amounts to be repayable by Borrower on demand. Lender shall be under no obligation to effect such cure, payment or bonding and shall not, by doing so, be deemed to have assumed any obligation or liability of Borrower. Any payment made or other action taken by Lender under this Section shall be without prejudice to any right to assert an Event of Default hereunder and to proceed accordingly. 7.5 Access to Premises. From time to time as requested by Lender, at the cost and expense of Borrower, (a) Lender or its designee shall have complete access to all of Borrower's premises during normal business hours and after three (3) Business Days' prior notice to Borrower, or at any time and without notice to Borrower if an Event of Default exists or has occurred and is continuing, for the purposes of inspecting, verifying and auditing the Collateral and all of Borrower's books and records, including the Records, and (b) Borrower shall promptly furnish to Lender such copies of such books and records or extracts therefrom as Lender may request, and (c) Lender or its designee may use during normal business hours and after three (3) Business Days' prior notice to Borrower, or at any time and without notice to Borrower if an Event of Default exists or has occurred and is continuing, such of Borrower's personnel, equipment, supplies and premises as may be reasonably necessary for the foregoing and if an Event of Default exists or has occurred and is continuing for the collection of Accounts and realization of other Collateral. Notwithstanding anything to the contrary contained herein, so long as no Event of Default exists or has occurred and is continuing, Lender shall not conduct more than four (4) field examinations of the operations of Borrower at the expense of Borrower, provided, that, Borrower shall only pay such expenses and charges (including the per diem charge) as required under Section 9.19 hereof in connection with such field examinations. SECTION 8. REPRESENTATIONS AND WARRANTIES Borrower hereby represents and warrants to Lender the following (which shall survive the execution and delivery of this Agreement), the truth and accuracy of which are a continuing condition of the making of Revolving Loans to Borrower: 8.1 Corporate Existence, Power and Authority; Capitalization; Subsidiaries. Borrower is a corporation duly organized and in good standing under the laws of its state of incorporation and is duly qualified as a foreign corporation and in good standing in all states or other jurisdictions where the nature and extent of the business transacted by it or the ownership of assets makes such qualification necessary, except for those jurisdictions in which the failure to so qualify could not reasonably be expected to have a Material Adverse Effect. The execution, delivery and performance of this Agreement and the other Financing Agreements, the issuance to Lender of the Common Stock and the transactions contemplated hereunder and thereunder are -30- 36 all within Borrower's corporate powers, have been duly authorized and are not in contravention of law or the terms of Borrower's certificate of incorporation, by-laws, or other organizational documentation, or, except as set forth on Schedule 8.7, any indenture, agreement or undertaking to which Borrower is a party or by which Borrower or its property are bound. This Agreement and the other Financing Agreements constitute legal, valid and binding obligations of Borrower enforceable in accordance with their respective terms. On the Closing Date after giving effect to the transactions contemplated hereunder to occur on the Closing Date, the authorized Capital Stock of Borrower will consist of the securities described in Part I of Schedule 8.1 hereto. Except for any shares of Common Stock to be issued pursuant to the Warrant, Registration Agreement and as set forth on Part II of Schedule 8.1 hereto, there are no outstanding equity rights with respect to Borrower, nor are there any outstanding obligations of Borrower or any of its Subsidiaries to repurchase, redeem, or otherwise acquire any shares of Capital Stock of Borrower or any of its Subsidiaries, nor are there any outstanding obligations of Borrower or any of its Subsidiaries to make payments to any Person, such as "phantom stock" payments, where the amount thereof is calculated with reference to the fair market value or equity value of Borrower or any of its Subsidiaries or any of their Subsidiaries. After giving effect to the transactions contemplated hereby and in the Financing Agreements and the issuance to Lender of the Warrant, all of the issued and outstanding Capital Stock of Borrower is and will be validly issued, fully paid and non-assessable and free of all liens, pledges and preemptive rights. Borrower does not have any Subsidiaries except as set forth on the Information Certificate. 8.2 Financial Statements; No Material Adverse Change. All financial statements relating to Borrower which have been or may hereafter be delivered by Borrower to Lender have been prepared in accordance with GAAP and fairly present the financial condition and the results of operation of Borrower as at the dates and for the periods set forth therein. Except as disclosed in any interim financial statements furnished by Borrower to Lender prior to the date of this Agreement, there has been no material adverse change in the assets, liabilities, properties or condition, financial or otherwise, of Borrower, since the date of the most recent audited financial statements furnished by Borrower to Lender prior to the date of this Agreement. Borrower has heretofore furnished the Projections to Lender, a copy of which is attached as Schedule 1 hereto. Such Projections were believed at the time furnished to be reasonable, have been prepared on a reasonable basis and in good faith by Borrower, and have been based on assumptions believed by Borrower to be reasonable at the time made and upon the best information then reasonably available to Borrower. 8.3 Chief Executive Office; Collateral Locations. The chief executive office of Borrower and Borrower's Records concerning Accounts are located only at the address set forth below and its only other places of business and the only other locations of Collateral, if any, are the addresses set forth in the Information Certificate, subject to the right of Borrower to establish new locations in accordance with Section 9.2 below. The Information Certificate correctly identifies any of such locations which are not owned by Borrower and sets forth the owners and/or operators thereof and to the best of Borrower's knowledge, the holders of any mortgages on such locations. 8.4 Priority of Liens; Title to Properties. The security interests and liens granted to Lender under this Agreement and the other Financing Agreements constitute valid and perfected liens and security interests in and upon the Collateral of the first priority subject only to the liens indicated on Schedule 8.4 hereto and liens (junior and subordinate to Lender's lien and security interest, except to the extent the lien of any warehouse to secure storage and other related charges in Inventory stored at such warehouse and constituting Collateral may have priority over the lien and security interest of Lender in such Inventory) expressly permitted under Section 9.11. Borrower has good and marketable title to all properties and assets it owns subject to no liens, mortgages, pledges, security interests, encumbrances or charges of any kind, except those granted to Lender and such others as are specifically listed on Schedule 8.4 hereto or permitted under Section 9.11. 8.5 Tax Returns. Borrower has filed, or caused to be filed, in a timely manner all tax returns, reports and declarations which are required to be filed by it (without requests for extension except as previously disclosed in writing to Lender). All information in such tax returns, reports and declarations is complete and accurate in all material respects. Borrower has paid or caused to be paid all taxes due and payable or claimed due and payable in any assessment received by it, except taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrower and with respect to which adequate reserves have been set aside on its books. Adequate provision has been made for the payment of all accrued and unpaid Federal, State, county, local, foreign and other taxes whether or not yet due and payable and whether or not disputed. 8.6 Litigation. Except as set forth on Schedule 8.6 or the Information Certificate, there is no present investigation by any governmental agency pending, or to the best of Borrower's knowledge overtly threatened, against or affecting Borrower, its assets or business and there is no action, suit, proceeding or claim by any Person pending, or to the best of Borrower's knowledge overtly threatened, against Borrower or its assets or goodwill, or against or affecting any transactions contemplated by this Agreement, which if adversely determined against Borrower could reasonably be expected to have a Material Adverse Effect. 8.7 Compliance with Other Agreements and Applicable Laws. Except as set forth on Schedule 8.7, Borrower is not in default in any respect under, or in violation in any respect of any of the terms of, any agreement, contract, instrument, lease or other commitment to which it is a party or by which it or any of its assets are bound and Borrower is in compliance in all respects with all applicable provisions of laws, rules, regulations, licenses, permits, approvals and orders of any Governmental Authority, except in any case where such default, violation or failure to so comply could not reasonably be expected to have a Material Adverse Effect. 8.8 Environmental Compliance. (a) Except as set forth on Schedule 8.8 hereto, Borrower has not generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials, on or off its premises (whether or not owned by it) in material violation of any applicable Environmental Law or any license, permit, certificate, approval or similar -32- 37 authorization issued to Borrower thereunder and the operations of Borrower comply in all material respects with all applicable Environmental Laws and all licenses, permits, certificates, approvals and similar authorizations thereunder. (b) Except as set forth on Schedule 8.8 hereto, there is no investigation, proceeding, complaint, order, directive, claim, citation or notice by any Governmental Authority or any other Person pending or to the best of Borrower's knowledge threatened, with respect to any material non-compliance with or violation of the requirements of any applicable Environmental Law by Borrower, nor to the best of Borrower's knowledge has any such investigation, proceeding, complaint, order, directive, claim, citation or notice by any Governmental Authority or any other Person been asserted against any facilities that have received Hazardous Materials generated by Borrower which could reasonably be expected to affect Borrower or its business, operations or assets in any material respect, nor has there been any release, spill or discharge, overtly threatened or actual, of any Hazardous Material on any properties owned, operated or leased by Borrower, or to the best of Borrower's knowledge, releases, spills or discharges from any properties at which Borrower has transported, stored or disposed of any Hazardous Materials, or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or any other environmental matter which affects Borrower or its business, operations or assets in any material respect. (c) Except as set forth in Schedule 8.8 hereto, to Borrower's knowledge, Borrower has no material liability (contingent or otherwise) in connection with a release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials. (d) Borrower has all licenses, permits, certificates, approvals or similar authorizations required to be obtained or filed in connection with the operations of Borrower under any Environmental Law and all of such licenses, permits, certificates, approvals or similar authorizations are valid and in full force and effect in each case where the failure to obtain or maintain such licenses, permits, certificates, approvals or similar authorizations could reasonably be expected to have a Material Adverse Effect. (e) Except as set forth in Schedule 8.8 hereto, the Real Property has never been used by Borrower or, to the best knowledge of Borrower, by any prior owner of the Real Property as (i) a dump site for Hazardous Materials or (ii) a storage (whether temporary or permanent) site for Hazardous Materials requiring a permit pursuant to the Resource Conservation and Recovery Act ("RCRA") Section 3005, 42 USC Section 6925 or any comparable state law. 8.9 Employee Benefits. (a) Except as set forth in Schedule 8.9 hereto, there has been no Termination Event or any other event or condition with respect to any Employee Plan which can reasonably be expected to result in a Termination Event. Except as set forth in Schedule 8.9 -33- 38 hereto, Borrower has not engaged in any transaction in connection with which Borrower or any of its ERISA Affiliates could be subject to a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, including any accumulated funding deficiency described in Section 8.9(c) hereof. (b) Except as set forth in Schedule 8.9 hereto, no liability to the PBGC has been or is expected by Borrower to be incurred with respect to any Employee Plan or any other employee pension benefit plan subject to Title IV of ERISA maintained by Borrower or any of its ERISA Affiliates within the immediately preceding six years. (c) Except as set forth in Schedule 8.9 hereto, full payment has been made of all amounts which Borrower or any of its ERISA Affiliates is required under Section 302 of ERISA and Section 412 of the Code to have paid under the terms of each Employee Plan as contributions to such plan as of the last day of the most recent fiscal year of such plan ended prior to the date hereof, and no accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists with respect to any Employee Plan, including any penalty or tax described in Section 8.9(a) hereof. (d) Except as set forth in Schedule 8.9 hereto, Borrower's projected benefit obligation under all Employee Plans, as of December 31, 1996, does not exceed the value of the assets of such plans, determined by accounting requirements under GAAP. Notwithstanding the foregoing, during the period commencing on January 1, 1997 through the Closing Date, to the best of Borrower's knowledge, (i) there has been no material decrease in the assets of any Employee Plan and (ii) neither Borrower nor any of its ERISA Affiliates has entered into any significant acquisition, merger or other transaction or employee pension benefit plan merger which would result in a material increase in the unfunded vested accrued benefit liability of any Employee Plan. (e) Neither Borrower nor any of its ERISA Affiliates is or has ever been obligated to contribute to any Multiemployer Plan that is subject to Title IV of ERISA. (f) The most recent annual report (Form 5500 Series) with respect to each Employee Plan, including any required Schedule B (Actuarial Information) thereto, copies of which have been filed with the Internal Revenue Service and delivered to Lender, is complete and correct and fairly presents the funding status of such Employee Plan, and since the date of such report there has been no material adverse change in such funding status. 8.10 Bank Accounts. All of the Blocked Accounts, deposit accounts, investment accounts or other accounts in the name of or used by Borrower maintained at any bank or other financial institution are set forth on Schedule 8.10 hereto, subject to the right of Borrower to establish new accounts in accordance with Section 9.16 below. Borrower has instructed all obligors to cause all payments in respect of Accounts to be mailed directly to a Blocked Account. As of the Closing Date, the aggregate amount held or otherwise on deposit in all such accounts does not exceed $6,000,000. -34- 39 8.11 Dissolution of Santa Fe Plastics Corporation. Borrower has taken, or caused to be taken, all actions and proceedings required to be taken by it to liquidate and dissolve Santa Fe Plastics Corporation, including, but not limited to, appropriate shareholder and board approvals and filings with the state Governmental Authorities in accordance with the certificate of incorporation and by-laws of such company and applicable laws and regulations. No consent from any governmental authority is required to be obtained in connection with such dissolution other than clearance from the California Franchise Tax Board. Borrower has no notice of any facts which would prevent such clearance from being obtained. The liquidation and dissolution of Santa Fe Plastics Corporation does not violate any law or any order or decree of court or governmental instrumentality in any respect and does not and will not conflict with or result in the breach of, or constitute a default under, any indenture, mortgage, deed of trust, or any other material agreement or instrument to which Borrower or Santa Fe Plastics Corporation is a party or may be bound. No court of competent jurisdiction has issued any injunction, restraining order or other order which prohibits the liquidation or dissolution of Santa Fe Plastics Corporation and no governmental action or proceeding has been threatened or commenced, seeking to prevent or in any way limit the liquidation and dissolution of Santa Fe Plastics Corporation. Borrower has delivered, or caused to be delivered, to Lender, true, correct and complete copies of all documents and agreements related to the liquidation and dissolution of Santa Fe Plastics Corporation. 8.12 Accuracy and Completeness of Information. All information furnished by or on behalf of Borrower in writing to Lender in connection with this Agreement or any of the other Financing Agreements or any transaction contemplated hereby or thereby, including all information on the Information Certificate, and all certificates, reports, statements and other documents furnished to Lender in connection with any Financing Agreement, is true and correct in all material respects on the date as of which such information is dated or certified and taken as a whole does not omit any material fact necessary in order to make such information not misleading on the date as of which such information is dated or certified. No event or circumstance has occurred which has had or could reasonably be expected to have a Material Adverse Effect that has not been fully and accurately disclosed to Lender in writing. 8.13 Survival of Warranties; Cumulative. All representations and warranties contained in this Agreement or any of the other Financing Agreements shall survive the execution and delivery of this Agreement and shall be conclusively presumed to have been relied on by Lender regardless of any investigation made or information possessed by Lender. The representations and warranties set forth herein shall be cumulative and in addition to any other representations or warranties which Borrower shall now or hereafter give, or cause to be given, to Lender. 8.14 Governmental Approvals. No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority or other regulatory body is required in connection with the due execution, delivery and performance by Borrower or any of its Subsidiaries of any Financing Agreement to which it is or will be a party or the issuance to Lender of the Warrant and the Common Stock, other than in connection with the perfection of the security interests created hereunder (i) in respect of Accounts, the filing of a Uniform -35- 40 Commercial Code financing statement with the Secretary of State of the Commonwealth of Pennsylvania and the Prothonotary of Lancaster County, Pennsylvania,and (ii) in respect of Inventory, the filing of a Uniform Commercial Code financing statement with the Secretary of State of the Commonwealth of Pennsylvania, the Prothontary of Lancaster County, Pennsylvania, the Secretary of State of the State of North Carolina, the County Clerk of Hertford County, North Carolina, the Secretary of State of the State of Kentucky, the County Clerk of Warren County, Kentucky, the Secretary of State of the State of Virginia, and the County Clerk of the City of Suffolk, Virginia, which filings shall be completed by May 1, 1997. 8.15 Permits, Etc. Borrower and each of its Subsidiaries has all permits, licenses, authorizations and approvals required for it lawfully to own its Property and to operate its business except where failure to obtain such permits, licenses, authorizations or approvals could not reasonably be expected to have a Material Adverse Effect. 8.16 Financing Statements. Except for Uniform Commercial Code financing statements and filings thereof in favor of Lender, (i) no Uniform Commercial Code financing statement applicable to the Accounts or any of the other Collateral is currently on file in any applicable Uniform Commercial Code filing office in the jurisdiction of the chief executive office of Borrower and (ii) Borrower has not executed as debtor any Uniform Commercial Code financing statement applicable to the Accounts or any of the other Collateral other than Uniform Commercial Code financing statements naming Borrower as debtor and PNC Bank, National Association, as secured party, which such financing statements are being terminated on the Closing Date. 8.17 Representations and Warranties Regarding Accounts. As to each Account: (a) each Account is a valid and binding obligation of the parties thereto, enforceable in accordance with its respective terms except as enforceability may be limited by bankruptcy, insolvency, reorganization, or similar creditors' rights; (b) each Account has been generated by Borrower in the ordinary course of business or financial affairs of Borrower; (c) each Account represents a true and correct statement of a bona fide Indebtedness incurred by an obligor for goods sold to, or services performed for, such obligor; (d) each Account is owned by Borrower free and clear of any claim of ownership interest by any other Person; (e) no Uniform Commercial Code financing statement or other instrument similar in effect covering any Account, any interest therein or any other Collateral is on file in any recording office except as such may be filed in favor of Lender in accordance with this Agreement; -36- 41 (f) all filings and recordings required to evidence and perfect Lender's first priority security interest in the Collateral have been made and are in full force and effect, including, without limitation, all financing statements required under the provisions of the Uniform Commercial Code of any applicable jurisdiction to be filed or recorded against Borrower, as debtor; and (g) each Account has been originated pursuant to and in accordance with the Credit and Collection Policy. 8.18 Credit and Collection Policy. The Credit and Collection Policy conforms with industry practice. SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS 9.1 Maintenance of Existence. Borrower shall at all times preserve, renew and keep in full, force and effect its corporate existence and rights and franchises with respect thereto and maintain in full force and effect all material permits, licenses, trademarks, tradenames, approvals, authorizations, leases and contracts necessary to carry on the business as presently or proposed to be conducted. Borrower shall give Lender thirty (30) days prior written notice of any proposed change in its corporate name, which notice shall set forth the new name and Borrower shall deliver to Lender a copy of the amendment to the certificate of incorporation of Borrower providing for the name change certified by the Secretary of State of the jurisdiction of incorporation of Borrower as soon as it is available. 9.2 New Chief Executive Office or Collateral Locations. Borrower may relocate its chief executive office or the location where Records concerning the Collateral are maintained or open any new location within the continental United States, provided Borrower (a) gives Lender thirty (30) days prior written notice of the intended relocation or opening of any such new location and (b) executes and delivers, or causes to be executed and delivered, to Lender such agreements, documents, and instruments as Lender may deem reasonably necessary or desirable to protect its interests in the Collateral at such location, including Uniform Commercial Code financing statements. 9.3 No Changes. Borrower shall not (i) make any change in the character of its business or in Borrower's Credit and Collection Policy, which change would, in either case, impair the collectibility of any material amount of the Accounts, or otherwise adversely affect the interests or remedies of Lender under this Agreement or any other Financing Agreement or (ii) make any material change in, or fail to comply with, Borrower's Credit and Collection Policy without prior written notification to Lender. 9.4 Further Assurances. At the request of Lender at any time and from time to time, Borrower shall, at its expense, duly execute and deliver, or cause to be duly executed and delivered, such further agreements, documents and instruments, and do or cause to be done such further acts as may be necessary or proper to evidence, perfect, maintain and enforce the security interests and the priority thereof in the Collateral and to otherwise effectuate the -37- 42 provisions or purposes of this Agreement or any of the other Financing Agreements. Where permitted by law, Borrower hereby authorizes Lender to execute and file one or more Uniform Commercial Code financing statements signed only by Lender. 9.5 Blocked Accounts. (a) Borrower shall (i) instruct all obligors to cause all payments in respect of Accounts to be mailed directly to a Blocked Account; (ii) not suffer or permit any funds other than such payments to be mailed to a Blocked Account or deposited in a Blocked Account; (iii) apply all such payments as provided in this Agreement; (iv) not amend or modify any term of any Blocked Account Agreement or any agreement with respect to the disposition of such payments or any other amounts received by Borrower or the Blocked Account bank without the prior written consent of Lender to such amendment or modification; (v) not add or terminate any Person as a Blocked Account bank from those listed on Schedule 8.10 hereto except as otherwise expressly provided in Section 9.16; and (vi) not make any change in the instructions to its obligors regarding payments to be made to Borrower or payments to be made to any Blocked Account. (b) Borrower agrees that (i) each Blocked Account shall be maintained with a bank that has entered into a Blocked Account Agreement with Lender; (ii) each Blocked Account shall be a segregated account and the funds deposited in such Blocked Account from time to time shall not be commingled with any other funds of Borrower; (iii) each Blocked Account shall be in the name of Borrower in trust for Lender; (iv) the location of each Blocked Account may not be changed without the written consent of Lender; (v) funds deposited into each Blocked Account shall be transferred to the account specified by Lender pursuant to Section 6.2(a) hereof not later than the next Business Day after such funds are deposited in each such Blocked Account; and (vi) each Blocked Account shall be insured by the Federal Deposit Insurance Corporation to the fullest extent permitted by applicable law. 9.6 Compliance with Laws, Regulations, Etc. (a) Borrower shall, at all times, comply in all material respects with all laws, rules, regulations, licenses, permits, approvals and orders applicable to it and duly observe all requirements of any Federal, State or local Governmental Authority, including the Occupational Safety and Health Act of 1970, as amended, the Fair Labor Standards Act of 1938, as amended, ERISA, the Code and all statutes, rules, regulations, orders, permits and stipulations relating to environmental pollution and employee health and safety, including all of the Environmental Laws in each case where the failure to so comply could reasonably be expected to have a Material Adverse Effect. (b) Borrower shall establish and maintain, at its expense, a system to assure and monitor its continued compliance with all applicable Environmental Laws in all of its operations. Copies of all environmental surveys, audits, assessments, feasibility studies and results of remedial investigations shall be promptly furnished, or caused to be furnished, by Borrower to Lender. Borrower shall take prompt and appropriate action to respond to any material non-compliance with any of the Environmental Laws and shall regularly report to Lender on each such response. -38- 43 (c) Borrower shall give both oral and written notice to Lender promptly upon Borrower's receipt of any notice of, or Borrower's otherwise obtaining knowledge of, (i) the occurrence of any event involving the release, spill or discharge, threatened or actual, of any Hazardous Material in violation of any Environmental Law in any material respect or (ii) any investigation, proceeding, complaint, order, directive, claims, citation or notice with respect to: (A) any non-compliance with or violation of any Environmental Law by Borrower or (B) the release, spill or discharge, threatened or actual, of any Hazardous Material or (C) the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or (D) any other environmental, health or safety matter, which has a material affect on Borrower or its business, operations or assets or any properties at which Borrower transported, stored or disposed of any Hazardous Materials or (E) that any lien, security interest, charge or other encumbrance for liability associated with an Environmental Law has been filed by a Governmental Authority against real or personal property of Borrower. (d) Without limiting the generality of the foregoing, whenever Lender reasonably determines that there is material non-compliance, or any condition which requires any action by or on behalf of Borrower in order to avoid any material non-compliance with any Environmental Law, Borrower shall, at Lender's reasonable request and Borrower's expense: (i) cause an independent environmental engineer acceptable to Lender to conduct such tests of the site where Borrower's non-compliance or alleged non-compliance with such Environmental Laws has occurred as to such non-compliance and prepare and deliver to Lender a report as to such non-compliance setting forth the results of such tests, a proposed plan for responding to any environmental problems described therein, and an estimate of the costs thereof and (ii) provide to Lender a supplemental report of such engineer whenever the scope of such non-compliance, or Borrower's response thereto or the estimated costs thereof, shall change in any material respect. 9.7 Payment of Taxes and Claims. Borrower shall duly pay and discharge all taxes, assessments, contributions and governmental charges upon or against it or its properties or assets, except for taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrower and with respect to which adequate reserves have been set aside on its books. Borrower shall be liable for any tax or penalties imposed on Lender as a result of the financing arrangements provided for herein and Borrower agrees to indemnify and hold Lender harmless with respect to the foregoing, and to repay to Lender on demand the amount thereof, and until paid by Borrower such amount shall be added and deemed part of the Loans, provided, that, nothing contained herein shall be construed to require Borrower to pay any income or franchise taxes attributable to the income of Lender from any amounts charged or paid hereunder to Lender. The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. 9.8 Insurance. Borrower shall, at all times, maintain with financially sound and reputable insurers insurance with respect to the Collateral against loss or damage and all other insurance of the kinds and in the amounts customarily insured against or carried by corporations of established reputation engaged in the same or similar businesses and similarly situated. Said policies of insurance shall be satisfactory to Lender as to form, amount and insurer. Borrower -39- 44 shall furnish certificates, policies or endorsements to Lender as Lender shall require as proof of such insurance. 9.9 Financial Statements and Other Information. (a) Borrower shall keep proper books and records in which true and complete entries shall be made of all dealings or transactions of or in relation to the Collateral and the business of Borrower and its Subsidiaries (if any) in accordance with GAAP and Borrower shall furnish or cause to be furnished to Lender: (i) within eighteen (18) days after the end of each fiscal month, monthly unaudited consolidated financial statements, and, if Borrower has any Subsidiaries, unaudited consolidating financial statements (including in each case balance sheets, statements of income and loss, statements of cash flow and statements of shareholders' equity), all in reasonable detail, fairly presenting the financial position and the results of the operations of Borrower and its Subsidiaries as of the end of and through such fiscal month (subject to normal year-end audit adjustments and the absence of notes); (ii) within eighteen (18) days after the end of each fiscal month, a summary of resin prices paid by Borrower during the preceding six months, certified by the chief financial officer of Borrower; (iii) as soon as available and in any event not later than 20 days prior to the beginning of each fiscal year of Borrower, commencing with the fiscal year beginning on January 1, 1998, a copy of the annual operating and capital budgets for Borrower and its Subsidiaries for such fiscal year, detailed by quarter, together with appropriate supporting assumptions in reasonable detail, by each operating entity, each such budget to have been previously approved and adopted by the Board of Directors of Borrower; and (v) within ninety (90) days after the end of each fiscal year, audited consolidated financial statements and, if Borrower has any Subsidiaries, audited consolidating financial statements of Borrower and its Subsidiaries (including in each case balance sheets, statements of income and loss, statements of cash flow and statements of shareholders' equity), and the accompanying notes thereto, all in reasonable detail, fairly presenting the financial position and the results of the operations of Borrower and its Subsidiaries as of the end of and for such fiscal year, together with the opinion of independent certified public accountants, which accountants shall be KPMG Peat Marwick L.L.P. or any other independent accounting firm selected by Borrower and reasonably acceptable to Lender, that such financial statements have been prepared in accordance with GAAP, and present fairly the results of operations and financial condition of Borrower and its Subsidiaries as of the end of and for the fiscal year then ended. -40- 45 (b) Borrower shall promptly notify Lender in writing of the details of (i) any loss, damage, investigation, action, suit, proceeding or claim relating to the Collateral or any other property which is security for the Obligations or which could reasonably be expected to result in any Material Adverse Effect and (ii) the occurrence of any Default or Event of Default. (c) Borrower shall promptly after the sending or filing thereof furnish or cause to be furnished to Lender copies of all reports which Borrower sends to its stockholders generally and copies of all reports and registration statements which Borrower files with the SEC, NYSE, any national securities exchange or the National Association of Securities Dealers, Inc. (d) Borrower shall furnish or cause to be furnished to Lender such budgets, forecasts, projections and other information respecting the Collateral and the business of Borrower, as Lender may, from time to time, reasonably request. Lender is hereby authorized to deliver a copy of any financial statement or any other information relating to the business of Borrower to any court or other government agency or subject to Section 13.5 below, to any participant or assignee or prospective participant or assignee. Borrower hereby irrevocably authorizes and directs all accountants or auditors to deliver to Lender, at Borrower's expense, copies of the financial statements of Borrower and any reports or management letters prepared by such accountants or auditors on behalf of Borrower and to disclose to Lender such information as they may have regarding the business of Borrower. Any documents, schedules, invoices or other papers delivered to Lender may be destroyed or otherwise disposed of by Lender one (1) year after the same are delivered to Lender, except as otherwise designated by Borrower to Lender in writing. 9.10 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Borrower shall not, directly or indirectly, (a) merge into or with or consolidate with any other Person or permit any other Person to merge into or with or consolidate with it, or (b) sell, assign, lease, transfer, abandon or otherwise dispose of any Capital Stock or Indebtedness to any other Person or any of its assets to any other Person, except for (i) sales of Inventory in the ordinary course of business and the discontinued consumer products business, (ii) the disposition of worn-out or obsolete Equipment or Equipment no longer used in the business of Borrower so long as (A) if an Event of Default has occurred and is continuing, any proceeds are paid to Lender and (B) such sales do not involve Equipment having an aggregate fair market value in excess of $250,000 for all such Equipment disposed of in any fiscal year of Borrower, (iii) the issuance and sale by Borrower of Capital Stock of Borrower after the date hereof (other than pursuant to the Warrant or the Registration Agreement), provided, that (A) Lender shall have received not less than ten (10) Business Days prior written -41- 46 notice of such issuance and sale by Borrower, which notice shall specify the parties to whom such shares are to be sold, the terms of such sale, the total amount which it is anticipated will be realized from the issuance and sale of such stock and the net cash proceeds which it is anticipated will be received by Borrower from such sale, (B) Borrower shall not be required to pay any dividends or repurchase or redeem such Capital Stock or make any other payments in respect thereof, (C) the terms of such Capital Stock, and the terms and conditions of the purchase and sale thereof, shall not amend or modify any of the terms or conditions of this Agreement or any of the other Financing Agreements or otherwise in any way relate to or affect the arrangements of Borrower with Lender or be more restrictive or burdensome to Borrower than the terms of any Capital Stock in effect on the date hereof, and (D) as of the date of such issuance and sale and after giving effect thereto, no Event of Default or Default shall exist or have occurred and be continuing; (iv) the issuance by Borrower of Capital Stock of Borrower pursuant to this Agreement, the Warrant or the Registration Agreement; (v) the issuance by Borrower of Capital Stock of Borrower pursuant to the existing employee stock option plans, director stock purchase plans or employee stock bonus plans (as each is in effect on the date hereof), whether to existing employees or new employees that receive the benefit of such plans; (vi) the issuance by Borrower of Capital Stock of Borrower pursuant to the exercise by the holders of the Class B Cumulative Convertible Preferred Stock, Series D of Borrower of the right to convert such preferred stock to common stock of Borrower; provided, that, in no event shall Borrower be required to make any payment in connection with or as a result of such conversion; (vii) the grant by Borrower of a license to a Person other than an Affiliate for the use of any trademarks, patents or other intellectual property rights, provided, that, as to each and all of such licenses, each of the following conditions is satisfied, (A) at the time of the grant of the license and after giving effect thereto, no Event of Default or Default shall exist or have occurred and be continuing, (B) the rights of such licensee in the trademarks, patents or other intellectual property subject to such license shall be subject and subordinate in all respects to the rights of Lender therein, (C) Lender shall have approved the terms and conditions of such license prior to the execution and delivery of the applicable license agreement, which consent shall not be unreasonably withheld or delayed and (D) Lender shall have received true, correct and complete copies of the executed license agreement, promptly after the execution thereof, which shall contain the terms and conditions approved by Lender; or (viii) the licenses with respect to intellectual property listed on Schedule 9.10 hereto; or (c) form or acquire any Subsidiaries; or (d) wind up, liquidate or dissolve; or -42- 47 (e) agree to do any of the foregoing. 9.11 Encumbrances. Borrower shall not create, incur, assume or suffer to exist any security interest, mortgage, pledge, lien, charge or other encumbrance of any nature whatsoever on any of its assets or properties, including the Collateral, except: (a) the liens and security interests of Lender; (b) liens securing the payment of taxes, either not yet overdue or the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrower and with respect to which adequate reserves have been established on its books; (c) mechanics, materialmen, warehousemen, carriers and other non-consensual statutory liens (other than liens securing the payment of taxes) arising in the ordinary course of Borrower's business to the extent: (i) such liens secure Indebtedness which is not overdue or (ii) such liens secure Indebtedness relating to claims or liabilities which are fully insured and being defended at the sole cost and expense and at the sole risk of the insurer or being contested in good faith by appropriate proceedings diligently pursued and available to Borrower, in each case prior to the commencement of foreclosure or other similar proceedings and with respect to which adequate reserves have been set aside on its books; (d) zoning restrictions, easements, licenses, covenants and other restrictions affecting the use of Real Property that are incurred in the ordinary course of business which do not interfere in any material respect with the use of such Real Property or ordinary conduct of the business of Borrower as presently conducted thereon or materially impair the value of the Real Property which may be subject thereto; (e) purchase money security interests in Equipment (including capital leases) and purchase money mortgages on real estate not to exceed $1,000,000 in the aggregate at any time outstanding so long as such security interests and mortgages do not apply to any property of Borrower other than the Equipment or real estate so acquired, and the Indebtedness secured thereby does not exceed the cost of the Equipment or real estate so acquired, as the case may be; (f) liens arising in connection with judgments for the payment of money in an amount not to exceed $250,000 in any one case or $500,000 in the aggregate (other than a judgment in the L.A. Lease Litigation) or a lien arising in connection with a judgment for the payment of money in an amount not to exceed $500,000 in the L.A. Lease Litigation; provided, that, as to any of such liens, (i) the judgment or other court order giving rise to such lien is being contested in good faith by appropriate proceedings diligently pursued and available to Borrower prior to the commencement of foreclosure or other similar proceedings, (ii) execution thereon is at all times effectively stayed and (iii) an adequate reserve for such Indebtedness has been established on Borrower's books; (g) cash deposits or liens on assets other than Collateral made in the ordinary course of the business of Borrower to the extent required in connection with workers' -43- 48 compensation, unemployment insurance, social security and other similar laws consistent with the current practices of Borrower as of the date hereof; (h) cash deposits or liens on assets other than Collateral to secure the performance of tenders, contracts (other than contracts for the payment of money) or leases, or surety and appeal bonds, in each case incurred in the ordinary course of business consistent with the current practices of Borrower as of the date hereof; (i) the security interests and liens set forth on Schedule 8.4 hereto; and (j) non-statutory liens granted in favor of the PBGC to secure liabilities that would be incurred under Title IV of ERISA in the event of termination of an Employee Plan, provided that Lender has given its prior written consent to the granting of any such non-statutory lien. 9.12 Indebtedness. Borrower shall not incur, create, assume, become or be liable in any manner with respect to, or permit to exist, any obligations or Indebtedness, except: (a) the Obligations; (b) trade obligations, obligations to employees under employment contracts, and normal accruals in the ordinary course of business not yet due and payable, or with respect to which Borrower is contesting in good faith the amount or validity thereof by appropriate proceedings diligently pursued and available to Borrower and with respect to which adequate reserves have been set aside on its books; (c) purchase money Indebtedness (including capital leases) to the extent not incurred or secured by liens (including capital leases) in violation of any other provision of this Agreement; (d) operating leases of Equipment in the ordinary course of the business of Borrower; (e) Indebtedness with respect to the Employee Plans, not arising as a result of a Termination Event, that is incurred to obtain the PBGC's forbearance in connection with the refinancing of the Senior Notes, provided that Lender has given its prior written consent to such Indebtedness; (f) obligations to pay dividends in respect of the Capital Stock of Borrower consisting of the Class B Cumulative Convertible Preferred Stock, Series D; provided, that, Borrower shall not make, and shall not be required to make, any payments in respect of such dividends; and (g) Indebtedness of Borrower existing on the date hereof set forth on Schedule 9.12 hereto, provided, that, (i) Borrower may only make regularly scheduled payments of principal and interest in respect of such Indebtedness in accordance with the terms of the -44- 49 agreement or instrument evidencing or giving rise to such Indebtedness as in effect on the date hereof (or as amended to the extent permitted herein), (ii) Borrower shall not, directly, or indirectly, (A) amend, modify, alter or change the terms of such Indebtedness or any agreement, document or instrument related thereto as in effect on the date hereof, except that, Borrower may, after prior written notice to Lender, amend, modify, alter or change the terms thereof so as to extend the maturity thereof or defer the timing of any payments in respect thereof, or to forgive or cancel a portion of such Indebtedness (other than pursuant to payments thereof), or to reduce the interest rate or any fees in connection therewith, or to release any of the liens or security interests in any assets and properties of Borrower, or to make any covenants contained therein less restrictive or burdensome as to Borrower or otherwise more favorable to Borrower, or (B) redeem, retire, defease, purchase or otherwise acquire such Indebtedness (except to the extent permitted under clause (i) above), and (iii) Borrower shall furnish to Lender all notices or demands in connection with such Indebtedness either received by Borrower or on its behalf, promptly after the receipt thereof, or sent by Borrower or on its behalf, concurrently with the sending thereof, as the case may be. 9.13 Loans, Investments, Guarantees, Etc. Borrower shall not, directly or indirectly, make any loans or advance money or property to any person, or invest in (by capital contribution, dividend or otherwise) or purchase or repurchase the Capital Stock or Indebtedness or all or a substantial part of the assets or property of any person, or guarantee, assume, endorse, or otherwise become responsible for (directly or indirectly) the Indebtedness, performance, obligations or dividends of any Person or agree to do any of the foregoing, except: (a) the endorsement of instruments for collection or deposit in the ordinary course of business; (b) investments in cash or Cash Equivalents; provided, that, as to any of the foregoing, unless waived in writing by Lender, Borrower shall, take such actions as are deemed necessary by Lender to perfect the security interest of Lender in such investments; (c) loans and advances by Borrower to employees of Borrower not to exceed the principal amount of $400,000 in the aggregate at any time outstanding for: reasonable and necessary work-related travel or other ordinary business expenses to be incurred by such employees in connection with their work for Borrower and reasonable and necessary relocation expenses of such employees (including home mortgage financing for relocated employees); (d) advances by Borrower (x) described in Schedule 9.13 hereto and (y) after the date hereof in the ordinary course of the business of Borrower consistent with current practices as of the date hereof on behalf of customers of Borrower other than Affiliates to purchase molds and other tooling to be used by Borrower in the production of Inventory on behalf of such customer, provided, that, (i) as of the date of each such advance and after giving effect thereto, no Event of Default or Default shall exist or have occurred and be continuing, (ii) Borrower shall report the outstanding amount of such advances monthly as of the end of the immediately preceding month or more frequently and as of such date as Lender may from time to time request, (iii) in no event shall, at any time, the aggregate outstanding amount of such advances exceed $750,000 and (iv) the indebtedness arising pursuant to such advances is not, and shall not be, evidenced by any promissory note or other instrument, unless the original of such note or other instrument is immediately delivered to, duly endorsed and assigned in a manner acceptable to Lender by Borrower; (e) the loans, advances and guarantees existing as of the date hereof set forth on Schedule 9.13 hereto; provided, that, as to such loans, advances and guarantees, (i) Borrower shall not, directly or indirectly, (A) amend, -45- 50 modify, alter or change the terms of such loans, advances or guarantees or any agreement, document or instrument related thereto, or (B) as to such guarantees, redeem, retire, defease, purchase or otherwise acquire the obligations arising pursuant to such guarantees, or set aside or otherwise deposit or invest any sums for such purpose, and (ii) Borrower shall furnish to Lender all notices or demands in connection with such loans, advances or guarantees or other Indebtedness subject to such guarantees either received by Borrower or on its behalf, promptly after the receipt thereof, or sent by Borrower or on its behalf, concurrently with the sending thereof, as the case may be. 9.14 Dividends and Redemptions. Except as permitted by this Agreement, the Warrant or the Registration Agreement, Borrower shall not, directly or indirectly, declare or pay any dividends on account of any shares of any class of Capital Stock of Borrower now or hereafter outstanding, or set aside or otherwise deposit or invest any sums for such purpose, or redeem, retire, defease, purchase or otherwise acquire any shares of any class of Capital Stock (or set aside or otherwise deposit or invest any sums for such purpose) for any consideration other than common stock or apply or set apart any sum, or make any other distribution (by reduction of capital or otherwise) in respect of any such shares or agree to do any of the foregoing. 9.15 Transactions with Affiliates. Borrower shall not, directly or indirectly, (a) purchase, acquire or lease any property from, or sell, transfer or lease any property to, any officer, director, agent or other person affiliated with Borrower, except in the ordinary course of and pursuant to the reasonable requirements of Borrower's business and upon fair and reasonable terms no less favorable to Borrower than Borrower would obtain in a comparable arm's length transaction with an unaffiliated person or (b) make any payments of management, consulting or other fees for management or similar services, or of any Indebtedness owing to any employee or any officer, shareholder, director or any other Affiliate, except reasonable compensation to officers, employees and directors for services rendered to Borrower in the ordinary course of business and except for consulting fees payable to Lehman Brothers, so long as such fees are fair and commercially reasonable and no less favorable to Borrower than Borrower would obtain in a comparable arm's length transaction with an unaffiliated person. 9.16 Additional Bank Accounts. Borrower shall not, directly or indirectly, open, establish or maintain any lockbox, deposit account, investment account or any other account with any bank or other financial institution, other than the accounts set forth in Schedule 8.10 hereto, except: (a) as to any new or additional accounts which contain any Collateral or proceeds thereof, with the prior written consent of Lender and subject to such conditions thereto as Lender may establish and (b) as to any accounts used by Borrower to make payments of payroll, taxes or other obligations to third parties, after prior written notice to Lender, provided that (i) the aggregate amount held or otherwise on deposit in the accounts referred to in clauses (a) and (b) hereof may not exceed $100,000 at any time outstanding, and (ii) the aggregate amount held or otherwise on deposit in all accounts maintained by or on behalf of Borrower shall not exceed $4,000,000 if at such time any Revolving Loan is outstanding. 9.17 Compliance with ERISA. -46- 51 (a) Except as set forth on Schedule 8.9, Borrower shall not with respect to any Employee Plans: (i) terminate any such plan so as to incur any liability to the PBGC established pursuant to ERISA, (ii) allow or suffer to exist any prohibited transaction involving any such plan or any trust created thereunder which would subject Borrower or such ERISA Affiliate to a tax or penalty or other liability on prohibited transactions imposed under Section 4975 of the Code or ERISA, (iii) fail to pay to any such plan any contribution which it is obligated to pay under Section 302 of ERISA, Section 412 of the Code or the terms of such plan, (iv) allow or suffer to exist any accumulated funding deficiency, whether or not waived, with respect to any such plan, (v) allow or suffer to exist any occurrence of a Reportable Event or any other event or condition which presents a material risk of termination by the PBGC of any such plan that is a single employer plan, which termination could result in any liability to the PBGC or (vi) incur any withdrawal liability with respect to any Multiemployer Plan. (b) Borrower shall furnish to Lender (A) as soon as possible and in any event (x) within 30 days after Borrower knows or has reason to know that any Termination Event described in clause (a) of the definition of Termination Event with respect to any Employee Plan has occurred, (y) within 10 Business Days after Borrower knows or has reason to know that any other Termination Event with respect to any Employee Plan has occurred, or (z) within 10 Business Days after Borrower knows or has reason to know that an accumulated funding deficiency has been incurred or an application has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard (including installment payments) or an extension of any amortization period under Section 412 of the Code with respect to an Employee Plan, a statement of the chief financial officer of Borrower setting forth the details of such occurrence and the action, if any, which Borrower proposes to take with respect thereto, (B) promptly and in any event within two Business Days after receipt thereof by Borrower from the PBGC, copies of each notice received by Borrower of the PBGC's intention to terminate any Employee Plan or to have a trustee appointed to administer any Employee Plan, (C) promptly and in any event within 30 days after the filing thereof with the Internal Revenue Service, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Employee Plan, (D) promptly and in any event within 10 Business Days after Borrower knows or has reason to know that a required installment within the meaning of Section 412 of the Code has not been made when due with respect to an Employee Plan, a statement of the chief financial officer of Borrower setting forth such fact, (E) promptly and in any event within 10 Business Days after receipt thereof by Borrower from a sponsor of a Multiemployer Plan or from the PBGC, a copy of each notice received by Borrower concerning the imposition or amount of withdrawal liability under Section 4202 of ERISA or indicating that such Multiemployer Plan may enter reorganization status under Section 4241 of ERISA, and (F) promptly and in any event within 10 days after Borrower or any of its ERISA Affiliates sends notice of a plant closing or mass layoff (as defined in the Worker Adjustment and Retraining Notification Act) to employees, copies of each such notice sent by Borrower or any of its ERISA Affiliates. (c) As used in this Section 9.17, the term "accumulated funding deficiency" shall have the meaning assigned to it in ERISA, and the term "prohibited transaction" shall have the meaning assigned to it in Section 4975 of the Code and ERISA. -47- 52 9.18 Minimum EBITDA. Borrower shall not permit the EBITDA of Borrower at any time to be less than $2,500,000 for the immediately preceding three (3) month period. 9.19 Costs and Expenses. Borrower shall pay to Lender on demand all costs, expenses, filing fees and taxes paid or payable in connection with the preparation, negotiation, execution, delivery, recording, administration, collection, liquidation, enforcement and defense of the Obligations, Lender's rights in the Collateral, this Agreement, the other Financing Agreements and all other documents related hereto or thereto, including any amendments, supplements or consents which may hereafter be contemplated (whether or not executed) or entered into in respect hereof and thereof (including reasonable legal fees, costs and expenses), including: (a) all costs and expenses of filing, searching or recording (including Uniform Commercial Code financing statement filing taxes and fees, documentary taxes, intangibles taxes and mortgage recording taxes and fees, if applicable); (b) costs and expenses of remitting loan proceeds, collecting checks and other items of payment, together with Lender's customary charges and fees with respect thereto; (c) reasonable costs and expenses of preserving and protecting the Collateral; (d) costs and expenses paid or incurred in connection with obtaining payment of the Obligations, enforcing the security interests and liens of Lender, selling or otherwise realizing upon the Collateral, and otherwise enforcing the provisions of this Agreement and the other Financing Agreements or defending any claims made or threatened against Lender arising out of the transactions contemplated hereby and thereby (including preparations for and consultations concerning any such matters); (e) all reasonable out-of-pocket expenses and costs heretofore and from time to time hereafter incurred by Lender during the course of periodic field examinations of the Collateral and Borrower's operations, plus a per diem charge at the rate of $600 per person per day for Lender's examiners in the field and office; and (f) the reasonable fees and disbursements of Schulte Roth & Zabel LLP, local counsel for Lender, and any other counsel (including legal assistants) to Lender in connection with any of the foregoing. SECTION 10. EVENTS OF DEFAULT AND REMEDIES 10.1 Events of Default. The occurrence or existence of any one or more of the following events are referred to herein individually as an "Event of Default", and collectively as "Events of Default": (a) (i) Borrower shall fail to pay any principal of any Revolving Loan or any Registered Note when due hereunder (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), (ii) Borrower shall fail to pay, within three (3) Business Days after the due date thereof, any interest on any Registered Note or any fee or other Obligation when due hereunder or under any other Financing Agreements, (iii) Borrower or any Obligor fails to perform any of the covenants contained in Sections 7.1, 7.2, 9.1, 9.2, 9.3, 9.4, 9.5, 9.6, 9.7, 9.9, and 9.17 of this Agreement and such failure shall continue for ten (10) Business Days; provided, that, such ten (10) Business Day period shall not apply in the case of: (A) any failure to observe any such covenant which is not capable of being cured at all or within such ten (10) Business Days period or which has been the subject of a prior failure within a six (6) month period or (B) an intentional breach of Borrower -48- 53 or any Obligor of any such covenant or (iv) Borrower fails to perform any of the terms, covenants, conditions or provisions contained in this Agreement or any of the other Financing Agreements other than those described in Sections 10.1(a)(i), 10.1(a)(ii) and 10.1(a)(iii) above; (b) any representation, warranty or statement of fact made by Borrower to Lender in this Agreement, any other Financing Agreement or any other agreement, schedule, confirmatory assignment, certificate or otherwise shall when made or deemed made be false or misleading in any material respect; (c) any Obligor revokes, terminates or fails to perform any of the terms, covenants, conditions or provisions of any guarantee, endorsement or other agreement of such Person in favor of Lender; (d) any judgment (other than a judgment in the L.A. Lease Litigation) for the payment of money is rendered against Borrower or any Obligor in excess of $250,000 in any one case or in excess of $500,000 in the aggregate or any judgment in the L.A. Lease Litigation for the payment of money is rendered against Borrower in excess of $500,000 and any of such judgments shall remain undischarged or unvacated for a period in excess of thirty (30) days or execution shall at any time not be effectively stayed, or any judgment other than for the payment of money, or injunction, attachment, garnishment or execution is rendered against Borrower or any Obligor or any of their assets; (e) any Obligor (being a natural person or a general partner of an Obligor which is a partnership) dies or Borrower or any Obligor, which is a partnership, limited liability company, limited liability partnership or a corporation, dissolves or suspends or discontinues doing business; (f) Borrower or any Obligor becomes insolvent (however defined or evidenced), makes an assignment for the benefit of creditors, makes or sends notice of a bulk transfer or calls a meeting of its creditors or principal creditors; (g) a case or proceeding under the bankruptcy laws of the United States of America now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at law or in equity) is filed against Borrower or any Obligor or all or any part of its properties and such petition or application is not dismissed within thirty (30) days after the date of its filing or Borrower or any Obligor shall file any answer admitting or not contesting such petition or application or indicates its consent to, acquiescence in or approval of, any such action or proceeding or the relief requested is granted sooner; (h) a case or proceeding under the bankruptcy laws of the United States of America now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at a law or equity) is filed by Borrower or any Obligor or for all or any part of its property; or -49- 54 (i) Borrower or any Obligor shall fail to pay any Indebtedness (excluding Indebtedness evidenced by the Registered Notes and the Bank of Boston Note) in an aggregate amount in excess of $750,000, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness; or (ii) any other default under any agreement or instrument relating to any such Indebtedness (excluding the Senior Notes), or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or (iii) any such Indebtedness (including, without limitation, any Senior Note) shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), redeemed, purchased or defeased, or an offer to prepay, redeem, purchase or defease such Indebtedness shall be required to be made, in each case prior to the stated maturity thereof, or any holder of any such Indebtedness shall take any enforcement action with respect to such Indebtedness; or (iv) Borrower or any Obligor shall default under any other material contract, lease (other than the lease with respect to the premises of Borrower at 1840 Century Park East, Los Angeles, California), license or other obligation to any Person other than Lender, or any other event shall occur and shall continue, after the applicable grace period, if any, specified in such contract, lease, license or other obligation, if the effect of such default or event is to permit the other party thereto to terminate or cancel such contract, lease, license or other obligation; (j) the indictment or overtly threatened indictment of Borrower or any Obligor under any criminal statute, or commencement or overtly threatened commencement of criminal or civil proceedings against Borrower or any Obligor, pursuant to which statute or proceedings the penalties or remedies sought or available include forfeiture of any of the property of Borrower or such Obligor and such property is material to the operations of Borrower; (k) there shall be any event or litigation pending or overtly threatened which has or (in Lender's good faith opinion) could reasonably be expected to have a Material Adverse Effect; (l) there shall be an Event of Default under and as defined in any of the other Financing Agreements; (m) Borrower or any of its ERISA Affiliates shall have made a complete or partial withdrawal from a Multiemployer Plan, and, as a result of such complete or partial withdrawal, Borrower or such ERISA Affiliate incurs a withdrawal liability in an annual amount exceeding $250,000; or a Multiemployer Plan enters reorganization status under Section 4241 of ERISA, and, as a result thereof, Borrower's or such ERISA Affiliate's annual contribution requirement with respect to such Multiemployer Plan increases in an annual amount exceeding $250,000; -50- 55 (n) any Termination Event with respect to any Employee Plan shall have occurred, and, 30 days after notice thereof shall have been given to Borrower by Lender, (i) such Termination Event (if correctable) shall not have been corrected, (ii) the then current value of such Employee Plan's vested benefits exceeds the then current value of assets allocable to such benefits in such Employee Plan by more than $250,000 (or in the case of a Termination Event involving the withdrawal of a "substantial employer" as defined in Section 4001(a)(2) of ERISA or the withdrawal of an employer treated as a "substantial employer" under Section 4062(e) of ERISA, the withdrawing employer's proportionate share of such excess shall exceed such amount), and (iii) notwithstanding the provisions of this Section 10.1(n)(i) and (ii), to the extent that any event or transaction constitutes a Termination Event solely because such event causes Borrower or any of its ERISA Affiliates to incur liability under Sections 409, 502(i), 502(l), 4201, 4204, or 4212 of ERISA or Sections 4971 or 4975 of the Code, such Termination Event shall not be an Event of Default unless Borrower or any ERISA Affiliates, where appropriate, shall be obligated to pay when due under such Sections of ERISA and the Code in any calendar year an amount in excess of $250,000; (o) this Agreement or any other security document, after delivery thereof pursuant hereto, shall for any reason fail to constitute or cease to create a valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority lien on or security interest in any Collateral purported to be covered thereby; or (p) any provision of any Financing Agreement shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by Borrower or any Obligor, or a proceeding shall be commenced by any such Person or by any Governmental Authority or other regulatory body having jurisdiction over such Person, seeking to establish the invalidity or unenforceability thereof, or Borrower or any Obligor shall deny that it has any liability or obligation purported to be created under any Financing Agreement. 10.2 Remedies. (a) At any time an Event of Default exists or has occurred and is continuing, Lender shall have all rights and remedies provided in this Agreement, the other Financing Agreements, the Uniform Commercial Code and other applicable law, all of which rights and remedies may be exercised without notice to or consent by Borrower or any Obligor, except as such notice or consent is expressly provided for hereunder or required by applicable law. All rights, remedies and powers granted to Lender hereunder, under any of the other Financing Agreements, the Uniform Commercial Code or other applicable law, are cumulative, not exclusive and enforceable, in Lender's discretion, alternatively, successively, or concurrently on any one or more occasions, and shall include, without limitation, the right to apply to a court of equity for an injunction to restrain a breach or threatened breach by Borrower of this Agreement or any of the other Financing Agreements. Lender may, at any time or times, proceed directly against Borrower or any Obligor to collect the Obligations without prior recourse to the Collateral. -51- 56 (b) Without limiting the foregoing, at any time an Event of Default exists or has occurred and is continuing, Lender may, in its discretion and without limitation, (i) accelerate the payment of all Obligations and demand immediate payment thereof to Lender (provided, that, upon the occurrence of any Event of Default described in Sections 10.1(g) and 10.1(h), all Obligations shall automatically become immediately due and payable), (ii) with or without judicial process or the aid or assistance of others, enter upon any premises on or in which any of the Collateral may be located and take possession of the Collateral or complete processing, manufacturing and repair of all or any portion of the Collateral, (iii) require Borrower, at Borrower's expense, to assemble and make available to Lender any part or all of the Collateral at any place and time designated by Lender, (iv) collect, foreclose, receive, appropriate, setoff and realize upon any and all Collateral, (v) remove any or all of the Collateral from any premises on or in which the same may be located for the purpose of effecting the sale, foreclosure or other disposition thereof or for any other purpose, (vi) sell, lease, transfer, assign, deliver or otherwise dispose of any and all Collateral (including entering into contracts with respect thereto, public or private sales at any exchange, broker's board, at any office of Lender or elsewhere) at such prices or terms as Lender may deem reasonable, for cash, upon credit or for future delivery, with Lender having the right to purchase the whole or any part of the Collateral at any such public sale, all of the foregoing being free from any right or equity of redemption of Borrower, which right or equity of redemption is hereby expressly waived and released by Borrower, (vii) terminate the Commitment (provided, that, upon the occurrence of any Event of Default described in Sections 10.1(g) and (h), the Commitment shall automatically and immediately terminate), and/or (viii) terminate this Agreement. If any of the Collateral is sold or leased by Lender upon credit terms or for future delivery, the Obligations shall not be reduced as a result thereof until payment therefor is finally collected by Lender. If notice of disposition of Collateral is required by law, ten (10) days prior notice by Lender to Borrower designating the time and place of any public sale or the time after which any private sale or other intended disposition of Collateral is to be made, shall be deemed to be reasonable notice thereof and Borrower waives any other notice. In the event Lender institutes an action to recover any Collateral or seeks recovery of any Collateral by way of prejudgment remedy, Borrower waives the posting of any bond which might otherwise be required. (c) Lender shall apply the cash proceeds of Collateral actually received by Lender from any sale, lease, foreclosure or other disposition of the Collateral to payment of the Obligations, in whole or in part and in such order as Lender may elect, whether or not then due. Borrower shall remain liable to Lender for the payment of any deficiency with interest at the highest rate provided for herein and all costs and expenses of collection or enforcement, including reasonable attorneys' fees and legal expenses. SECTION 11. ISSUANCE OF EQUITY INTERESTS TO LENDER 11.1 Authorization and Issuance of Capital Stock. Borrower has authorized: (a) the issuance of the Warrant and the certificate evidencing such Warrant; and (b) the issuance of such number of shares of Common Stock as shall be necessary to permit Borrower to comply with its obligations to issue the shares of Common Stock required by the Warrant. -52- 57 11.2 Securities Act Matters. (a) Lender warrants to Borrower that: (i) Lender is acquiring the Warrant and the Common Stock specified in Section 11.1 hereunder for its own account, without a view to the distribution thereof, all without prejudice, however, to the right of Lender at any time, in accordance with this Agreement, lawfully to sell or otherwise to dispose of all or any part of the Warrant or Common Stock held by it. (ii) Lender is an "accredited investor" within the meaning of Regulation D under the Securities Act. (b) Borrower represents and warrants to Lender that: (i) Assuming the truth and accuracy of Lender's representations and warranties contained in the preceding paragraph, the issuance of the Warrant and the shares of Capital Stock pursuant to the Warrant are exempt from the registration and prospectus delivery requirements of the Securities Act. (ii) All stock and securities of Borrower heretofore issued and sold by Borrower were, and all securities of Borrower issued and sold by Borrower on and after the date hereof are or will be issued and sold in accordance with, or are or will be exempt from, the registration and prospectus delivery requirements of the Securities Act. (iii) Borrower agrees that neither Borrower nor any Person acting on its behalf has offered or will offer the Warrant or Common Stock specified in Section 11.1 or any part thereof or any similar securities for issue or sale to, or has solicited or will solicit any offer to acquire any of the same from, any Person so as to bring the issuance and sale of such Warrant and Common Stock hereunder within the provisions of the registration and prospectus delivery requirements of the Securities Act. 11.3 Certain Taxes. Borrower shall pay all taxes (other than Federal, state or local income taxes) which may be payable in connection with the execution and delivery of this Agreement or the issuance of the Warrant and Common Stock specified in Section 11.1 hereunder or in connection with any modification of this Agreement and shall hold Lender harmless without limitation as to time against any and all liabilities with respect to all such taxes. The obligations of Borrower under this Section 11.3 shall survive any redemption, repurchase or acquisition of such Warrant and Common Stock by Borrower and any termination of this Agreement. The parties hereto agree that, for income tax purposes, the purchase price to be attributed to the Warrant issued to Lender hereunder on the date hereof is $100,000. 11.4 Cancellation and Issuance. If Lender assigns or otherwise transfers all or any part of the Revolving Loans (including by selling participations therein) to any -53- 58 Person, Lender may request (upon 10 days' prior notice to Borrower) that (a) a number of Warrants held by Lender be canceled on the date of such assignment and transfer and (b) a like number of Warrants be issued by Borrower to the Person to whom the Revolving Loans are being assigned or otherwise transferred. Upon the date specified in such request: (i) Borrower shall issue, and Lender shall surrender (or cause to be surrendered) for cancellation, such number of Warrants as aforesaid, provided that such issuance shall not violate the Securities Act or any applicable state securities laws; (ii) Borrower will deliver to each Person that receives a certificate for Warrants a favorable legal opinion from counsel to Borrower reasonably acceptable to such Person, in substantially the form and covering the matters set forth in the opinion of counsel to Borrower (to the extent relating to the Warrants) delivered to Lender on the Closing Date; (iii) each Person that receives a certificate for Warrants will deliver a certificate to Borrower affirming the representations and warranties contained in the first paragraph of Section 11.2 hereof as of such date; and (iv) Borrower will deliver a certificate to each Person that receives a certificate for Warrants affirming the representations and warranties contained in the second paragraph of Section 11.2 hereof as of such date. SECTION 12. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW 12.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver. (a) The validity, interpretation and enforcement of this Agreement, the Registered Note and the other Financing Agreements and any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of New York (without giving effect to principles of conflicts of law). (b) Borrower and Lender irrevocably consent and submit to the non-exclusive jurisdiction of the Supreme Court of the State of New York in New York County and the United States District Court for the Southern District of New York and waive any objection based on venue or forum non conveniens with respect to any action instituted therein arising under this Agreement or any of the other Financing Agreements or in any way connected with or related or incidental to the dealings of the parties hereto in respect of this Agreement or any of the other Financing Agreements or the transactions related hereto or thereto, in each case whether now existing or hereafter arising, and whether in contract, tort, equity or otherwise, and agree that any dispute with respect to any such matters shall be heard only in the courts -54- 59 described above (except that Lender shall have the right to bring any action or proceeding against Borrower or its property in the courts of any other jurisdiction which Lender deems necessary or appropriate in order to realize on the Collateral or to otherwise enforce its rights against Borrower or its property). (c) Borrower hereby waives personal service of any and all process upon it and consents that all such service of process may be made by certified mail (return receipt requested) directed to its address set forth on the signature pages hereof and service so made shall be deemed to be completed ten (10) days after the same shall have been so deposited in the U.S. mails, or, at Lender's option, by service upon Borrower in any other manner provided under the rules of any such courts. Within thirty (30) days after such service, Borrower shall appear in answer to such process, failing which Borrower shall be deemed in default and judgment may be entered by Lender against Borrower for the amount of the claim and other relief requested. (d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS AGREEMENT, THE REGISTERED NOTE OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND LENDER EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (e) Lender shall not have any liability to Borrower (whether in tort, contract, equity or otherwise) for losses suffered by Borrower in connection with, arising out of, or in any way related to the transactions or relationships contemplated by this Agreement, or any act, omission or event occurring in connection herewith, unless it is determined by a final and non-appealable judgment or court order binding on Lender, that the losses were the result of acts or omissions constituting gross negligence or willful misconduct. In any such litigation, Lender shall be entitled to the benefit of the rebuttable presumption that it acted in good faith and with the exercise of ordinary care in the performance by it of the terms of this Agreement. 12.2 Waiver of Notices. Borrower hereby expressly waives demand, presentment, protest and notice of protest and notice of dishonor with respect to any and all instruments and commercial paper, included in or evidencing any of the Obligations or the Collateral, and any and all other demands and notices of any kind or nature whatsoever with respect to the Obligations, the Collateral and this Agreement, except such as are expressly provided for herein. -55- 60 No notice to or demand on Borrower which Lender may elect to give shall entitle Borrower to any other or further notice or demand in the same, similar or other circumstances. 12.3 Amendments and Waivers. Neither this Agreement nor any provision hereof shall be amended, modified, waived or discharged orally or by course of conduct, but only by a written agreement signed by an authorized officer of Lender, and as to amendments and modifications, as also signed by an authorized officer of Borrower. Lender shall not, by any act, delay, omission or otherwise be deemed to have expressly or impliedly waived any of its rights, powers and/or remedies unless such waiver shall be in writing and signed by an authorized officer of Lender. Any such waiver shall be enforceable only to the extent specifically set forth therein. A waiver by Lender of any right, power and/or remedy on any one occasion shall not be construed as a bar to or waiver of any such right, power and/or remedy which Lender would otherwise have on any future occasion, whether similar in kind or otherwise. 12.4 Waiver of Counterclaims. Borrower waives all rights to interpose any claims, deductions, setoffs or counterclaims of any nature (other then compulsory counterclaims) in any action or proceeding with respect to this Agreement, the Obligations, the Collateral or any matter arising therefrom or relating hereto or thereto. 12.5 Indemnification. Borrower shall indemnify and hold Lender, and its directors, agents, employees and counsel, harmless from and against any and all losses, claims, damages, liabilities, costs or expenses imposed on, incurred by or asserted against any of them in connection with any litigation, investigation, claim or proceeding commenced or threatened related to the negotiation, preparation, execution, delivery, enforcement, performance or administration of this Agreement, any other Financing Agreements, or any undertaking or proceeding related to any of the transactions contemplated hereby or any act, omission, event or transaction related or attendant thereto, including amounts paid in settlement, court costs, and the reasonable fees and expenses of counsel, except for any such losses, claims, liabilities, cost or expenses resulting from the gross negligence or willful misconduct of Lender as determined pursuant to a final non-appealable order of a court of competent jurisdiction. Notwithstanding the exclusion set forth in the immediately preceding sentence, Borrower shall indemnify and hold Lender, and its directors, agents, employees and counsel, harmless from and against any and all losses, claims, damages, liabilities, costs or expenses imposed on, incurred by or asserted against any of them arising out of, or in any manner related to, any action, suit or proceeding commenced by any holder of the Senior Notes, or any representative thereof, in connection with this Agreement, the other Financing Agreements or the transactions contemplated hereby or thereby. In no event shall Lender be responsible or liable to Borrower or any other Person for any consequential or incidental damages that may be alleged as a result of this Agreement, the other Financing Agreements and the transactions contemplated hereby and thereby. To the extent that the undertaking to indemnify, pay and hold harmless set forth in this Section may be unenforceable because it violates any law or public policy, Borrower shall pay the maximum portion which it is permitted to pay under applicable law to Lender in satisfaction of indemnified matters under this Section. The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. -56- 61 SECTION 13. TERM OF AGREEMENT; MISCELLANEOUS 13.1 Term. (a) This Agreement and the other Financing Agreements (other than the Warrant and the Registration Agreement) shall become effective as of the date set forth on the first page hereof and shall continue in full force and effect until the payment in full of all Obligations. (b) In addition, Lender shall have the right to terminate this Agreement and the other Financing Agreements at any time upon the occurrence of a Change of Control. Borrower shall give Lender notice of any Change of Control on the later of (x) the tenth (10th) Business Day prior to such Change of Control or (y) the first Business Day after Borrower has any notice of such Change of Control. (c) On the earlier to occur of (i) the termination of this Agreement and the other Financing Agreements and (ii) the Maturity Date, Borrower shall pay to Lender, in full, all outstanding and unpaid Obligations and shall furnish cash collateral to Lender in such amounts as Lender determines are reasonably necessary to secure Lender from loss, cost, damage or expense, including reasonable attorneys' fees and legal expenses, in connection with any Obligations (including, without limitation, Obligations arising under Sections 9.19, 12.5 and 13.1(e) hereof), including checks or other payments provisionally credited to the Obligations and/or as to which Lender has not yet received final and indefeasible payment and the indemnification obligations of Borrower to Lender under Sections 12.5 and 13.1(e) hereof, provided, that, as to such indemnification obligations Borrower shall only be required to provide cash collateral in respect of any matters or circumstances known at the time of the termination of the Financing Agreements and the payment to Lender of the Obligations which Lender determines could reasonably be expected to result in liability of Borrower pursuant to such indemnification obligations. Such payments in respect of the Obligations and cash collateral shall be remitted by wire transfer in Federal funds to such bank account of Lender, as Lender may, in its discretion, designate in writing to Borrower for such purpose. Interest shall be due until and including the next Business Day, if the amounts so paid by Borrower to the bank account designated by Lender are received in such bank account later than 12:00 noon, New York City time. (d) No termination of this Agreement or the other Financing Agreements shall relieve or discharge Borrower of its respective duties, obligations and covenants under this Agreement or the other Financing Agreements until all Obligations have been fully and finally discharged and paid, and Lender's continuing security interest in the Collateral and the rights and remedies of Lender hereunder, under the other Financing Agreements and applicable law, shall remain in effect until all such Obligations have been fully and finally discharged and paid. (e) On the earlier to occur of (i) the termination of this Agreement and the other Financing Agreements and (ii) the Maturity Date, Borrower shall pay to Lender a fee (the "Exit Fee") in the amount of $47,367.50, plus the amount by which the Purchase Price (as such term is defined in the Warrant) exceeds $47,367.50; provided, however, that if Lender has not -57- 62 exercised the Warrant on or before such date, Borrower shall pay Lender the Exit Fee upon exercise of the Warrant. Borrower's obligations under this Section 13.1(e) shall survive the termination or non-renewal of this Agreement. 13.2 Notices. Except as otherwise expressly provided herein, all notices, requests and demands hereunder shall be in writing and made to Lender at its address set forth below and to Borrower at its chief executive office set forth below, or to such other address as either party may designate by written notice to the other in accordance with this provision, and deemed to have been given or made: if delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt; if by nationally recognized overnight courier service with instructions to deliver the next business day, one (1) Business Day after sending; and if by certified mail, return receipt requested, five (5) days after mailing. 13.3 Partial Invalidity. If any provision of this Agreement is held to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate this Agreement as a whole, but this Agreement shall be construed as though it did not contain the particular provision held to be invalid or unenforceable and the rights and obligations of the parties shall be construed and enforced only to such extent as shall be permitted by applicable law. 13.4 Successors. (a) This Agreement, the other Financing Agreements and any other document referred to herein or therein shall be binding upon and inure to the benefit of and be enforceable by Lender, Borrower and their respective successors and assigns, except that Borrower may not assign its rights under this Agreement, the other Financing Agreements and any other document referred to herein or therein or any interest herein or therein without the prior written consent of Lender. Lender may, after notice to Borrower, assign its rights and delegate its obligations under this Agreement and the Registered Note and the other Financing Agreements (a) to any of its present and future Subsidiaries or Affiliates or (b) to any participant or (c) upon the merger, consolidation, sale, transfer or other disposition of all or any substantial portion of its business, loan portfolio or other assets or (d) at any time after an Event of Default shall exist or have occurred. In addition, Lender may assign, or sell participations in, all or any part of the Revolving Loans and the Registered Note or any other interest herein to another financial institution or other Person, in which event the assignee or participant shall have, to the extent of such assignment or participation, the same rights and benefits as it would have if it were Lender hereunder and under the Registered Note, except as otherwise provided by the terms of such assignment or participation. Notwithstanding the foregoing, so long as no Event of Default has occurred and is continuing, Lender will not assign its rights hereunder to any Person engaged in the manufacture and sale of plastic products who competes with Borrower. Lender may, in connection with any such assignment or participation or as may be required by law or any Governmental Authority, disclose any public and non-public information relating to Borrower and its Subsidiaries furnished by or on behalf of Borrower or its Subsidiary or any of their Affiliates to Lender. -58- 63 (b) Borrower shall maintain, or cause to be maintained, a register (the "Register") on which it enters the name of Lender as the registered owner of each Revolving Loan held by Lender. A Registered Loan (and the Registered Note, if any, evidencing the same) may be assigned or sold in whole or in part only by registration of such assignment or sale on the Register (and the Registered Note shall expressly so provide). Any assignment or sale of all or part of such Registered Loan (and the Registered Note, if any, evidencing the same) may be effected only by registration of such assignment or sale on the Register, together with the surrender of the Registered Note, if any, evidencing the same duly endorsed by (or accompanied by a written instrument of assignment or sale duly executed by) the holder of such Registered Note, whereupon, at the request of the designated assignee(s) or transferee(s), one or more new Registered Notes in the same aggregate principal amount shall be issued to the designated assignee(s) or transferee(s). Prior to the registration of assignment or sale of any Registered Loan (and the Registered Note, if any evidencing the same), Borrower shall treat the Person in whose name such Revolving Loan (and the Registered Note, if any, evidencing the same) is registered as the owner thereof for the purpose of receiving all payments thereon and for all other purposes, notwithstanding notice to the contrary. (c) In the event that Lender sells participations in any Registered Loan, Lender shall, as Borrower's agent, maintain a register on which it enters the name of all participants in such Registered Loan (the "Participant Register"). A Registered Loan (and the Registered Note, if any, evidencing the same) may be participated in whole or in part only by registration of such participation on the Participant Register (and each Registered Note shall expressly so provide). Any participation of such Registered Loan (and the Registered Note, if any, evidencing the same) may be effected only by the registration of such participation on the Participant Register. (d) Any foreign Person who purchases or is assigned or participates in any portion of the Revolving Loans shall provide Borrower (in the case of a purchase or assignment) or Lender (in the case of a participation) with a completed Internal Revenue Service Form W-8 (Certificate of Foreign Status) or a substantially similar form for such purchaser, participant or any other affiliate who is a holder of beneficial interests in the Revolving Loans. 13.5 Confidentiality. (a) Lender shall use all reasonable efforts to keep confidential, in accordance with its customary procedures for handling confidential information and safe and sound lending practices, any non-public information supplied to it by Borrower pursuant to this Agreement which is clearly and conspicuously marked as confidential at the time such information is furnished by Borrower to Lender, provided, that, nothing contained herein shall limit the disclosure of any such information: (i) to the extent required by statute, rule, regulation, subpoena or court order, (ii) to bank examiners and other regulators, auditors and/or accountants, (iii) in connection with any litigation to which Lender is a party, (iv) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) shall have first agreed in writing to treat such information as -59- 64 confidential in accordance with this Section 13.5, or (v) to counsel for Lender or any participant or assignee (or prospective participant or assignee). (b) In no event shall this Section 13.5 or any other provision of this Agreement or applicable law be deemed: (i) to apply to or restrict disclosure of information that has been or is made public by Borrower or any third party without breach of this Section 13.5 or otherwise becomes generally available to the public other than as a result of a disclosure in violation hereof, (ii) to apply to or restrict disclosure of information that was or becomes available to Lender on a non-confidential basis from a person other than Borrower, (iii) to require Lender to return any materials furnished by Borrower to Lender or (iv) prevent Lender from responding to routine informational requests in accordance with the Code of Ethics for the Exchange of Credit Information promulgated by The Robert Morris Associates or other applicable industry standards relating to the exchange of credit information. The obligations of Lender under this Section 13.5 shall supersede and replace the obligations of Lender under any confidentiality letter signed prior to the date hereof. 13.6 Entire Agreement. This Agreement, the other Financing Agreements, any supplements hereto or thereto, and any instruments or documents delivered or to be delivered in connection herewith or therewith represents the entire agreement and understanding concerning the subject matter hereof and thereof between the parties hereto, and supersede all other prior agreements, understandings, negotiations and discussions, representations, warranties, commitments, proposals, offers and contracts concerning the subject matter hereof, whether oral or written. In the event of any inconsistency between the terms of this Agreement and any schedule or exhibit hereto, the terms of this Agreement shall govern. 13.7 Records. The unpaid principal of and interest on the Registered Note, the interest rate or rates applicable to such unpaid principal and interest, the duration of such applicability, and accrued and unpaid fees shall at all times be ascertained from the records of Lender, which shall be conclusive and binding absent manifest error. 13.8 Acknowledgments. Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Financing Documents; (b) Lender has no fiduciary relationship with Borrower, and the relationship between Lender, on the one hand, and Borrower, on the other hand, is solely that of creditor and debtor; and (c) no joint venture exists between Lender and Borrower. [REMAINDER OF PAGE LEFT INTENTIONALLY BLANK] -60- 65 IN WITNESS WHEREOF, Lender and Borrower have caused these presents to be duly executed as of the day and year first above written. LENDER BORROWER - ------ -------- MADELEINE L.L.C. KERR GROUP, INC. By: /s/ Kevin Genda By: /s/ D. Gordon Strickland ------------------------- ---------------------------- Title: Vice President Title: President & Chief Executive Officer -------------- ----------------------------------- Address: Chief Executive Office: - ------- ---------------------- 450 Park Avenue, 28th Floor 500 New Holland Avenue New York, New York 10022 Lancaster, Pennsylvania 17602-2104 -61- EX-10.2 3 COMMON STOCK PURCHASE WARRANT 1 THIS WARRANT AND ANY SHARES ACQUIRED UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAW OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. THIS WARRANT AND SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THIS WARRANT. KERR GROUP, INC. COMMON STOCK PURCHASE WARRANT No. W-001 April 18, 1997 Void after the Expiration Date (as defined herein) 94,735 Warrants (subject to adjustment) to purchase Shares of Common Stock Kerr Group, Inc., a Delaware corporation (the "Company"), for value received, hereby certifies that Madeleine L.L.C., a New York limited liability company ("Lender"), or registered assigns (the Lender or any assignee, collectively the"Holder"), is entitled to purchase from the Company an aggregate number of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock, par value $0.50 per share, of the Company (the "Common Stock") equal to the Adjusted Share Amount (as defined in Section 1), at an initial purchase price of $0.50 per share , at any time or from time to time prior to 5:00 P.M., New York City time, on April 18, 1999 (or such later date as may be determined pursuant to Section 22) (the "Expiration Date"), all subject to the terms, conditions and adjustments set forth below in this Warrant. This Warrant is one of the Common Stock Purchase Warrants (collectively, the "Warrants", such term to include any such warrants issued in substitution therefor) originally issued in connection with the revolving credit facility provided by the Lender to the Company of up to $8.5 million pursuant to the terms of the Loan and Security Agreement, dated as of April 18, 1997, between the Company and the Lender (as amended or otherwise modified from time to time, the "Loan Agreement"). The Warrants originally so issued evidence rights to purchase an aggregate of 94,735 shares of Common Stock, subject to adjustment as 2 provided herein, initially representing 2% of the aggregate issued and outstanding shares of Common Stock on a fully diluted basis. 1. Definitions. As used herein, unless the context otherwise requires, the following terms shall have the meanings indicated: "Additional Shares of Common Stock" shall mean all shares (including treasury shares) of Common Stock issued or sold (or, pursuant to Section 3.3 or 3.4, deemed to be issued) by the Company after the date hereof, whether or not subsequently reacquired or retired by the Company (excluding shares of Common Stock issued upon (i) the conversion or exchange of any existing preferred stock of the Company and (ii) the exercise or exchange of any existing option, warrant, debenture or similar agreement, in each case to the extent that such shares do not exceed the number of shares issuable pursuant to existing rights), other than (a) shares issued upon the exercise of the Warrants, and (b) such additional number of shares as may become issuable upon the exercise of any of the securities referred to in the foregoing clause (a) by reason of adjustments required pursuant to anti-dilution provisions applicable to such securities as in effect on the date hereof, in order to reflect any subdivision or combination of Common Stock, by reclassification or otherwise, or any dividend on Common Stock payable in Common Stock. "Adjusted Share Amount" shall mean, initially 94,735 shares of Common Stock, subject to adjustment as set forth below. "Adjustment Factor" shall mean initially 1.00 per share of Common Stock, subject to adjustment and readjustment from time to time as provided in Section 3, and, as so adjusted or readjusted, shall remain in effect until a further adjustment or readjustment thereof is required by Section 3. "Business Day" shall mean any day other than a Saturday or a Sunday or a day on which commercial banking institutions in the City of New York or Los Angeles are authorized by law to be closed. Any reference to "days" (unless Business Days are specified) shall mean calendar days. "Commission" shall mean the Securities and Exchange Commission or any successor agency having jurisdiction to enforce the Securities Act. "Common Stock" shall have the meaning assigned to it in the introduction to this Warrant, such term to include any stock into which such Common Stock shall have been changed or any stock resulting from any reclassification of such Common Stock, and all other stock of any class or classes (however designated) of the Company the holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current 2 3 dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference. "Company" shall have the meaning assigned to it in the introduction to this Warrant, such term to include any corporation or other entity which shall succeed to or assume the obligations of the Company hereunder in compliance with Section 4. "Convertible Securities" shall mean any evidences of indebtedness, shares of stock (other than Common Stock) or other securities directly or indirectly convertible into or exchangeable for Additional Shares of Common Stock. "Current Market Price" shall mean, on any date specified herein, the average of the daily Market Price during the 10 consecutive trading days commencing 15 trading days before such date, except that, if on any such date the shares of Common Stock are not listed or admitted for trading on any national securities exchange or quoted in the over-the-counter market, the Current Market Price shall be the Market Price on such date. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time, and the rules and regulations thereunder, or any similar or successor statute. "Expiration Date" shall have the meaning assigned to it in the introduction to this Warrant. "Loan Agreement" shall have the meaning assigned to it in the introduction to this Warrant. "Holder" shall have the meaning assigned to it in the introduction to this Warrant. "Market Price" shall mean, on any date specified herein, the amount per share of the Common Stock, equal to (a) the last reported sale price of such Common Stock, regular way, on such date or, in case no such sale takes place on such date, the average of the closing bid and asked prices thereof regular way on such date, in either case as officially reported on the principal national securities exchange on which such Common Stock is then listed or admitted for trading, or (b) if such Common Stock is not then listed or admitted for trading on any national securities exchange but is designated as a national market system security by the NASD, the last reported trading price of the Common Stock on such date, or (c) if there shall have been no trading on such date or if the Common Stock is not so designated, the average of the closing bid and asked prices of the Common Stock on such date as shown by the NASD automated quotation system, or (d) if such Common Stock is not then listed or admitted for trading on any national exchange or quoted in the over-the-counter market, the fair value thereof (as of a date which is within 20 days of the date as of which the determination is to be made) determined in good faith jointly by the Company and the Holder; provided, however, that if such parties are unable to reach agreement within a reasonable period of time, the Market Price shall be determined in good faith by an independent investment banking firm 3 4 selected jointly by the Company and the Holder or, if that selection cannot be made within ten days, by an independent investment banking firm selected by the American Arbitration Association in accordance with its rules, and provided further, that the Company shall pay all of the fees and expenses of any third parties incurred in connection with determining the Market Price. "NASD" shall mean the National Association of Securities Dealers, Inc. "Options" shall mean any rights, options or warrants to subscribe for, purchase or otherwise acquire either Additional Shares of Common Stock or Convertible Securities. "Other Securities" shall mean any stock (other than Common Stock) and other securities of the Company or any other Person (corporate or otherwise) which the holders of the Warrants at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise. "Person" shall mean any individual, firm, corporation, partnership, trust, joint venture, association, joint stock company, limited liability company, unincorporated organization or any other entity or organization, including a government or agency or subdivision thereof, and shall include any successor (by merger or otherwise) of such entity. "Purchase Price" shall mean the purchase price per share of Common Stock, which shall initially be $0.50 per share. If the par value per share of Common Stock is at any time increased or decreased, the Purchase Price shall be adjusted to equal the par value per share of Common Stock immediately after the effective time and date of such increase or decrease. "Registration Agreement" shall mean the Registration Agreement, dated as of the date hereof, substantially in the form of Exhibit E to the Loan Agreement. "Restricted Securities" shall mean (a) any Warrants bearing the applicable legend set forth in Section 10.1, (b) any shares of Common Stock (or Other Securities) issued or issuable upon the exercise of Warrants which are (or, upon issuance, will be) evidenced by a certificate or certificates bearing the applicable legend set forth in such Section, and (c) any shares of Common Stock (or Other Securities) issued subsequent to the exercise of any of the Warrants as a dividend or other distribution with respect to, or resulting from a subdivision of the outstanding shares of Common Stock (or other Securities) into a greater number of shares by reclassification, stock splits or otherwise, or in exchange for or in replacement of the Common Stock (or Other Securities) issued upon such exercise, which are evidenced by a certificate or certificates bearing the applicable legend set forth in such Section. "Securities Act" shall mean the Securities Act of 1933, as amended from time to time, and the rules and regulations thereunder, or any similar or successor statute. 4 5 "Warrants" shall have the meaning assigned to it in the introduction to this Warrant. 2. Exercise of Warrant. 2.1. Manner of Exercise; Payment of the Purchase Price. (a) This Warrant may be exercised by the Holder hereof, in whole (with respect to the number of shares determined in accordance with Section 3.1) or in part, at any time or from time to time prior to the Expiration Date, by surrendering to the Company at its principal office during normal business hours on any Business Day this Warrant, with the form of Election to Purchase Shares attached hereto as Exhibit A (or a reasonable facsimile thereof) duly executed by the Holder and accompanied by payment of the Purchase Price for the number of shares of Common Stock specified in such form. (b) Payment of the Purchase Price may be made as follows (or by any combination of the following): (i) in United States currency by cash or delivery of a certified check, bank draft or postal or express money order payable to the order of the Company or by wire transfer to the Company, (ii) by cancellation of all or any part of the unpaid principal amount of Notes held by the Holder in an amount equal to the Purchase Price, (iii) by cancellation of all or any part of the unpaid amount of the exit fee payable by the Company to the Holder pursuant to the terms and provisions of the Loan Agreement, (iv) by reducing the the amount otherwise payable to the Holder pursuant to Section 3.2.2, (v) by cancellation of such number of the shares of Common Stock otherwise issuable to the Holder upon such exercise as shall be specified in such Election to Purchase Shares, such that the Current Market Price of such specified number of shares on the date of exercise attributable to such shares shall equal the Purchase Price attributable to the shares of Common Stock to be issued upon such exercise, in which case such amount shall be deemed to have been paid to the Company and the number of shares issuable upon such exercise shall be reduced by such specified number, or (vi) by surrender to the Company for cancellation of securities of the Company having a Current Market Price on the date of Warrant exercise equal to the Purchase Price. 2.2. When Exercise Effective. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the Business Day on which this Warrant shall have been surrendered to, and the Purchase Price shall have been received by, the Company as provided in Section 2.1, and at such time the Person or Persons in whose name or names any certificate or certificates for shares of Common Stock (or Other Securities) shall be issuable upon such exercise as provided in Section 2.3 shall be deemed to have become the holder or holders of record thereof for all purposes. 2.3. Delivery of Stock Certificates, etc.; Charges, Taxes and Expenses. (a) As soon as practicable after each exercise of this Warrant, in whole or in part, and in any event within three Business Days thereafter, the Company shall cause to be issued in the name of and delivered to the Holder hereof or, subject to Section 10, as the Holder may direct, 5 6 (1) a certificate or certificates for the number of shares of Common Stock (or Other Securities) to which the Holder shall be entitled upon such exercise plus, in lieu of issuance of any fractional share to which the Holder would otherwise be entitled, if any, a check for the amount of cash equal to the same fraction multiplied by the Current Market Price per share on the date of Warrant exercise, and (2) in case such exercise is for less than all of the shares of Common Stock purchasable under this Warrant, a new Warrant or Warrants of like tenor, for the balance of the shares of Common Stock purchasable hereunder. (b) Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Holder hereof for any issue or transfer tax or other incidental expense, in respect of the issuance of such certificates, all of which such taxes and expenses shall be paid by the Company, unless the Holder directs shares of Common Stock to be issued in the name of a Person other than the Holder, in which case the Holder or such transferee shall pay any transfer taxes payable in connection with such transfer. It shall be a condition to such issuance that the Company receive evidence reasonably acceptable to it that any transfer taxes payable in connection with such transfer have been paid. 2.4. Company to Reaffirm Obligations. The Company shall, at the time of each exercise of this Warrant, upon the request of the Holder hereof, acknowledge in writing its continuing obligation to afford to such Holder all rights of the shares of Common Stock or Other Securities issued upon such exercise to which the Holder shall continue to be entitled after such exercise in accordance with the terms of this Warrant, provided that if the Holder of this Warrant shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford such rights to the Holder. 3. Adjustment of Common Stock Issuable Upon Exercise. 3.1. Adjustment of Number of Shares. Upon each adjustment of the Adjustment Factor as a result of the calculations made in this Section 3, this Warrant shall thereafter evidence the right to receive, at the Purchase Price then in effect, that number of shares of Common Stock obtained by dividing (i) the product of the aggregate number of shares covered by this Warrant immediately prior to such adjustment and the Adjustment Factor in effect immediately prior to such adjustment of the Adjustment Factor by (ii) the Adjustment Factor in effect immediately after such adjustment of the Adjustment Factor. 3.2. Adjustment of Adjustment Factor. 3.2.1 Issuance of Additional Shares of Common Stock. In case the Company at any time or from time to time after the date hereof shall issue or sell Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 3.3 or Section 3.4) without consideration or for a consideration per share less than the greater of the Current Market Price and the Purchase Price immediately prior to such 6 7 issue or sale, then, and in each such case, subject to Section 3.8, such Adjustment Factor shall be decreased, concurrently with such issue or sale, to a number (calculated to the nearest .00001) determined by multiplying such Adjustment Factor by a fraction (a) the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issue or sale and (ii) the number of shares of Common Stock which the aggregate consideration received by the Company for the total number of such Additional Shares of Common Stock so issued or sold would purchase at the greater of such Current Market Price and the Purchase Price, and (b) the denominator of which shall be the number of shares of Common Stock outstanding immediately after such issue or sale, provided that, for the purposes of this Section 3.2.1, (x) immediately after any Additional Shares of Common Stock are deemed to have been issued pursuant to Section 3.3 or 3.4, such Additional Shares shall be deemed to be outstanding, and (y) treasury shares shall not be deemed to be outstanding. 3.2.2 Extraordinary Dividends and Distributions. In case the Company at any time or from time to time after the date hereof shall declare, order, pay or make a dividend or other distribution (including, without limitation, any distribution of other or additional stock or other securities or property or Options by way of dividend or spin-off, reclassification, recapitalization or similar corporate rearrangement) on the Common Stock , then, in each such case, the Company shall pay to the Holder of this Warrant, upon the exercise of this Warrant, an amount equal to the product of (i) the number of shares of Common Stock that the Holder would be entitled to purchase upon exercise of this Warrant after consideration of all prior adjustments and readjustments pursuant to Section 3.1, and (ii) the aggregate amount at such time of such dividend or distribution (as determined in good faith by the Board of Directors of the Company ) applicable to the shares of Common Stock issuable upon such exercise by such Holder. 3.3. Treatment of Options and Convertible Securities. In case the Company at any time or from time to time after the date hereof shall issue, sell, grant or assume, or shall fix a record date for the determination of holders of any class of securities entitled to receive, any Options or Convertible Securities, then, and in each such case, the maximum number of Additional Shares of Common Stock (as set forth in the instrument relating thereto, without regard to any provisions contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue, sale, grant or assumption or, in case such a record date shall have been fixed, as of the close of business on such record date (or, if the Common Stock trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading), provided that such Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 3.5) of such shares would be less than the greater of the 7 8 Current Market Price and the Purchase Price in effect on the date of and immediately prior to such issue, sale, grant or assumption or immediately prior to the close of business on such record date (or, if the Common Stock trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading), as the case may be, and provided, further, that in any such case in which Additional Shares of Common Stock are deemed to be issued (a) no further adjustment of the Adjustment Factor shall be made upon the subsequent issue or sale of Convertible Securities or shares of Common Stock upon the exercise of such Options or the conversion or exchange of such Convertible Securities, except in the case of any such Options or Convertible Securities which contain provisions requiring an adjustment, subsequent to the date of the issue or sale thereof, of the number of Additional Shares of Common Stock issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities by reason of (x) a change of control of the Company, (y) the acquisition by any Person or group of Persons of any specified number or percentage of the voting securities of the Company or (z) any similar event or occurrence, each such case to be deemed hereunder to involve a separate issuance of Additional Shares of Common Stock, Options or Convertible Securities, as the case may be; (b) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company, or decrease in the number of Additional Shares of Common Stock issuable, upon the exercise, conversion or exchange thereof (by change of rate or otherwise), the Adjustment Factor computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of the record date, or date prior to the commencement of ex-dividend trading, as the case may be, with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options, or the rights of conversion or exchange under such Convertible Securities, which are outstanding at such time; (c) upon the expiration (or purchase by the Company and cancellation or retirement) of any such Options which shall not have been exercised or the expiration of any rights of conversion or exchange under any such Convertible Securities which (or purchase by the Company and cancellation or retirement of any such Convertible Securities the rights of conversion or exchange under which) shall not have been exercised, the Adjustment Factor computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of the record date, or date prior to the commencement of ex-dividend trading, as the case may be, with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration (or such cancellation or retirement, as the case may be), be recomputed as if: (i) in the case of Options for Common Stock or Convertible Securities, the only Additional Shares of Common Stock issued or sold were the Additional Shares of Common Stock, if any, actually issued or sold upon the 8 9 exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration actually received by the Company upon such exercise, or for the issue or sale of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Company upon such conversion or exchange, and (ii) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued or sold upon the exercise of such Options were issued at the time of the issue or sale, grant or assumption of such Options, and the consideration received by the Company for the Additional Shares of Common Stock deemed to have then been issued was the consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Company (pursuant to Section 3.5) upon the issue or sale of such Convertible Securities with respect to which such Options were actually exercised; (d) no readjustment pursuant to subdivision (b) or (c) above shall have the effect of increasing the Adjustment Factor by an amount in excess of the amount of the adjustment thereof originally made in respect of the issue, sale, grant or assumption of such Options or Convertible Securities; and (e) in the case of any such Options which expire by their terms not more than 30 days after the date of issue, sale, grant or assumption thereof, no adjustment of the Adjustment Factor shall be made until the expiration or exercise of all such Options, whereupon such adjustment shall be made in the manner provided in subdivision (c) above. 3.4. Treatment of Stock Dividends, Stock Splits, etc. In case the Company at any time or from time to time after the date hereof shall declare or pay any dividend on the Common Stock payable in Common Stock, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock), then, and in each such case, Additional Shares of Common Stock shall be deemed to have been issued (a) in the case of any such dividend, immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend, or (b) in the case of any such subdivision, at the close of business on the day immediately prior to the day upon which such corporate action becomes effective. 3.5. Computation of Consideration. For the purposes of this Section 3, (a) the consideration for the issue or sale of any Additional Shares of Common Stock shall, irrespective of the accounting treatment of such consideration, 9 10 (i) insofar as it consists of cash, be computed at the net amount of cash received by the Company, without deducting any expenses paid or incurred by the Company or any commissions or compensations paid or concessions or discounts allowed to underwriters, agents, dealers or others performing similar services in connection with such issue or sale, (ii) insofar as it consists of property (including securities) other than cash, be computed at the fair value thereof at the time of such issue or sale, as determined in good faith by the Board of Directors of the Company, and (iii) in case Additional Shares of Common Stock are issued or sold together with other stock or securities or other assets of the Company for a consideration which covers both, be the portion of such consideration so received, computed as provided in clauses (i) and (ii) above, allocable to such Additional Shares of Common Stock, all as determined in good faith by the Board of Directors of the Company; (b) Additional Shares of Common Stock deemed to have been issued pursuant to Section 3.3, relating to Options and Convertible Securities, shall be deemed to have been issued for a consideration per share determined by dividing (i) the total amount, if any, received and receivable by the Company as consideration for the issue, sale, grant or assumption of the Options or Convertible Securities in question, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration to protect against dilution) payable to the Company upon the exercise in full of such Options or the conversion or exchange of such Convertible Securities or, in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, in each case computing such consideration as provided in the foregoing subdivision (a), by (ii) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number to protect against dilution) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities; and (c) Additional Shares of Common Stock deemed to have been issued pursuant to Section 3.4, relating to stock dividends, stock splits, etc., shall be deemed to have been issued for no consideration. 10 11 3.6. Adjustments for Combinations, etc. In case the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Adjustment Factor in effect immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. 3.7 Dilution in Case of Other Securities. In case any Other Securities shall be issued or sold or shall become subject to issue or sale upon the conversion or exchange of any stock (or Other Securities) of the Company (or any issuer of Other Securities or any other Person referred to in Section 4) or to subscription, purchase or other acquisition pursuant to any Options issued or granted by the Company (or any such other issuer or Person) for a consideration such as to dilute, on a basis consistent with the standards established in the other provisions of this Section 3, the purchase rights granted by this Warrant, then, and in each such case, the computations, adjustments and readjustments provided for in this Section 3 with respect to the Purchase Price and the number of shares purchasable upon Warrant exercise shall be made as nearly as possible in the manner so provided and applied to determine the amount of Other Securities from time to time receivable upon the exercise of the Warrants, so as to protect the holders of the Warrants against the effect of such dilution. 3.8 De Minimis Adjustments. If the amount of any adjustment of the Adjustment Factor per share required pursuant to this Section 3 would be less than one-tenth (1/10) of one percent (1%) of the Adjustment Factor in effect at such time, such amount shall be carried forward and adjustment with respect thereto made at the time of and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate a change in the Adjustment Factor of at least one-tenth (1/10) of one percent (1%) of such Adjustment Factor. 3.9 Abandoned Dividend or Distribution. If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution (which results in an adjustment to the Adjustment Factor under the terms of this Warrant) and shall, thereafter, and before such dividend or distribution is paid or delivered to stockholders entitled thereto, legally abandon its plan to pay or deliver such dividend or distribution, then any adjustment made to the Adjustment Factor and number of shares of Common Stock purchasable upon Warrant exercise by reason of the taking of such record shall be reversed, and any subsequent adjustments, based thereon, shall be recomputed. 3.10. Grant, Issue or Sale of Options, Convertible Securities, or Rights. If at any time or from time to time the Company shall grant, issue or sell any Options, Convertible Securities, rights to purchase property or evidences of indebtedness (the "Purchase Rights") to the holders of its shares of Common Stock generally and such grants, issuances or sales do not result in an adjustment of the Adjustment Factor under Section 3 (or otherwise entitle the Holder to receive the Purchase Rights), then the Holder of this Warrant shall be entitled to acquire (within 30 days after the later to occur of the initial exercise date of such Purchase Rights or receipt by such Holder of the notice concerning Purchase Rights to which such 11 12 Holder shall be entitled under Section 8) and upon the terms applicable to such Purchase Rights either: (i) the aggregate Purchase Rights which such Holder could have acquired if it had held the number of shares of Common Stock acquired upon exercise of this Warrant immediately before the grant, issuance or sale of such Purchase Rights; provided that if any Purchase Rights were distributed to holders of Common Stock without the payment of additional consideration by such holders, corresponding Purchase Rights shall be distributed to the exercising Holder of this Warrant as soon as possible after such exercise and it shall not be necessary for the exercising Holder of this Warrant specifically to request delivery of such rights; or (ii) in the event that any such Purchase Rights shall have expired or shall expire prior to the end of such 30 day period, the number of shares of Common Stock or the amount of property which such Holder could have acquired upon such exercise at the time or times at which the Company granted, issued or sold such expired Purchase Rights. 4. Consolidation, Merger, etc. 4.1. Adjustments for Consolidation, Merger, Sale of Assets, Reorganization, etc. In case the Company after the date hereof (a) shall consolidate with or merge into any other Person and shall not be the continuing or surviving corporation of such consolidation or merger, or (b) shall permit any other Person to consolidate with or merge into the Company and the Company shall be the continuing or surviving Person but, in connection with such consolidation or merger, the Common Stock or Other Securities shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, or (c) shall transfer all or substantially all of its properties or assets to any other Person, or (d) shall effect a capital reorganization or reclassification of the Common Stock or Other Securities (other than a capital reorganization or reclassification resulting in the issue of Additional Shares of Common Stock for which adjustment in the Adjustment Factor is provided in Section 3.2.1 or 3.2.2), then, and in the case of each such transaction, proper provision shall be made so that, upon the basis and the terms and in the manner provided in this Warrant, the Holder, upon the exercise hereof at any time after the consummation of such transaction, shall be entitled to receive (at the aggregate Adjustment Factor in effect at the time of such consummation for all Common Stock or Other Securities issuable upon such exercise immediately prior to such consummation), in lieu of the Common Stock or Other Securities issuable upon such exercise prior to such consummation, the highest amount of securities, cash or other property to which such Holder would actually have been entitled as a stockholder upon such consummation if such Holder had exercised this Warrant immediately prior thereto, subject to adjustments (subsequent to such consummation) as nearly equivalent as possible to the adjustments provided for in Sections 3 through 5, provided that if a purchase, tender or exchange offer shall have been made to and accepted by the holders of more than 50% of the outstanding shares of Common Stock, and if the Holder so designates in a notice given to the Company on or before the date immediately preceding the date of the consummation of such 12 13 transaction, the Holder upon the exercise of the Warrants shall be entitled to receive the highest amount of securities, cash or other property to which it would actually have been entitled as a stockholder if such Holder had exercised such Warrants immediately prior to the expiration of such purchase, tender or exchange offer and accepted such offer, subject to adjustments (from and after the consummation of such purchase, tender or exchange offer) as nearly equivalent as possible to the adjustments provided for in Sections 3 through 5. 4.2. Assumption of Obligations. Notwithstanding anything contained in the Warrants or in the Loan Agreement to the contrary, the Company shall not effect any of the transactions described in clauses (a) through (d) of Section 4.1 unless, prior to the consummation thereof, each Person (other than the Company) which may be required to deliver any stock, securities, cash or property upon the exercise of this Warrant as provided herein shall assume, by written instrument delivered to, and in form and substance reasonably satisfactory to, the Holder, (a) the obligations of the Company under this Warrant (and if the Company shall survive the consummation of such transaction, such assumption shall be in addition to, and shall not release the Company from, any continuing obligations of the Company under this Warrant), (b) the obligations of the Company under the Registration Agreement and (c) the obligation to deliver to the Holder such shares of stock, securities, cash or property as, in accordance with the foregoing provisions of this Section 4, the Holder may be entitled to receive and such Person shall have similarly delivered to the Holder an opinion of counsel for such Person, which counsel shall be reasonably satisfactory to the Holder, stating that each of this Warrant and the Registration Agreement shall thereafter continue in full force and effect and the terms hereof (including, without limitation, all of the provisions of this Section 4) shall be applicable to the stock, securities, cash or property which such Person may be required to deliver upon any exercise of this Warrant or the exercise of any rights pursuant hereto. Nothing in this Section 4 shall be deemed to authorize the Company to enter into any transaction not otherwise permitted by the Loan Agreement. 5. Other Dilutive Events. In case any event shall occur as to which the provisions of Section 3 or Section 4 hereof are not strictly applicable or if strictly applicable would not fairly protect the purchase rights of the Holder in accordance with the essential intent and principles of such Sections, then, in each such case, the Board of Directors of the Company shall in good faith make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to preserve, without dilution, the purchase rights represented by this Warrant. 6. No Dilution or Impairment. The Company shall not, by amendment of its certificate of incorporation or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against dilution or other impairment. Without limiting the generality of the foregoing, the Company (a) shall not permit the par value of any shares of stock receivable upon the exercise of this Warrant to exceed the amount payable therefor upon such exercise, (b) shall take all such action as may 13 14 be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock, free from all taxes, liens, security interests, encumbrances, preemptive rights and charges on the exercise of the Warrants from time to time outstanding, (c) shall not take any action which results in any adjustment of the Adjustment Factor if the total number of shares of Common Stock (or Other Securities) issuable after the action upon the exercise of all of the Warrants would exceed the total number of shares of Common Stock (or Other Securities) then authorized by the Company's certificate of incorporation and available for the purpose of issue upon such exercise, and (d) shall not issue any capital stock of any class which is preferred as to dividends or as to the distribution of assets upon voluntary or involuntary dissolution, liquidation or winding-up, unless the rights of the holders thereof shall be limited to a fixed rate or sum or percentage of par value or a sum determined by reference to a formula based on a published index of interest rates, an interest rate publicly announced by a financial institution or a similar indicator of interest rates in respect of participation in dividends and to a fixed sum or percentage of par value in any such distribution of assets. 7. Accountants' Report as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable upon the exercise of this Warrant, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms of this Warrant and cause independent certified public accountants of recognized national standing (which may be the regular auditors of the Company) selected by the Company to verify such computation (other than any computation of the fair value of property as determined in good faith by the Board of Directors of the Company) and prepare a report setting forth such adjustment or readjustment and showing in reasonable detail the method of calculation thereof and the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or to be received by the Company for any Additional Shares of Common Stock issued or sold or deemed to have been issued, (b) the number of shares of Common Stock outstanding or deemed to be outstanding, and (c) the Adjustment Factor in effect immediately prior to such issue or sale and as adjusted and readjusted (if required by Section 3) on account thereof. The Company shall forthwith mail a copy of each such report to each Holder and shall, upon the written request at any time of any Holder, furnish to such holder a like report setting forth the Adjustment Factor at the time in effect and showing in reasonable detail how it was calculated. The Company shall also keep copies of all such reports at its principal office and shall cause the same to be available for inspection at such office during normal business hours by any Holder or any prospective purchaser of a Warrant designated by the Holder thereof. 8. Notices of Corporate Action. In the event of: (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a regularly scheduled cash dividend payable out of consolidated earnings or earned surplus, determined in accordance with generally accepted accounting principles, in an amount not exceeding the amount of the immediately preceding cash dividend for such period) or other distribution, or any right 14 15 to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company, any consolidation or merger involving the Company and any other Person, any transaction or series of transactions in which more than 50% of the voting securities of the Company are transferred to another Person, or any transfer, sale or other disposition of all or substantially all the assets of the Company to any other Person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, the Company shall mail to each Holder a notice specifying (i) the date or expected date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right, and (ii) the date or expected date on which any such reorganization, reclassification, recapitalization, consolidation, merger, transfer, sale, disposition, dissolution, liquidation or winding-up is to take place and the time, if any such time is to be fixed, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for the securities or other property deliverable upon such reorganization, reclassification, recapitalization, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least 30 days prior to the date therein specified. 9. Registration of Common Stock. If any shares of Common Stock required to be reserved for purposes of exercise of this Warrant require registration with or approval of any governmental authority under any federal or state law (other than the Securities Act) before such shares may be issued upon exercise, the Company shall, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered or approved, as the case may be. The Company shall, at its expense, obtain promptly and maintain the approval for listing on each such exchange, upon official notice of issuance, the shares of Common Stock issuable upon exercise of the then outstanding Warrants and maintain the listing of such shares after their issuance; and the Company shall also list on such national securities exchange, shall register under the Exchange Act and shall maintain such listing of, any Other Securities that at any time are issuable upon exercise of the Warrants, if and at the time that any securities of the same class shall be listed on such national securities exchange by the Company. 10. Restrictions on Transfer. 10.1. Restrictive Legends. Except as otherwise permitted by this Section 10, each Warrant (including each Warrant issued upon the transfer of any Warrant) shall be stamped or otherwise imprinted with a legend in substantially the following form: 15 16 "THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAW OF ANY STATE, AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. THIS WARRANT AND SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THIS WARRANT." Except as otherwise permitted by this Section 10, each certificate for Common Stock (or Other Securities) issued upon the exercise of any Warrant, and each certificate issued upon the transfer of any such Common Stock (or Other Securities), shall be stamped or otherwise imprinted with a legend in substantially the following form: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAW OF ANY STATE, AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN CERTAIN COMMON STOCK PURCHASE WARRANTS ISSUED ON APRIL 18, 1997 BY KERR GROUP, INC. A COMPLETE AND CORRECT COPY OF THE FORM OF SUCH WARRANT IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF KERR GROUP, INC. OR AT THE OFFICE OR AGENCY MAINTAINED BY KERR GROUP, INC. AS PROVIDED IN SUCH WARRANTS AND WILL BE FURNISHED TO THE HOLDER OF SUCH SHARES UPON WRITTEN REQUEST AND WITHOUT CHARGE." 10.2. Transfer to Comply With the Securities Act. Restricted Securities may not be sold, assigned, pledged, hypothecated, encumbered or in any manner transferred or disposed of, in whole or in part, except in compliance with the provisions of the Securities Act and state securities or Blue Sky laws and the terms and conditions hereof. 10.3. Termination of Restrictions. The restrictions imposed by this Section 10 upon the transferability of Restricted Securities shall cease and terminate as 16 17 to any particular Restricted Securities (a) when such securities are transferred pursuant to an effective registration statement under the Securities Act, (b) when such securities are transferred pursuant to Rule 144 under the Securities Act (or any similar provision then in force), or (c) when such securities are transferred in any other transaction if the Holder delivers to the Company an opinion of its counsel, which counsel and opinion shall be reasonably satisfactory to the Company, to the effect that such legend is no longer necessary in order to protect the Company against a violation of the Securities Act upon any sale or other disposition of such securities without registration thereunder. Whenever such restrictions shall cease and terminate as to any Restricted Securities, the holder thereof shall be entitled to receive from the Company, without expense (other than applicable transfer taxes, if any), new securities of like tenor not bearing the applicable legends required by Section 10.1. 11. Availability of Information. The Company shall timely file the reports required to be filed by it under the Securities Act and the Exchange Act (including but not limited to the reports under Sections 13 and 15(d) of the Exchange Act referred to in subparagraph (c) of Rule 144 adopted by the Commission under the Securities Act)) and will take such further action as any holder of Restricted Securities may reasonably request, all to the extent required from time to time to enable such holder to sell Restricted Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such rules may be amended from time to time, or (b) any other rule or regulation now existing or hereafter adopted by the Commission. Upon the request of any holder of Restricted Securities, the Company will deliver to such holder a written statement as to whether it has complied with such requirements. 12. Reservation of Stock, etc. The Company shall at all times reserve and keep available, solely for issuance and delivery upon exercise of the Warrants, the number of shares of Common Stock (or Other Securities) from time to time issuable upon exercise of all Warrants at the time outstanding. All shares of Common Stock (or Other Securities) issuable upon exercise of any Warrants shall be duly authorized and, when issued upon such exercise, shall be validly issued and, in the case of shares, fully paid and nonassessable with no liability on the part of the holders thereof, and, in the case of all securities, shall be free from all taxes, liens, security interests, encumbrances, preemptive rights and charges. The transfer agent for the Common Stock, which may be the Company ("Transfer Agent"), and every subsequent Transfer Agent for any shares of the Company's capital stock issuable upon the exercise of any of the purchase rights represented by this Warrant are hereby irrevocably authorized and directed at all times until the Expiration Date to reserve such number of authorized and unissued shares as shall be requisite for such purpose. The Company shall keep copies of this Warrant on file with the Transfer Agent for the Common Stock and with every subsequent Transfer Agent for any shares of the Company's capital stock issuable upon the exercise of the rights of purchase represented by this Warrant. The Company shall supply such Transfer Agent with duly executed stock certificates for such purpose. All Warrant Certificates surrendered 17 18 upon the exercise of the rights thereby evidenced shall be canceled, and such canceled Warrants shall constitute sufficient evidence of the number of shares of stock which have been issued upon the exercise of such Warrants. Subsequent to the Expiration Date, no shares of stock need be reserved in respect of any unexercised Warrant. 13. Registration and Transfer of Warrants, etc. 13.1. Warrant Register; Ownership of Warrants. Each Warrant issued by the Company shall be numbered and shall be registered in a warrant register (the "Warrant Register") as it is issued and transferred, which Warrant Register shall be maintained by the Company at its principal office or, at the Company's election and expense, by a Warrant Agent or the Company's transfer agent. The Company shall be entitled to treat the registered Holder of any Warrant on the Warrant Register as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrant on the part of any other Person, and shall not be affected by any notice to the contrary, except that, if and when any Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer thereof as the owner of such Warrant for all purposes. Subject to Section 10, a Warrant, if properly assigned, may be exercised by a new holder without a new Warrant first having been issued. 13.2. Transfer of Warrants. Subject to compliance with Section 10, this Warrant and all rights hereunder are transferable in whole or in part, without charge to the Holder hereof, upon surrender of this Warrant with a properly executed Form of Assignment attached hereto as Exhibit B at the principal office of the Company. Upon any partial transfer, the Company shall at its expense issue and deliver to the Holder a new Warrant of like tenor, in the name of the Holder, which shall be exercisable for such number of shares of Common Stock with respect to which rights under this Warrant were not so transferred. 13.3. Replacement of Warrants. On receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender of such Warrant to the Company at its principal office and cancellation thereof, the Company at its expense shall execute and deliver, in lieu thereof, a new Warrant of like tenor. 13.4. Adjustments To Adjustment Factor and Number of Shares. Notwithstanding any adjustment in the Adjustment Factor or in the number or kind of shares of Common Stock purchasable upon exercise of this Warrant, any Warrant theretofore or thereafter issued may continue to express the same number and kind of shares of Common Stock as are stated in this Warrant, as initially issued. 13.5 Fractional Shares. Notwithstanding any adjustment pursuant to Section 3 in the number of shares of Common Stock covered by this Warrant or any other 18 19 provision of this Warrant, the Company shall not be required to issue fractions of shares upon exercise of this Warrant or to distribute certificates which evidence fractional shares. In lieu of fractional shares, the Company shall make payment to the Holder, at the time of exercise of this Warrant as herein provided, in an amount in cash equal to such fraction multiplied by the Current Market Price of a share of Common Stock on the date of Warrant exercise. 14. Remedies; Specific Performance. The Company stipulates that there would be no adequate remedy at law to the Holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant and accordingly, the Company agrees that, in addition to any other remedy to which the Holder may be entitled at law or in equity, the Holder shall be entitled to seek to compel specific performance of the obligations of the Company under this Warrant, without the posting of any bond, in accordance with the terms and conditions of this Warrant in any court of the United States or any State thereof having jurisdiction, and if any action should be brought in equity to enforce any of the provisions of this Warrant, the Company shall not raise the defense that there is an adequate remedy at law. Except as otherwise provided by law, a delay or omission by the Holder hereto in exercising any right or remedy accruing upon any such breach shall not impair the right or remedy or constitute a waiver of or acquiescence in any such breach. No remedy shall be exclusive of any other remedy. All available remedies shall be cumulative. 15. No Rights or Liabilities as Shareholder. Nothing contained in this Warrant shall be construed as conferring upon the Holder hereof any rights as a shareholder of the Company or as imposing any obligation on the Holder to purchase any securities or as imposing any liabilities on the Holder as a shareholder of the Company, whether such obligation or liabilities are asserted by the Company or by creditors of the Company. 16. Notices. All notices and other communications (and deliveries) provided for or permitted hereunder shall be made in writing by hand delivery, telex, telecopier, any courier guaranteeing overnight delivery or first class registered or certified mail, return receipt requested, postage prepaid, addressed (a) if to the Company, to the attention of its President at its principal office located at 500 New Holland Avenue, Lancaster, Pennsylvania 17062 or such other address as may hereafter be designated in writing by the Company to the Holder in accordance with the provisions of this Section, or (b) if to the Holder, at its address as it appears in the Warrant Register. All such notices and communications (and deliveries) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; when answered back, if telexed; when receipt is acknowledged, if telecopied; on the next Business Day, if timely delivered to a courier guaranteeing overnight delivery; and ten days after being deposited in the mail, if sent first class or certified mail, return receipt requested, postage prepaid; provided, that the exercise of any Warrant shall be effective in the manner provided in Section 2. 19 20 17. Amendments. This Warrant and any term hereof may not be amended, modified, supplemented, discharged or terminated, and waivers or consents to departures from the provisions hereof may not be given, except by an instrument in writing signed by the Company and the Holder. 18. Descriptive Headings, Etc. The headings in this Warrant are for convenience of reference only and shall not limit or otherwise affect the meaning of terms contained herein. Unless the context of this Warrant otherwise requires: (1) words of any gender shall be deemed to include each other gender; (2) words using the singular or plural number shall also include the plural or singular number, respectively; (3) the words "hereof", "herein" and "hereunder" and words of similar import when used in this Warrant shall refer to this Warrant as a whole and not to any particular provision of this Warrant, and Section and paragraph references are to the Sections and paragraphs of this Warrant unless otherwise specified; (4) the word "including" and words of similar import when used in this Warrant shall mean "including, without limitation," unless otherwise specified; (5) "or" is not exclusive; and (6) provisions apply to successive events and transactions. 19. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES THEREOF). 20. Judicial Proceedings. Any legal action, suit or proceeding brought against the Company with respect to this Agreement may be brought in any federal court of the Southern District of New York or any state court located in New York County, State of New York, and by execution and delivery of this Agreement, the Company irrevocably waives any claim (by way of motion, as a defense or otherwise) of improper venue, that it is not subject personally to the jurisdiction of such court, that such courts are an inconvenient forum or that this Agreement or the subject matter may not be enforced in or by such court. The Company hereby irrevocably consents to the service of process of any of the aforementioned courts in any such action, suit or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, at its address set forth or provided for in Section 16, such service to become effective 10 days after such mailing. Nothing herein contained shall be deemed to affect the right of any party to serve process in any manner permitted by law or commence legal proceedings or otherwise proceed against any other party in any other jurisdiction to enforce judgments obtained in any action, suit or proceeding brought pursuant to this Section. EACH OF THE HOLDER AND THE COMPANY HEREBY IRREVOCABLY WAIVES TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING, WHETHER AT LAW OR EQUITY, BROUGHT BY IT OR THE HOLDER IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 21. Registration Agreement. The shares of Common Stock (and Other Securities) issuable upon exercise of this Warrant (or upon conversion of any shares of Common Stock issued upon such exercise) shall constitute Registrable Securities (as such term 20 21 is defined in the Registration Agreement). Each Holder shall be entitled to all of the benefits afforded to a holder of any such Registrable Securities under the Registration Agreement and such holder, by its acceptance of this Warrant, agrees to be bound by and to comply with the terms and conditions of the Registration Agreement applicable to such holder as a holder of such Registrable Securities. A complete and correct copy of the Registration Agreement may be obtained without charge upon request to the Company at its address as set forth or provided for in Section 16. 22. Expiration. The Company shall give the Holder of this Warrant not less than six weeks nor more than six months notice of the expiration of the right to exercise this Warrant. The right to exercise this Warrant shall expire at 5:00 p.m, New York City time, on April 18, 1999, unless the Company shall fail to give such notice as aforesaid, in which event the right to exercise this Warrant shall not expire until a date six weeks after the date on which the Company shall give the holder hereof notice of the expiration of the right to exercise this Warrant. 21 22 23. Tax Basis. The Company and the Holder shall mutually agree as to the basis of this Warrant for purposes of the Internal Revenue Code of 1986, as amended and the treatment of this Warrant under the Code by each of the Company and the Holder shall be consistent with such agreement. KERR GROUP, INC. By: /s/ D. Gordon Strickland ------------------------------------------ Name: D. Gordon Strickland Title: President & Chief Executive Officer 22 23 EXHIBIT A to Common Stock Purchase Warrant [FORM OF] ELECTION TO PURCHASE SHARES The undersigned hereby irrevocably elects to exercise the Warrant to purchase ____ shares of Common Stock, par value $0.50 per share ("Common Stock"), of Kerr Group, Inc. and hereby makes payment of $________ therefor. The undersigned hereby requests that certificates for such shares be issued and delivered as follows: ISSUE TO: _____________________________________________________________________ (NAME) ________________________________________________________________________________ (ADDRESS, INCLUDING ZIP CODE) ________________________________________________________________________________ (SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER) DELIVER TO: ___________________________________________________________________ (NAME) ________________________________________________________________________________ (ADDRESS, INCLUDING ZIP CODE) If the number of shares of Common Stock purchased (and/or canceled) hereby is less than the number of shares of Common Stock covered by the Warrant, the undersigned requests that a new Warrant representing the number of shares of Common Stock not so purchased (or canceled) be issued and delivered as follows: ISSUE TO: _____________________________________________________________________ (NAME OF HOLDER(1)) ________________________________________________________________________________ (ADDRESS, INCLUDING ZIP CODE) DELIVER TO: ___________________________________________________________________ (NAME OF HOLDER(1)) ________________________________________________________________________________ (ADDRESS, INCLUDING ZIP CODE) Dated: _____________, ____ [NAME OF HOLDER(1)] By _____________________________________ Name: Title: - ---------- (1) Name of Holder must conform in all respects to name of holder as specified on the face of the Warrant. 23 24 EXHIBIT B to Common Stock Purchase Warrant [FORM OF] ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto the Assignee named below all of the rights of the undersigned to purchase Common Stock, par value $0.50 per share ("Common Stock") of Kerr Group, Inc. represented by the Warrant, with respect to the number of shares of Common Stock set forth below: Name of Assignee Address No. of Shares and does hereby irrevocably constitute and appoint ____________________ Attorney to make such transfer on the books of Kerr Group, Inc. maintained for that purpose, with full power of substitution in the premises. Dated: _______________, ____ [NAME OF HOLDER(1)] By _____________________________________ Name: Title: - ---------- (1) Name of Holder must conform in all respects to name of holder as specified on the face of the Warrant. 24 EX-10.3 4 REGISTRATION AGREEMENT 1 EXHIBIT 10.3 REGISTRATION AGREEMENT THIS AGREEMENT is made as of April 18, 1997, by and among Kerr Group, Inc., a Delaware corporation (the "Company"), and Madeleine L.L.C., a New York limited liability company (the "Purchaser"), and each other Person who becomes a party to this Agreement after the date hereof pursuant to Section 3.5 below. Certain capitalized terms used herein are defined in Section 2 below. WHEREAS, the Purchaser is the holder of Warrants issued by the Company in connection with the revolving credit facility provided to the Company of up to $8,500,000 pursuant to the terms and provisions of the Loan and Security Agreement, dated as of the date hereof, by and among the Company and the Purchaser; and WHEREAS, the Company presently has each of its shares of Common Stock and its $1.70 Class B Cumulative Convertible Preferred Stock, Series D, registered under the Exchange Act and listed on the New York Stock Exchange; WHEREAS, in connection with the purchase of such Warrants, the Company has agreed to provide for the registration of certain of its securities under the Securities Act; WHEREAS, the registration of such securities may permit the delayed or continuous offering of the Registrable Securities of the Company; NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement hereby agree as follows: 1. Registration under Securities Act, etc. 1.1. Registration on Request. (a) Request. Upon the written request of one or more Initiating Holders, requesting that the Company effect the registration under the Securities Act of all or part of such Initiating Holders' Registrable Securities and specifying the intended method of disposition thereof, which method may include a delayed or continuous offering pursuant to Rule 415, the Company will, subject to the terms of this Agreement, promptly give written notice of such requested registration to all registered holders of Registrable Securities, and thereupon the Company will use its reasonable best efforts to effect the registration under the Securities Act of: 2 (i) the Registrable Securities which the Company has been so requested to register by such Initiating Holders for disposition in accordance with the intended method of disposition stated in such request, (ii) all other Registrable Securities the holder of which shall have made a written request to the Company for registration thereof within 30 days after the giving of such written notice by the Company, and (iii) all shares of Common Stock which the Company may elect to register in connection with the offering of Registrable Securities pursuant to this Section 1.1 ("Additional Registrable Shares"), all to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities and the Additional Registrable Shares, if any, so to be registered. (b) Registration Statement Form. Registrations under this Section 1.1 shall be on such appropriate registration form of the Commission (i) as shall be selected by the Company and reasonably acceptable to the holders of more than 50% (by number of shares) of the Registrable Securities so to be registered (excluding the Additional Registrable Shares, if any) and (ii) as shall permit the disposition of such Registrable Securities in accordance with the intended method or methods of disposition specified in the request for such registration by such Initiating Holders. The Company agrees to include in any such registration statement all information which holders of Registrable Securities being registered shall reasonably request. (c) Expenses. The Company shall pay all Registration Expenses in connection with any registration requested pursuant to this Section 1.1 by any Initiating Holders of Registrable Securities. The discounts and commissions of the underwriters or agents and transfer taxes, if any, in connection with such registration requested under this Section 1.1 shall be allocated pro rata among all Persons on whose behalf securities of the Company are included in such registration, on the basis of the respective amounts of the securities offered and sold on their behalf. (d) Effective Registration Statement. A registration requested pursuant to this Section 1.1 shall not be deemed to have been effected (i) unless a registration statement with respect thereto has become effective, provided that a registration statement which does not become effective after the Company has filed such registration statement with respect thereto solely by reason of the unreasonable refusal to proceed of the Initiating Holders (which may be based upon the advice of counsel) shall be deemed to have been effected by the Company at the request of such Initiating Holders unless the Initiating Holders shall have elected to pay all Registration Expenses in connection with such registration, (ii) if, after it has become effective, such registration statement becomes subject to any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason, or (iii) the conditions to closing specified in the Offering Agreement entered into in 2 3 connection with such registration are not satisfied, other than by reason of some unreasonable act or omission by such Initiating Holders. (e) Selection of Underwriters or Agents. If a requested registration pursuant to this Section 1.1 involves an Offering, the managing or lead underwriter(s) or agent(s) thereof shall be selected by the holders of at least a majority (by number of shares) of the Registrable Securities as to which registration has been requested (other than Additional Registrable Shares, if any) subject to prior approval of the Company, which such approval shall not unreasonably withheld. (f) Priority in Requested Registrations. If a requested registration pursuant to this Section 1.1 involves an Offering, and the managing underwriter or agent advises the Company in writing (an "Underwriter's Letter"), with a copy to each holder of Registrable Securities requesting registration, that, in its opinion, the number of securities to be included in such Offering (including securities of the Company which are not Registrable Securities) exceeds the number which may reasonably be expected to be sold in such Offering within a price range that such managing underwriter or agent believes is acceptable to the holders of a majority of the Registrable Securities (other than Additional Registrable Shares, if any) to be included in such Offering (such Underwriter's Letter to state the basis of such belief and the approximate number of such Registrable Securities which may be distributed without such effect, the "Marketable Amount"), then the Company may, upon written notice to all holders of such Registrable Securities, reduce the number of Registrable Securities to be included in such Offering to the number equal to the Marketable Amount in the following order of priority: (i) first, the securities of the Company which are proposed to be included in the Offering which are not Registrable Securities, then (ii) the securities the Company proposes to sell which are proposed to be included in such Offerings; then (iii) pro rata among the holders of Registrable Securities requesting such registration on the basis of the number of such securities requested to be included by such holders. No Registrable Securities or any other securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. (g) Postponement of a Requested Registration. The Company shall be entitled to postpone the filing of a registration requested pursuant to this Section 1.1 for a period of time of up to ninety (90) days after the receipt of a written request by a Initiating Holder if the filing of a registration statement would require (i) the disclosure therein, pursuant to the Securities Act, of previously undisclosed, material pending corporate development or undertaking, such as an acquisition or a financing, which, in the good faith determination of the Board of Directors of the Company, would be materially and adversely affected by such disclosure or (ii) any special audit or the acceleration of any annual audit of the financial statements of the Company or any subsidiary (or any company proposed to be acquired by the Company); provided that if such disclosure or such financial statements are required by the Exchange Act, the Company shall not be entitled to so postpone the filing of such registration statement, 3 4 and provided, further, that the Company shall be entitled to so postpone a registration statement only once during any one-hundred and eighty (180) day period. (h) Limitations. Notwithstanding any provision of this Section 1.1 to the contrary, the Company shall not be obligated to effect, or take any action to effect, any such registration pursuant to this Section 1.1: (x) In any particular jurisdiction in which the Company would be required in execute a general consent to service of process in effecting such registration, qualification or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act or applicable rules or regulations thereunder; or (y) After the Company has effected three (3) such registrations pursuant to this Section 1.1 and such registrations have been declared or ordered effective and the sales of such Registrable Securities shall have closed. 1.2. Incidental Registration. (a) Right to Include Registrable Securities. If the Company at any time proposes to register any of its equity securities under the Securities Act (other than by a registration of Form S-4 or S-8 or any successor or similar forms and other than pursuant to Section 1.1), whether or not for sale for its own account, it will each such time give prompt written notice (in any event such notice shall be provided at least 45 days prior to the filing of such registration statement) to all holders of Registrable Securities of its intention to do so and of such holders' rights under this Section 1.2. Upon the written request of any such holder made within 30 days after the receipt of any such notice, the Company will, subject to the terms of this Agreement, use its reasonable best efforts to effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the holders thereof, to the extent requisite to permit the disposition of the Registrable Securities so to be registered, by inclusion of such Registrable Securities in the registration statement which covers the securities which the Company proposes to register, provided that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason either not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to each holder of Registrable Securities and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith), without prejudice, however, to the rights of any holder or holders of Registrable Securities entitled to do so to request that such registration be effected as a registration under Section 1.1, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the 4 5 same period as the delay in registering such other securities. Any registration effected under this Section 1.2 shall not relieve the Company of its obligation to effect any registration upon request under Section 1.1 nor shall any such registration hereunder be deemed to have been effected pursuant to Section 1.1. The Company will pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to this Section 1.2. (b) Priority in Incidental Registrations. If (i) a registration pursuant to this Section 1.2 involves an Offering of the securities so being registered, whether or not for sale for the account of the Company, to be distributed by or through one or more underwriters or agents of recognized standing under underwriting terms appropriate for such a transaction, (ii) the Registrable Securities so requested to be registered for sale for the account of holders of Registrable Securities are not also to be included in such Offering (either because the Company has not been requested so to include such Registrable Securities pursuant to Section 1.4(b) or, if requested to do so, is not obligated to do so under Section 1.4(b)), and (iii) the managing underwriter or agent of such Offering shall provide the Company (with a copy to each of the holders of the Registrable Securities requesting such registration) with an Underwriter's Letter, then the Company may, upon written notice to all holders of such Registrable Securities, reduce pro rata (if and to the extent stated by such managing underwriter to be necessary to eliminate such effect) the number of such Registrable Securities the registration of which shall have been requested by each holder of Registrable Securities such that the resultant aggregate number of such Registrable Securities so included in such registration shall be equal to the Marketable Amount, provided, that in such event, each holder shall have an option, exercisable by written notice to the Company with 30 days after such holder has received the Underwriter's Letter, to not participate in such Offering and withdraw its request provided under Section 1.2(a). No Registrable Securities or any other securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. 1.3 Registration Procedures. If and whenever (a) the Company is required to use its reasonable best efforts to effect the registration of any Registrable Securities under the Securities Act as provided in Sections 1.1 and 1.2 or (b) there is a Requesting Holder in connection with any other proposed registration by the Company under the Securities Act, the Company shall, as expeditiously as possible: (i) prepare and (within 90 days after the end of the period within which requests for registration may be given to the Company or in any event as soon thereafter as possible) (in the case of a registration pursuant to Section 1.1, such filing to be made within 90 days after the initial request of one or more Initiating Holders of Registrable Securities or in any event as soon thereafter as possible) file with the Commission the requisite registration statement to effect such registration (including such audited financial statements as may be required by the Securities Act (subject to Section 1.1(g)) and thereafter use its reasonable best efforts to cause such registration statement to become and remain effective 5 6 in compliance with the provisions of the Securities Act, provided, that the Company may discontinue any registration of its securities which are not Registrable Securities (and, under the circumstances specified in Section 1.2(a), its securities which are Registrable Securities) at any time prior to the effective date of the registration statement relating thereto; (ii) prepare and file with the Commission such amendments and supplements (including, without limitation, any document incorporated by reference or deemed to be incorporated by reference therein) to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement until the earlier of (a) such time as all of such securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement and (b) 120 days from the effective date of such registration statement; (iii) furnish to each seller of Registrable Securities covered by such registration statement and each Requesting Holder and each underwriter or agent, if any, of the securities being sold by such seller such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits and, upon request, all schedules, appendixes and exhibits to any agreement or document included in any such exhibit), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus (or supplement thereto) and any summary prospectus) and any other prospectus (or supplement thereto) filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents, as such seller and underwriter or agent, if any, may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities owned by such seller; (iv) use its reasonable best efforts to register or qualify all Registrable Securities and other securities covered by such registration statement under such other securities laws or blue sky laws of such jurisdictions as any seller thereof and any underwriter or agent of the securities being sold by such seller and any Requesting Holder shall reasonably request, to keep such registrations or qualifications in effect for so long as such registration statement remains in effect, and take any other action which may be reasonably necessary or advisable to enable such seller and underwriter or agent to consummate the disposition in such jurisdictions of the securities owned by such seller, provided that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it 6 7 would not but for the requirements of this subdivision (iv) be obligated to be so qualified or to consent to general service of process in any such jurisdiction; (v) use its reasonable best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof to consummate the disposition of such Registrable Securities; (vi) furnish to each seller of Registrable Securities and each Requesting Holder a signed counterpart, addressed to such seller, such Requesting Holder and the underwriters or agents, if any of (x) in the case of an underwritten offering, an opinion of counsel for the Company, dated the Offering Date, substantially in the form delivered to the underwriter, and (y) to the full extent permitted under the prevailing accounting or auditing standards, a "comfort" letter (or, in the case of such Person which does not satisfy the conditions for receipt of a "comfort" letter specified in Statement on Auditing Standards ("SAS") No. 72 (or any similar pronouncement), an "agreed upon procedures" letter specified in SAS No. 75 (or any similar pronouncement) and interim report specified in SAS No. 71 (or any similar pronouncement), in each case, dated the Offering Date, signed by the independent public accountants who have certified the Company's financial statements included in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus (as amended and supplement) included therein) and, in the case of the accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to the underwriters in underwritten public offerings of securities and, in the case of the accountants' letter, such other financial matters, and, in the case of the legal opinion, (if applicable) such other legal matters, as such seller or such Requesting Holder (or the lead or managing underwriters or agents, if any) may reasonably request; (vii) notify the holders of Registrable Securities and the lead or managing underwriter(s) or agent(s), if any, promptly and confirm such advice in writing promptly thereafter: (v) when the registration statement, the prospectus or any prospectus supplement related thereto or amendment to the registration statement has been filed, and, with respect to the registration statement 7 8 or any post-effective amendment thereto, when the same has become effective; (w) of any comments by the Commission or any request by the Commission for amendments or supplements to the registration statement or the prospectus (or any supplement thereto) or for additional information; (x) of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation or contemplation of any proceedings by any Person for that purpose; (y) if at any time the representations and warranties of the Company made as contemplated by Section 1.4 cease to be true and correct in any material respect; and (z) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Securities for sale under the U.S. or applicable foreign securities or blue sky laws of any jurisdiction or the initiation or threat of any proceeding for such purpose; (viii) notify each seller of Registrable Securities covered by such registration statement and each Requesting Holder, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, immediately upon the happening of any event as a result of which, the prospectus (including any amendment or supplement thereto) included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statement therein not misleading in the light of the circumstances under which they were made, and at the request of any such seller or Requesting Holder promptly prepare and furnish to such seller or Requesting Holder and each underwriter or agent, if any, a reasonable number of copies of a supplement to, or an amendment of, such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include 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 in light of the circumstances under which they were made; (ix) otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar quarter after the effective date of such registration statement, which earnings statement shall satisfy the provisions 8 9 of Section 11(a) of the Securities Act and Rule 158 thereunder, and will furnish to each such seller and each Requesting Holder at least five business days prior to the filing thereof a copy of any amendment or supplement to such registration statement or prospectus and shall not file any thereof to which any such seller or any Requesting Holder shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act; (x) make available for inspection by a representative or representatives of the holders of Registrable Securities, each such representative representing the holders of not less than a majority of the Registrable Securities included in the registration, any underwriter or agent participating in any disposition pursuant to the registration statement and any attorney or accountant retained by such selling holders or underwriter or agent (each, an "Inspector"), all financial and other records, pertinent corporate documents and properties of the Company (the "Records"), and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Inspector in connection with such registration in order to permit a reasonable investigation within the meaning of Section 11 of the Securities Act; (xi) provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by such registration statement from and after a date not later than the effective date of such registration statement; (xii) enter into such customary agreements and take such other customary actions as sellers of such Registrable Securities holding more than 50% of the shares so to be sold shall reasonably request in order to expedite or facilitate the disposition of such Registrable Securities; and (xiii) use its reasonable best efforts to list all Registrable Securities covered by such registration statement on any securities exchange on which any of the securities of the same class as the Registrable Securities are then listed and, if not so listed, to be listed on the NASD automated quotation system and, if listed on the NASD automated quotation system, use its reasonable best efforts to secure designation of all such Registrable Securities covered by such registration statement as a NASDAQ "national market system security" within the meaning of Rule 11Aa2-1 of the Commission or, failing that, to secure NASDAQ authorization for such Registrable Securities and, without limiting the generality of the foregoing, to arrange for at least two market makers to register as such with respect to such Registrable Securities with the NASD. As a condition to its obligations hereunder, the Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company such information necessary for compliance with Regulation S-K under the Securities 9 10 Act regarding such seller, the Registrable Securities of such seller and the distribution of such securities as the Company may reasonably request in writing. Each holder of Registrable Securities hereby agrees that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in subdivision (viii) of this Section 1.3, such holder will forthwith discontinue such holder's disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until such holder's receipt of the copies of the supplemented or amended prospectus contemplated by subdivision (viii) of this Section 1.3 and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such holder's possession of the prospectus relating to such Registrable Securities current at the time of receipt of such notice. 1.4. Offerings. (a) Requested Offerings. If requested by the underwriters or agents for any Offering by holders of Registrable Securities pursuant to a registration requested under Section 1.1, the Company will enter into an underwriting agreement or similar agreement, e.g., distribution or selling agency agreement (each, an "Offering Agreement") with such underwriters or agents for such Offering, such agreement to be reasonably satisfactory in substance and form to the Company, each such holder and the underwriters or agents, and to contain such representations and warranties by the Company and such other terms and provisions as are generally prevailing in agreements of this type, including, without limitations, indemnities to the effect and to the extent provided in Section 1.7. The holders of the Registrable Securities will cooperate in good faith with the Company in the negotiation of the Offering Agreement and will give consideration to the reasonable suggestions of the Company regarding the form thereof, provided that nothing herein contained shall diminish the foregoing obligations of the Company. The holders of Registrable Securities to be distributed by such underwriters or agents shall be parties to such Offering Agreement and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters or agents shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters or agents under such Offering Agreement be conditions precedent to the obligations of such holders of Registrable Securities. (b) Incidental Underwritten Offerings. If the Company at any time proposes to register any of its securities under the Securities Act as contemplated by Section 1.2 and such securities are to be distributed by or through one or more underwriters or agents, the Company will, if requested by any holder of Registrable Securities as provided in Section 1.2 and subject to the provisions of Section 1.2(b), use its reasonable best efforts to arrange for such underwriters or agents to include all the Registrable Securities to be offered and sold by such holder among the securities to be distributed by such underwriters or agents. 10 11 (c) Holdback Agreements. (i) Each holder of Registrable Securities agrees, if so required by the managing underwriter or agent, not to sell, make any short sale of, loan, grant any option for the purchase of, effect any public sale or distribution of or otherwise dispose of any equity securities of the Company, during a period of 30 days after the Offering Date of any Offering, except as part of such Offering. Notwithstanding the foregoing sentence, each holder of Registrable Securities subject to the foregoing sentence shall be entitled to sell during the foregoing period securities in a sale exempt from registration under the provisions of the Securities Act. (ii) The Company agrees (x) not to sell, make any short sale of, loan, grant any option for the purchase of, effect any public sale or distribution of or otherwise dispose of its equity securities or securities convertible into or exchangeable or exercisable for any of such securities during the seven days prior to and the 90 days after the Offering Date of any Offering pursuant to Section 1.1 or 1.2, except as part of such registration and except pursuant to registrations on Form S-4, S-8 or any successor or similar forms thereto, and (y) to cause each holder of its equity securities or any securities convertible into or exchangeable or exercisable for any of such securities, in each case purchased directly from the Company at any time after the date of this Agreement (other than in a public offering, including an offering registered on Form S-8) to agree not to sell, make any short sale of, loan, grant any option for the purchase of, effect any such public sale or distribution of or otherwise dispose of such securities during such period except as part of such registration. (d) Participation in Offerings. No Person may participate in any Offering hereunder unless such Person (i) agrees to sell such Person's securities on the basis provided in any Offering Agreements approved, subject to the terms and conditions hereof, by the Company and the holders of a majority of Registrable Securities to be included in such Offering and (ii) completes and executes all questionnaires, indemnities, Offering Agreements and other documents (other than powers of attorney) required under the terms of such Offering Agreements. 1.5 Preparation; Reasonable Investigation. In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company will give the holders of Registrable Securities registered under such registration statement, their underwriters or agents, if any, each Requesting Holder and their respective counsel and accountants, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its directors, officers, legal counsel and the independent public accountants who have certified its financial statements as shall be necessary, in the reasonable opinion of such holders' and such 11 12 underwriters' or agents' respective counsel, to conduct a "reasonable investigation" within the meaning of Section 11 of the Securities Act. 1.6. Rights of Requesting Holders. The Company will not file any registration statement under the Securities Act (other than by a registration on Form S-8, S-4 or any successor form), unless it shall first have given to each holder of Registrable Securities at the time outstanding (other than any such Person who acquired all such securities held by such Person in a public offering registered under the Securities Act or as the direct or indirect transferee of shares initially issued in such an offering), at least 30 days prior written notice thereof. Any such Person who shall so request within 30 days after such notice (a "Requesting Holder") shall have the rights of a Requesting Holder provided in Sections 1.3, 1.5 and 1.7. In addition, if any such registration statement refers to any Requesting Holder by name or otherwise as the holder of any securities of the Company, then such holder shall have the right to require therein language, in form and substance reasonably satisfactory to such holder, relating to such holder to the extent that such reference to such holder by name or otherwise is not required by the Securities Act, the limitation or deletion of the reference to such holder to such extent. 1.7. Indemnification. (a) Indemnification by the Company. In the event of any registration of any securities of the Company under the Securities Act, the Company will, and hereby does, indemnify and hold harmless in the case of any registration statement filed pursuant to Section 1.1 or 1.2, the holder of any Registrable Securities covered by such registration statement, its directors and officers, each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such holder or any such underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such holder or Requesting Holder or any such director of officer or underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any 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 will reimburse such holder, such Requesting Holder and each such director, officer, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending (or preparing to investigate and defend) any such loss, claim, liability, action or proceeding, provided that the Company shall not be liable to any such Person in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such 12 13 registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such holder or Requesting Holder, as the case may be, specifically stating that it is for use in the preparation thereof. (b) Indemnification by the Sellers. The Company may require, as a condition to including any Registrable Securities in any registration statement filed pursuant to Section 1.3, that the Company shall have received an undertaking substantially in the form of Section 1.7(a) from the prospective seller of such Registrable Securities, to indemnify and hold harmless (in the same manner and to the same extent as set forth in subdivision (a) of this Section 1.7) the Company, each director of the Company, each officer of the Company and each other person, if any, who controls the Company within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. Any such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by such seller. (c) Notices of Claims, etc. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in the preceding subdivisions of this Section 1.7, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action, provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 1.7, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that the indemnifying party may wish, 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, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement of any such action which does not include as an unconditional term thereof the giving by the claimant or 13 14 plaintiff to such indemnified party of a release from all liability , or a covenant not to sue, in respect to such claim or litigation. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such action the defense of which has been assumed by an indemnifying party without the consent of such indemnifying party. (d) Other Indemnification. Indemnification similar to that specified in the preceding subdivisions of this Section 1.7 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any required registration or other qualification of securities under any Federal or state law or regulation of any governmental authority, other than the Securities Act. (e) Indemnification Payments. The indemnification required by this Section 1.7 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred, in any event, not later than 10 days after such amount is requested by the indemnified party. (f) Contribution. If the indemnification provided for in the preceding subdivisions of this Section 1.7 is unavailable to an indemnified party in respect of any expense, loss, claim, damage or liability referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such expense, loss, claim, damage or liability referred to therein, then each indemnifying party,. in lieu of indemnifying such indemnifying party, shall contribute to the amount paid or payable by such indemnified party as a result of such expense, loss, claim, damage or liability (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the holder or underwriter, as the case may be, on the other form the distribution of the Registrable Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the holder or underwriter, as the case may be, on the other in connection with the statement or omissions which resulted in such expense, loss, damage or liability, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the holder or underwriter, as the case may be, on the other in connection with the distribution of the Registrable Securities shall be deemed to be in the same proportion as the total net proceeds received by the Company from the initial sale of the Registrable Securities by the Company to the purchasers pursuant to the Offering Agreement bear to the gain, if any, realized by the selling holder or the underwriting discounts and commissions received by the underwriter, as the case may be. The relative fault of the Company on the one hand and of the holder or underwriter, as the case may be, on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission to state a material fact relates to information supplied by the Company, by the 14 15 holder or by the underwriter and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, provided that the foregoing contribution agreement shall not inure to the benefit of any indemnified party if indemnification would be unavailable to such indemnified party by reason of the provisions contained in the first sentence of subdivision (a) of this Section 1.7, and in no event shall the obligation of any indemnifying party to contribute under this subdivision (f) exceed the amount that such indemnifying party would have been obligated to pay by way of indemnification if the indemnification provided for under subdivisions (a) or (b) of this Section 1.7 had been available under the circumstances. The Company and the holders of Registrable Securities agree that it would not be just and equitable if contribution pursuant to this subdivision (f) were determined by pro rata allocation (even if the holders, Requesting Holders and any underwriters or agents were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth in the preceding sentence and subdivision (c) of this Section 1.7, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subdivision (f), no holder of Registrable Securities or underwriter shall be required to contribute any amount in excess of the amount by which (i) in the case of any such holder, the net proceeds received by such holder from the sale of Registrable Securities or (ii) in the case of an underwriter, the total price at which the Registrable Securities purchased by it and distributed to the public were offered to the public exceeds, in any such case, the amount of any damages that such holder or underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (g) The foregoing indemnity agreement of the Company is subject to the condition that, insofar as it relates to any loss, claim, liability or damage made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement in question becomes effective or the amended prospectus filed with the Commission pursuant to Commission Rule 424(b) (the "Final Prospectus"), such indemnity or contribution agreement shall not inure to the benefit of any underwriter or holder of Registrable Securities if a copy of the Final Prospectus was furnished to the underwriter or such holder and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act. 15 16 2. Certain Definitions. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: Affiliates: Shall have the meaning ascribed thereto by the Securities Act. Commission: The Securities and Exchange Commission (or, as the context may require, the staff of the Securities and Exchange Commission) or any other federal agency at the time administering the Securities Act. Common Stock: The common stock of the Company and any security into which such Common Stock shall have been changed or any security resulting from any reclassification of such Common Stock. Initiating Holders: Any holder or holders of Registrable Securities and initiating a request pursuant to Section 1.1 for the registration of all or part of such holder's Registrable Securities. NASD: The National Association of Securities Dealers, Inc. Offering: Any offer or solicitation of any offer to purchase Registrable Securities registered under the Securities Act whether or not by a firm commitment or best offer underwriting or in connection with a delayed or continuous offering in compliance with Rule 415 under the Securities Act (or any successor or similar rule). Offering Agreement: As defined in Section 1.4. Offering Date: (a) if the applicable Offering is an underwritten offering, then the closing date of such Offering; or (b) if the applicable Offering is in connection with a delayed or continuous offering in compliance with Rule 415, then the date the applicable registration statement is declared effective by the Commission [and the relevant closing date of such Offering]. Other Securities: Any stock (other than Common Stock) and other securities of the Company or any other Person (corporate or otherwise) which the holders of the Warrants at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities. Person: A corporation, an association, a partnership, an organization, a business, an individual, a government or political subdivision thereof or a governmental agency. Registrable Securities: (a) Any shares of Common Stock or Other Securities issued or issuable upon exercise of any Warrant, (b) any securities issued or issuable with respect to any securities referred to in the foregoing subdivision by way of stock dividend or 16 17 stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization, and (c) any securities issued or issuable with respect to any Warrants in connection with (i) a recapitalization, merger, consolidation or other reorganization or (ii) otherwise. As to any particular Registrable Securities, once issued such securities shall cease to be Registrable Securities when (A) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (B) they shall have been distributed to the public pursuant to Rule 144 (or any successor provision) under the Securities Act, (C) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of them shall not require registration or qualification of them under the Securities Act or any similar state law then in force, or (d) they shall have ceased to be outstanding. Registration Expense: All reasonable expenses incident to the Company's performance of or compliance with Section 1, including, without limitation, all registration, filing and NASD fees, all fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, messenger and delivery expenses, the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits, agreed upon procedures, interim reports, or "cold comfort" letters required by or incident to such performance and compliance, the fees and disbursements of any counsel and accountants (which fees and disbursements of such counsel and accountants shall not exceed $15,000) retained by the holder or holders of more than 50% of the Registrable Securities being registered (other than Additional Registrable Shares), costs of policies of insurance against liabilities arising out of the public offering of the Registrable Securities being registered, if any, and any fees and disbursements of underwriters or agents customarily paid by issuers or sellers of securities, but excluding underwriting discounts and commissions and transfer taxes, if any, provided that, in any case where Registration Expenses are not to be borne by the Company, such expenses shall not include salaries of Company personnel or general overhead expenses of the Company, auditing fees, premiums or other expenses relating to liability insurance required by underwriters or agents of the Company or other expenses for the preparation of financial statements or other data normally prepared by the Company in the ordinary course of its business or which the Company would have incurred in any event. Requesting Holder: As defined in Section 1.6. Rule 415: Rule 415 under the Securities Act (or any successor or similar rule). Securities Act: The Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. 17 18 Warrants: Any of the Warrants originally issued by the Company to the Purchaser on the date hereof and any Warrants issued in substitution therefor in accordance with the terms and provisions thereof. 3. Miscellaneous. 3.1. No Inconsistent Agreements. The Company shall not hereafter enter into any agreement with respect to its securities or amend any of its charter documents which is inconsistent with or violates the rights granted to the holders of Registrable Securities in this Agreement. 3.2. Adjustments Affecting Registrable Securities. The Company shall not take any action, or permit any change to occur, with respect to its securities which would materially and adversely affect the ability of the holders of Registrable Securities to include such Registrable Securities in a registration undertaken pursuant to this Agreement or which would materially and adversely affect the marketability of such Registrable Securities in any such registration (including, without limitation, effecting a stock split or a combination of shares). 3.3. Remedies. Any Person having rights under any provision of this Agreement shall be entitled to enforce such rights specifically to recover damages caused by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction (without posting any bond or other security) for specific performance and for other injunctive relief in order to enforce or prevent violation of the provisions of this Agreement. 3.4. Amendments and Waivers. Except as otherwise provided herein, no modification, amendment or waiver of any provision of this Agreement shall be effective against the Company or the holders of Registrable Securities unless such modification, amendment or waiver is approved in writing by (i) the Company and (ii) the holders of at least a majority of the Registrable Securities then in existence who are a party to this Agreement; provided that no such amendment or action which materially adversely affects any one holder of Registrable Securities, as such, vis-a-vis the other holders of Registrable Securities, as such, shall be effective against such holder without the prior written consent of such holder. The failure of any party to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and shall not affect the right of such party thereafter to enforce each and every provision of this Agreement in accordance with its terms. 3.5. Additional Parties. Each Person who after the date of this Agreement is the assignee or transferee of any of the Warrants shall be entitled, but not obligated, to execute a counterpart to this Agreement and become a party hereto (each, an "Additional Party"). 3.6. Successors and Assigns. All covenants and agreements in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the 18 19 respective successors and assigns of the parties hereto whether so expressed or not including, without limitation, any Person which is the successor to the Company. In addition, whether or not any express assignment has been made, the provisions of this Agreement which are for the benefit of purchasers or holders of Registrable Securities are also for the benefit of, and enforceable by, any subsequent holder of Registrable Securities. 3.7. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 3.8. Entire Agreement. Except as otherwise expressly set forth herein, this document embodies the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. 3.9. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. 3.10. Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 3.11. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PRINCIPLES THEREOF. 3.12. Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the recipient, sent to the recipient by reputable overnight courier service (charges prepaid) or mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid. Such notices, demands and other communications shall be sent to holder of Registrable Securities at the address indicated on the books and records of the Company and to the Company at its principal executive office (to the attention of the Company's president) or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. 3.13 Judicial Proceedings. Any legal action, suit or proceeding brought against the Company with respect to this Agreement may be brought in any federal court of the Southern District of New York or any state court located in New York County, State of New York, and by execution and delivery of this Agreement, the Company irrevocably waives any claim (by way of motion, as a defense or otherwise) of improper venue, that it is not subject personally to the jurisdiction of such court, that such courts are an inconvenient forum or that this Agreement or the subject matter may not be enforced in or by 19 20 such court. The Company hereby irrevocably consents to the service of process of any of the aforementioned courts in any such action, suit or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, at its address provided for in Section 3.12, such service to become effective 10 days after such mailing. Nothing herein contained shall be deemed to affect the right of any party to serve process in any manner permitted by law or commence legal proceedings or otherwise proceed against any other party in any other jurisdiction to enforce judgments obtained in any action, suit or proceeding brought pursuant to this Section. EACH OF THE PURCHASER AND THE COMPANY HEREBY IRREVOCABLY WAIVES TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING, WHETHER AT LAW OR EQUITY, BROUGHT BY IT OR THE PURCHASER IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 3.14 Interpretation. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine and/or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa. Unless the context otherwise requires, any reference to a prospectus or a prospectus supplement shall include all documents incorporated by reference, or deemed to be incorporated by reference, therein in accordance with the Securities Act. 3.15 Termination. The registration rights set forth in this Agreement shall not be available to any holder of Registrable Securities if, in the opinion of counsel to the Company, upon which opinion the Purchaser shall be expressly entitled to rely, all of the Registrable Securities then owned by such holders could be sold in any 90-day period pursuant to Rule 144. [REMAINDER OF PAGE LEFT INTENTIONALLY BLANK] 20 21 IN WITNESS WHEREOF, the parties hereto have executed this Registration Agreement on the day and year first above written. KERR GROUP, INC. By: /s/ D. Gordon Strickland ------------------------------------------ Name: D. Gordon Stricklland Title: President & Chief Executive Officer MADELEINE L.L.C. By: /s/ Kevin Genda ------------------------------------------ Name: Kevin Genda Title: Vice President 21 EX-11.1 5 COMPUTATION OF PER COMMON SHARE EARNINGS (LOSS) 1 EXHIBIT 11.1 KERR GROUP, INC. Statement Re: Computation of Per Share Earnings (Loss) (in thousands except per share data)
(Unaudited) Three Months Ended March 31, ----------------------- 1997 1996 ------- ------- Primary Net Earnings (Loss) Per Common Share - -------------------------------------------- Net loss $(1,130) $(6,235) Less Preferred Stock dividends (207) (207) ------- ------- Net loss applicable to primary earnings per common share $(1,337) (6,442) ======= ======= Weighted average number of common shares outstanding 3,933 3,933 ======= ======= Primary net loss per common share $ (0.34) $ (1.64) ======= ======= Fully Diluted Net Earnings (Loss) Per Common Share - -------------------------------------------------- Net loss applicable to primary earnings per common share $(1,337) $(6,442) Add Preferred Stock dividends 207 207 ------- ------- Net loss applicable to fully diluted earnings per common share $(1,130) $(6,235) ======= ======= Weighted average number of common shares outstanding 3,933 3,933 Common shares issuable upon assumed conversion of Preferred Stock 709 709 Incremental common shares issuable upon assumed exercise of outstanding stock options 0 19 ------- ------- Adjusted weighted average number of common shares outstanding 4,642 4,661 ======= ======= Fully diluted net loss per common share: As computed $ (0.24) $ (1.34) ======= ======= As reported (a) $ (0.34) $ (1.64) ======= =======
(a) The calculation of fully diluted net loss per common share for the three months ended March 31, 1997 and 1996 was not dilutive. EX-27.1 6 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S STATEMENTS OF EARNINGS (LOSS) AND BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 5,080 0 14,928 376 13,540 33,903 100,794 62,242 86,011 65,427 0 0 9,748 2,113 (9,689) 86,011 28,732 28,732 21,957 21,957 6,743 0 1,162 (1,130) 0 (1,130) 0 0 0 (1,130) (0.34) (0.34)
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