<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
SCHEDULE 13D
(RULE 13d-101)
INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT TO 13d-1(a)
AND AMENDMENTS THERETO FILED PURSUANT TO 13d-2(a)
(Amendment No. ______)/1/
Touchstone Applied Science Associates, Inc.
- -------------------------------------------------------------------------------
(Name of Issuer)
Common Stock, $.0001 par value
- -------------------------------------------------------------------------------
(Title of Class of Securities)
891546103
- -------------------------------------------------------------------------------
(CUSIP Number)
Victor I. Chang, Esq. (617) 248-7000
c/o Testa, Hurwitz & Thibeault, LLP, High Street Tower, 125 High Street,
Boston, MA 02110
- -------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
October 28, 1998
- -------------------------------------------------------------------------------
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G
to report the acquisition which is the subject of this Schedule 13D, and is
filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the
following box [ ].
Note: Schedules filed in paper format shall include a signed original
and five copies of the schedule, including all exhibits. See Rule 13d-7(b) for
other parties to whom copies are to be sent.
- ------------------------------------------------------
/1/ The remainder of this cover page shall be filled out for a reporting
person's initial filing on this form with respect to the subject class of
securities, and for any subsequent amendment containing information which would
alter disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be
deemed to be "filed" for the purpose of Section 18 of the Securities Exchange
Act of 1934 or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
<PAGE>
SCHEDULE 13D
- ----------------------- ---------------------
CUSIP NO. 891546103 PAGE 1 OF 6 PAGES
- ----------------------- ---------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Edward L. Cahill
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
2 (a) [_]
(b) [x]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS*
4
AF
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
5 PURSUANT TO ITEMS 2(d) or 2(e) [_]
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
USA
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 0
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
2,208,734
OWNED BY
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING 0
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
2,208,734
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
2,208,734
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
12 [x]
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
20.5%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON*
14
IN
- ------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
Page 1 of 6 pages
<PAGE>
SCHEDULE 13D
- ----------------------- ---------------------
CUSIP NO. 891546103 PAGE 2 OF 6 PAGES
- ----------------------- ---------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
David L. Warnock
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
2 (a) [_]
(b) [x]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS*
4
AF
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
5 PURSUANT TO ITEMS 2(d) or 2(e) [_]
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
USA
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 0
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
2,208,734
OWNED BY
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING 0
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
2,208,734
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
2,208,734
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
12 [x]
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
20.5%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON*
14
IN
- ------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
Page 2 of 6 pages
<PAGE>
SCHEDULE 13D
- ----------------------- ---------------------
CUSIP NO. 891546103 PAGE 3 OF 6 PAGES
- ----------------------- ---------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Cahill, Warnock Strategic Partners, L.P.
IRSN: 52-1970604
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
2 (a) [_]
(b) [x]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS*
4
AF
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
5 PURSUANT TO ITEMS 2(d) or 2(e) [_]
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
Delaware Limited Partnership
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 0
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
2,208,734
OWNED BY
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING 0
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
2,208,734
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
2,208,734
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
12 [x]
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
20.5%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON*
14
PN
- ------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
Page 3 of 6 pages
<PAGE>
SCHEDULE 13D
- ----------------------- ---------------------
CUSIP NO. 891546103 PAGE 4 OF 6 PAGES
- ----------------------- ---------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Cahill, Warnock Strategic Partners Fund, L.P.
IRSN: 52-1970619
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
2 (a) [x]
(b) [_]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS*
4
WC
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
5 PURSUANT TO ITEMS 2(d) or 2(e) [_]
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
Delaware Limited Partnership
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 0
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
2,208,734
OWNED BY
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING 0
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
2,208,734
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
2,208,734
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
12 [x]
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
20.5%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON*
14
PN
- ------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
Page 4 of 6 pages
<PAGE>
SCHEDULE 13D
- ----------------------- ---------------------
CUSIP NO. 891546103 PAGE 5 OF 6 PAGES
- ----------------------- ---------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Cahill, Warnock & Company, LLC
IRSN: 52-1931617
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
2 (a) [_]
(b) [x]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS*
4
AF
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
5 PURSUANT TO ITEMS 2(d) or 2(e) [_]
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
Maryland Limited Liability Company
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 0
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
2,208,734
OWNED BY
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING 0
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
2,208,734
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
2,208,734
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
12 [x]
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
20.5%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON*
14
OO
- ------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
Page 5 of 6 pages
<PAGE>
SCHEDULE 13D
- ----------------------- ---------------------
CUSIP NO. 891546103 PAGE 6 OF 6 PAGES
- ----------------------- ---------------------
- ------------------------------------------------------------------------------
NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Strategic Associates, L.P.
IRSN: 52-1991689
- ------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
2 (a) [x]
(b) [_]
- ------------------------------------------------------------------------------
SEC USE ONLY
3
- ------------------------------------------------------------------------------
SOURCE OF FUNDS*
4
WC
- ------------------------------------------------------------------------------
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
5 PURSUANT TO ITEMS 2(d) or 2(e) [_]
- ------------------------------------------------------------------------------
CITIZENSHIP OR PLACE OF ORGANIZATION
6
Delaware Limited Partnership
- ------------------------------------------------------------------------------
SOLE VOTING POWER
7
NUMBER OF 0
SHARES -----------------------------------------------------------
SHARED VOTING POWER
BENEFICIALLY 8
2,208,734
OWNED BY
-----------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
9
REPORTING 0
PERSON -----------------------------------------------------------
SHARED DISPOSITIVE POWER
WITH 10
2,208,734
- ------------------------------------------------------------------------------
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
2,208,734
- ------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
12 [x]
- ------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13
20.5%
- ------------------------------------------------------------------------------
TYPE OF REPORTING PERSON*
14
PN
- ------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
Page 6 of 6 pages
<PAGE>
ITEM 1. SECURITY AND ISSUER:
--------------------
This statement relates to the Common Stock, $0.0001 par value per share, of
Touchstone Applied Sciences, Inc., a Delaware corporation (the "Issuer"). The
address of the Issuer's principal executive offices is P.O. Box 382, 4
Hardscrabble Heights, Brewster, New York 10509.
ITEM 2. IDENTITY AND BACKGROUND:
------------------------
This statement is being filed by (i) Cahill, Warnock Strategic Partners Fund,
L.P. ("Strategic Partners Fund"), (ii) Cahill Warnock Strategic Partners, L.P.
("Strategic Partners"), the sole general partner of Strategic Partners Fund,
(iii) Strategic Associates, L.P. ("Strategic Associates"), (iv) Cahill, Warnock
& Company, LLC ("Cahill, Warnock & Co."), the sole general partner of Strategic
Associates, (v) Edward L. Cahill ("Cahill"), a general partner of Strategic
Partners and a member of Cahill, Warnock & Co., and (vi) David L. Warnock
("Warnock"), a general partner of Strategic Partners and a member of Cahill,
Warnock & Co. Strategic Partners Fund, Strategic Partners, Strategic
Associates, Cahill, Warnock & Co., Cahill, and Warnock are sometimes referred to
collectively herein as the "Reporting Persons."
The address of the principal business and principal office of Strategic
Partners Fund, Strategic Partners, Strategic Associates and Cahill, Warnock &
Co. is 1 South Street, Suite 2150, Baltimore, MD 21202. The business address
of Cahill and Warnock is 1 South Street, Suite 2150, Baltimore, MD 21202.
The state of organization for Strategic Partners Fund, Strategic Partners and
Strategic Associates is Delaware. The state of organization for Cahill, Warnock
& Co. is Maryland. Both Cahill and Warnock are citizens of the United States of
America.
The principal business of Strategic Partners Fund and Strategic Associates is
to make private equity investments in micro-cap public companies seeking capital
for expansion or undergoing a restructuring of ownership. The principal
business of Strategic Partners is to act as the sole general partner of
Strategic Partners Fund. The principal business of Cahill, Warnock & Co. is to
act as the sole general partner of Strategic Associates and Camden Partners,
L.P. ("Camden Partners") and to manage the activities of Strategic Partners
Fund, Strategic Associates, and Camden Partners. The principal occupations of
Cahill and Warnock are their activities on behalf of Strategic Partners Fund,
Strategic Partners, Strategic Associates, Cahill, Warnock & Co. and Camden
Partners.
The principal business of Camden Partners is to make passive investments in
public companies. The principal office of Camden Partners is 1 South Street,
Suite 2150, Baltimore, MD 21202.
During the five years prior to the date hereof, none of the Reporting Persons
has been convicted in a criminal proceeding (excluding traffic violations or
similar misdemeanors) or has been a party to a civil proceeding ending in a
judgment, decree or final order enjoining future violations of, or prohibiting
or mandating activities subject to, federal or state securities laws, or finding
a violation with respect to such laws.
<PAGE>
ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION:
--------------------------------------------------
On October 28, 1998 Strategic Partners Fund acquired warrants to purchase
2,615,970 shares of the Issuer's Common Stock in partial consideration for the
purchase of subordinated debentures of the Issuer in the principal amount of
$3,790,000. The working capital of Strategic Partners Fund was the source of
funds for this purchase. No part of the purchase price was or will be
represented by funds or other consideration borrowed or otherwise obtained for
the purpose of acquiring, holding, trading or voting such securities.
On October 28, 1998 Strategic Associates acquired warrants to purchase
144,948 shares of the Issuer's Common Stock in partial consideration for the
purchase of subordinated debentures of the Issuer in the principal amount of
$210,000. The working capital of Strategic Associates was the source of funds
for this purchase. No part of the purchase price was or will be represented by
funds or other consideration borrowed or otherwise obtained for the purpose of
acquiring, holding, trading or voting such securities.
ITEM 4. PURPOSE OF TRANSACTION:
----------------------
Strategic Partners Fund and Strategic Associates acquired the Issuer's
securities for investment purposes. Depending on market conditions, their
continuing evaluation of the business and prospects of the Issuer and other
factors, Strategic Partners Fund and Strategic Associates may dispose of or
acquire additional securities of the Issuer. Except as otherwise described
herein or as expressly stated below, none of the Reporting Persons has any
present plans which relate to or would result in:
(a) The acquisition by any person of additional securities of the Issuer,
or the disposition of securities of the Issuer;
(b) An extraordinary corporate transaction, such as a merger,
reorganization or liquidation, involving the Issuer or any of its
subsidiaries;
(c) A sale or transfer of a material amount of assets of the Issuer or of
any of its subsidiaries;
(d) Any change in the present board of directors or management of the
Issuer, including any plans or proposals to change the number or term
of directors or to fill any existing vacancies on the board;
(e) Any material change in the present capitalization or dividend policy
of the Issuer;
(f) Any other material change in the Issuer's business or corporate
structure;
(g) Changes in the Issuer's charter, bylaws or instruments corresponding
thereto or other actions which may impede the acquisition of control
of the Issuer by any person;
(h) Causing a class of securities of the Issuer to be delisted from a
national securities exchange or to cease to be authorized to be quoted
in an inter-dealer quotation system of a registered national
securities association;
(i) A class of equity securities of the Issuer becoming eligible for
termination of registration pursuant to Section 12(g)(4) of the
Securities Exchange Act of 1934; or
<PAGE>
(j) Any action similar to any of those enumerated above.
Exception. Pursuant to the terms of a certain Stock Purchase Agreement
---------
dated as of September 4, 1998 and closed on October 28, 1998 (the "Purchase
Agreement," attached hereto as Exhibit 3) by and among the Issuer, Strategic
---------
Partners Fund and Strategic Associates, upon the closing of a proposed
acquisition by the Issuer under certain terms and conditions set forth in the
Purchase Agreement, the Issuer will have the right to sell to Strategic Partners
Fund and Strategic Associates, and Strategic Partners Fund and Strategic
Associates have agreed to purchase upon such event, a number of shares of the
Issuer's Common Stock equal to the aggregate purchase price of $2,000,000.00
divided by the greater of $1 per share or an amount equal to the average closing
price as reported on Nasdaq per share for the preceding thirty days discounted
by twenty percent (the "Option Shares").
Exception. Pursuant to the terms of a certain Investor Rights Agreement
---------
dated as of September 4, 1998 and closed on October 28, 1998 (the "Investors
Rights Agreement," attached hereto as Exhibit 4) by and among the Issuer,
---------
Strategic Partners Fund, Strategic Associates and certain shareholders of the
Company (such shareholders being Andrew L. Simon, Stephen H. Ivens, Linda G.
Straley, Steven R. Berger, Michael D. Beck and Walter B. Barbe, collectively
referred to herein as the "Shareholders"), the Issuer agreed fix the size of its
board of directors at a range between six and nine directors, and granted
Strategic Partners Fund and Strategic Associates the right to nominate, in the
aggregate, two directors to the board of directors of the Issuer. Pursuant to
the Investors Rights Agreement, the Shareholders agreed to vote all of their
voting securities in such a manner as to cause the Issuer to comply with its
obligations under the Investors Rights Agreement. In addition, pursuant to the
Investors Rights Agreement, the Issuer agreed to redeem all of the outstanding
Series A Preferred Stock of the Issuer no later than 31 days after the closing
date.
Exception. Pursuant to the terms of a certain Registration Rights
---------
Agreement dated September 4, 1998 and closed on October 28, 1998 (the
"Registration Rights Agreement," attached hereto as Exhibit 5) by and among the
---------
Issuer, Strategic Partners Fund and Strategic Associates, Strategic Partners
Fund and Strategic Associates are granted, subject to certain restrictions and
limitations, certain demand and "piggyback" registration rights with respect to
the Touchstone Warrants Shares and the Option Shares.
ITEM 5. INTEREST IN THE SECURITIES OF THE ISSUER:
----------------------------------------
(a) Strategic Partners Fund is the record owner of warrants to purchase a
total of 2,615,970 shares of the Issuer's Common Stock (the "Fund Warrant"). As
of the date hereof, the Fund Warrant may be exercised for 2,092,776 shares of
the Issuer's Common Stock (the "Fund Warrant Shares"), with the remainder
becoming exercisable on April 28, 2000. Strategic Associates is the record
owner of warrants to purchase 144,948 shares of the Issuer's Common Stock (the
"Associates Warrant"). As of the date hereof, the Associates Warrant may be
exercised in exchange for 115,958 shares of the Issuer's Common Stock (the
"Associates Warrant Shares") with the remainder becoming exercisable on April
28, 2000.
The aggregate shares of the Issuer's Common Stock issuable upon the
exercise of the Fund Warrant and the Associate Warrant are sometimes referred to
herein as the "Registrable Warrant Shares." The Fund Warrant Shares and the
Associates Warrant Shares are sometimes referred to herein collectively as the
"Touchstone Warrant Shares."
<PAGE>
Because of their relationship as affiliated entities, both Strategic
Partners Fund and Strategic Associates may be deemed to own beneficially the
Touchstone Warrant Shares. As general partners of Strategic Partners Fund and
Strategic Associates, respectively, Strategic Partners and Cahill, Warnock & Co.
may be deemed to own beneficially the Touchstone Warrant Shares. As the
individual general partners of Strategic Partners and as the members of Cahill,
Warnock & Co., both Cahill and Warnock may be deemed to own beneficially the
Touchstone Warrant Shares.
By virtue of the Investors Rights Agreement (attached hereto as Exhibit 4),
---------
each of the Reporting Persons may be deemed to share voting power with respect
to each share of the Issuer's stock subject to the agreement. Consequently, the
Reporting Persons may be deemed to beneficially own, in addition to the
Touchstone Warrant Shares, an additional 1,719,855 shares of the Issuer's Common
Stock (the "Agreement Shares")
Strategic Partners Fund disclaims beneficial ownership of the Associates
Warrant Shares and the Agreement Shares. Strategic Associates disclaims
beneficial ownership of the Fund Warrant Shares and the Agreement Shares.
Strategic Partners, Cahill, Warnock & Co., Cahill, and Warnock each disclaim
beneficial ownership of the Touchstone Warrant Shares and the Agreement Shares,
except with respect to their pecuniary interest therein, if any.
Each of the Reporting Persons may be deemed to own beneficially 20.5% of
the Issuer's Common Stock, which percentage is calculated based upon (i)
8,567,222 shares of the Issuer's Common Stock reported as outstanding by the
Issuer in its Quarterly Report on Form 10-QSB for the quarterly period ended
July 31, 1998, and (ii) the number of shares issuable upon the exercise of the
Touchstone Warrant Shares (2,208,734 shares of the Issuer's Common Stock). Such
calculation of deemed beneficial ownership does not reflect potential deemed
beneficial ownership of the Agreement Shares.
In Amendment No. 1 to the Limited Partnership Agreement of Strategic
Partners Fund, dated July 26, 1996 (attached hereto as Exhibit 2), Strategic
---------
Partners and the limited partners of Strategic Partners Fund agreed that any
securities of a particular issuer that are acquired by both Strategic Partners
Fund and Strategic Associates shall be sold or otherwise disposed of at
substantially the same time, on substantially the same terms and in amounts
proportionate to the size of each of their investments. As a consequence,
Strategic Associates and Strategic Partners Fund may be deemed to be members of
a group pursuant to Rule 13d-5(b)(1) of the Securities Exchange Act of 1934.
Strategic Partners, Cahill, Warnock & Co., Cahill and Warnock each disclaim
membership in the aforementioned group.
(b) Number of Shares as to which each such person has
(i) Sole power to vote or direct the vote:
0 shares for each Reporting Person;
(ii) Shared power to vote or direct the vote:
2,208,734* shares for each Reporting Person;
<PAGE>
(iii) Sole power to dispose or to direct the disposition:
0 shares for each Reporting Person;
(iv) Shared power to dispose or to direct the disposition:
2,208,734* shares for each Reporting Person.
* Does not reflect potential deemed beneficial ownership of the Agreement
Shares.
(c) Except as set forth above, none of the Reporting Persons has effected
any transaction in the Shares during the last 60 days.
(d) No other person is known to have the right to receive or the power to
direct the receipt of dividends from, or any proceeds from the sale of, the
Shares beneficially owned by any of the Reporting Persons.
(e) Not applicable.
ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO SECURITIES OF THE ISSUER:
In Amendment No. 1 to the Limited Partnership Agreement of Strategic
Partners Fund, dated July 26, 1996 (attached hereto as Exhibit 2), Strategic
---------
Partners and the limited partners of Strategic Partners Fund agreed that any
securities of a particular issuer that are acquired by both Strategic Partners
Fund and Strategic Associates shall be sold or otherwise disposed of at
substantially the same time, on substantially the same terms and in amounts
proportionate to the size of each of their investments.
Pursuant to the terms of the Purchase Agreement (attached hereto as Exhibit
-------
3), Strategic Partners Fund acquired warrants to purchase 2,615,970 shares of
- -
the Issuer's Common Stock in partial consideration for the purchase of
subordinated debentures of the Issuer in the principal amount of $3,790,000.
Pursuant to the terms of the Purchase Agreement, Strategic Associates acquired
warrants to purchase 144,948 shares of the Issuer's Common Stock in partial
consideration for the purchase of subordinated debentures of the Issuer in the
principal amount of $210,000. In addition, upon the closing of a proposed
acquisition by the Issuer under certain terms and conditions set forth in the
Purchase Agreement, the Issuer will have the right to sell to Strategic Partners
Fund and Strategic Associates, and Strategic Partners Fund and Strategic
Associates have agreed to purchase upon such event, a number of shares of the
Issuer's Common Stock equal to the aggregate purchase price of $2,000,000.00
divided by the greater of $1 per share or an amount equal to the average closing
price as reported on Nasdaq per share for the preceding thirty days discounted
by twenty percent (the "Option Shares").
Pursuant to the terms of the Investors Rights Agreement (attached hereto as
Exhibit 4), the Issuer agreed fix the size of its board of directors at a range
- ---------
between six and nine directors, and granted Strategic Partners Fund and
Strategic Associates the right to designate, in the aggregate, two directors to
the board of directors of the Issuer. Pursuant to the Investors Rights
Agreement, the Shareholders agreed to vote all of their voting securities in
such a manner as to cause the Issuer to comply with its obligations under the
Investors Rights
<PAGE>
Agreement. In addition, pursuant to the Investors Rights Agreement, the Issuer
agreed to redeem all of the outstanding Series A Preferred Stock of the Issuer
no later than 31 days after the closing date.
Pursuant to the terms of the Registration Rights Agreement (attached hereto
as Exhibit 5), Strategic Partners Fund and Strategic Associates are granted,
---------
subject to certain restrictions and limitations, certain demand and "piggyback"
registration rights with respect to the Registrable Warrants Shares and the
Option Shares.
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS:
Exhibit 1 - Agreement regarding filing of joint Schedule 13D.
Exhibit 2 - Amendment No. 1 to the Limited Partnership Agreement of
Strategic Partners Fund.
Exhibit 3 - Execution Copy of the Stock Purchase Agreement dated as of
September 4, 1998 and closed on October 28, 1998, by and
among the Issuer, Strategic Partners Fund and Strategic
Associates.
Exhibit 4 - Execution Copy of the Investors Rights Agreement dated as of
September 4, 1998 and closed on October 28, 1998, by and
among the Issuer, Strategic Partners Fund, Strategic
Associates, Andrew L. Simon, Stephen H. Ivens, Linda G.
Straley, Steven R. Berger, Michael D. Beck and Walter B.
Barbe.
Exhibit 5 - Execution Copy of the Registration Rights Agreement dated as
of September 4, 1998 and closed on October 28, 1998, by and
among the Issuer, Strategic Partners Fund and Strategic
Associates.
Exhibit 6 - Form of 8% Debenture of the Issuer (issued October 28, 1998).
Exhibit 7 - Form of Warrant to Acquire Shares of Common Stock of the
Issuer.
<PAGE>
SCHEDULE 13D
SIGNATURE
After reasonable inquiry and to the best of our knowledge and belief, we
certify that the information set forth in this statement is true, complete and
correct.
Dated: November 9, 1998
/s/ Edward L. Cahill
--------------------
Edward L. Cahill
/s/ David L. Warnock
--------------------
David L. Warnock
CAHILL, WARNOCK STRATEGIC
PARTNERS FUND, L.P.
By: Cahill, Warnock Strategic Partners,
L.P., its Sole General Partner
By: /s/ Edward L. Cahill
--------------------
Edward L. Cahill, General Partner
By: /s/ David L. Warnock
--------------------
David L. Warnock, General Partner
CAHILL, WARNOCK STRATEGIC
PARTNERS, L.P.
By: /s/ Edward L. Cahill
--------------------
Edward L. Cahill, General Partner
By: /s/ David L. Warnock
--------------------
David L. Warnock, General Partner
<PAGE>
STRATEGIC ASSOCIATES, L.P.
By: Cahill, Warnock & Co., LLC, its sole
General Partner
By: /s/ Edward L. Cahill
--------------------
Edward L. Cahill, Member
By: /s/ David L. Warnock
--------------------
David L. Warnock, Member
CAHILL, WARNOCK & CO., LLC
By: /s/ Edward L. Cahill
--------------------
Edward L. Cahill, Member
By: /s/ David L. Warnock
--------------------
David L. Warnock, Member
<PAGE>
EXHIBIT 1
---------
AGREEMENT
Pursuant to Rule 13d-1(k)(1) under the Securities Exchange Act of 1934, the
undersigned hereby agree that only one statement containing the information
required by Schedule 13D need be filed with respect to the ownership by each of
the undersigned of shares of stock of Touchstone Applied Science Associates,
Inc.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original.
Executed this November 9, 1998
/s/ Edward L. Cahill
--------------------
Edward L. Cahill
/s/ David L. Warnock
--------------------
David L. Warnock
CAHILL, WARNOCK STRATEGIC
PARTNERS FUND, L.P.
By: Cahill, Warnock Strategic Partners,
L.P., its Sole General Partner
By: /s/ Edward L. Cahill
--------------------
Edward L. Cahill, General Partner
By: /s/ David L. Warnock
--------------------
David L. Warnock, General Partner
CAHILL, WARNOCK STRATEGIC
PARTNERS, L.P.
By: /s/ Edward L. Cahill
--------------------
Edward L. Cahill, General Partner
By: /s/ David L. Warnock
--------------------
David L. Warnock, General Partner
STRATEGIC ASSOCIATES, L.P.
By: Cahill, Warnock & Co., LLC, its sole
General Partner
By: /s/ Edward L. Cahill
--------------------
Edward L. Cahill, Member
By: /s/ David L. Warnock
--------------------
David L. Warnock, Member
CAHILL, WARNOCK & CO., LLC
By: /s/ Edward L. Cahill
--------------------
Edward L. Cahill, Member
By: /s/ David L. Warnock
--------------------
David L. Warnock, Member
<PAGE>
Exhibit 2
---------
AMENDMENT NO. 1 TO
LIMITED PARTNERSHIP AGREEMENT
OF
CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P.
AMENDMENT NO. 1 dated as of the 26th day of July, 1996, by and among
Cahill, Warnock Strategic Partners, L.P., a Delaware limited partnership, as
general partner (the "General Partner") of Cahill, Warnock Strategic Partners
Fund, L.P., a Delaware limited partnership (the "Partnership"), and the Limited
Partners of the Partnership listed on Schedule A to the Limited Partnership
Agreement of the Partnership, dated as of April 11, 1996 (the "Partnership
Agreement"), at least 66 2/3% in interest of whom have executed a counterpart
signature page to this Amendment No. 1:
WHEREAS, immediately prior to the admission on the date hereof of
additional Limited Partners to the Partnership pursuant to Section 8(c) of the
Partnership Agreement, the parties hereto desire to amend the Partnership
Agreement and approve Amendment No. 1 to the Management Agreement, the form of
which Management Agreement is attached to the Partnership Agreement as
Schedule B.
NOW, THEREFORE, the parties hereto, in consideration of the premises
and the agreements herein contained and intending to be legally bound hereby,
agree as follows:
1. Section 4(k)(2) of the Partnership Agreement is amended by deleting
the second sentence thereof in its entirety and substituting the
following:
"Notwithstanding Section 4(e)(1) to the contrary, the Principals
may organize, after the date of this Agreement, other investment
funds and client investment vehicles for the benefit of
employees, associates and advisors of the General Partner and the
Principals and for investors who may be strategically important
to the Partnership, specifically for the purpose of co-investing
with the Partnership; provided that the aggregate amount of
capital committed to such other investment funds and client
investment vehicles does not exceed $7 million; and provided,
further, that any such investment funds or client investment
vehicles which are
<PAGE>
managed by the General Partner or the Principals shall sell or
otherwise dispose of each such co-investment at substantially the
same time and on substantially the same terms as the Partnership
in amounts proportionate to the relative size of the investments
made by such investment funds and client investment vehicles and
the Partnership."
2. Section 7(a) of the Partnership Agreement is amended by deleting the
first sentence thereof in its entirety and substituting the following:
"The Partnership shall have a Valuation Committee which shall
consist of at least three (3) but not more than five (5) members,
none of whom shall be an officer, director, member or employee of
the General Partner, the Management Company or any affiliate
thereof, and none of whom shall be related to any Principal."
3. Section 8(a) of the Partnership Agreement is amended by adding the
following text at the end thereof:
"Each notice for an Additional Capital Contribution from the
General Partner shall include a general description of the
purposes and uses for which the Additional Capital Contribution
is being called including, for example, the payment of
Partnership expenses (including the Management Fee) and the
purchase of Portfolio Company Securities; provided that the
General Partner shall not be required to identify the purposes
and uses of 100% of any Additional Capital Contribution or be
required to identify the name of any particular Portfolio Company
or proposed Portfolio Company. After the fourth anniversary of
the last admittance of any additional Limited Partners pursuant
to Section 8(c) hereof, the General Partner shall not make any
further calls for Additional Capital Contributions for the
purpose of investing in the Securities of any entity that was not
a Portfolio Company (including as a Portfolio Company for such
purpose, any predecessor of such entity) on such anniversary
date, except with the approval of the Valuation Committee. After
the fifth anniversary of the last admittance of any additional
Limited Partners pursuant to Section 8(c) hereof, the General
Partner shall not make any further calls for Additional Capital
Contributions for the purpose of investing in the Securities of
any entity that was a Portfolio Company (including as a Portfolio
Company for such purpose, any predecessor of such entity) on such
anniversary date, except with the approval of the Valuation
Committee."
<PAGE>
4. Section 11(b) of the Partnership Agreement is amended by adding the
following subsection (8) at the end thereof:
"(8) An amount equal to 50% of all distributions made to the
General Partner, other than (A) Tax Distributions plus (B)
distributions the General Partner would have received if it had
made its Capital Contributions as a Limited Partner and did not
hold an interest as a General Partner (excluding any Tax
Distributions on account thereof which are included in (A)),
shall be used by the General Partner immediately upon
distribution thereof to prepay any promissory notes contributed
by the General Partner to the Partnership."
5. Section 16 of the Partnership Agreement is amended by adding the
following text at the end thereof:
"No Principal will voluntarily assign, pledge, mortgage,
hypothecate, sell or otherwise dispose of or encumber (a
"Disposition") all or any part of his interest in the allocations
made to the General Partner of "20% of such additional Net
Realized Gain" pursuant to Section 10(b)(1)(A)(iv) (the "20%
carried interest"), except for (a) Dispositions to members of his
immediate family or trusts for the benefit of such general
partner or members of his immediate family (and, in the case of
any Dispositions to such family members or such trusts, the
transferee shall thereafter be subject, as to further transfers,
to the same restrictions on transfer as were applicable to the
transferor), (b) Dispositions to other persons who are associated
with or employed by the General Partner, the Principals or the
Management Company, and (c) Dispositions to another Principal;
provided, that, the Dispositions of all Principals pursuant to
clauses (a) and (b) shall not exceed in the aggregate 45% of
their aggregate interests in the 20% carried interest."
6. Section 19(c) of the Partnership Agreement is amended by adding the
following text at the end thereof:
"The General Partner shall transmit to each Partner within sixty
(60) days after the close of each fiscal year, a report
describing any fees and other remuneration which, pursuant to
Section 4(b) of the Management Agreement, reduced the Management
Fee payable in such fiscal year. Such description will be
organized by the type of such fees and other remuneration (e.g.,
director's fees and consulting fees) and the dollar amount
attributable to each such category."
<PAGE>
7. Pursuant to Section 7 of the Management Agreement, the Limited
Partners hereby consent to Amendment No. 1 to the Management Agreement
dated the date hereof, which amends Section 4(b) of the Management
Agreement by adding the following text at the end thereof:
"If in any year such reductions exceed the Management Fee
otherwise payable, the excess amount of such reductions shall be
carried forward on a year-by-year basis."
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 1 as
of the day and year first above written.
GENERAL PARTNER
CAHILL, WARNOCK STRATEGIC PARTNERS, L.P.
By: /s/ Edward L. Cahill
---------------------------------
Edward L. Cahill, General Partner
By: /s/ David L. Warnock
---------------------------------
David L. Warnock, General Partner
<PAGE>
AMENDMENT NO. 1 TO
LIMITED PARTNERSHIP AGREEMENT
OF
CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P.
LIMITED PARTNER SIGNATURE PAGE
------------------------------
The undersigned Limited Partner hereby executes Amendment No. 1 to
Limited Partnership Agreement of Cahill, Warnock Strategic Partners Fund, L.P.
and hereby authorizes this signature page to be attached to a counterpart of
such document executed by the General Partner of Cahill, Warnock Strategic
Partners Fund, L.P.
Please type or print exact
name of Limited Partner *
---------------------------------------
Please sign here By
-------------------------------------
Please type or print exact
name of signer ---------------------------------------
Please type or print
title of signer Title
----------------------------------
* Signature pages of the limited partners will be provided upon request.
<PAGE>
EXHIBIT 3
---------
EXECUTION COPY
SECURITIES PURCHASE AGREEMENT
DATED AS OF SEPTEMBER 4, 1998
BY AND AMONG
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.,
AS THE COMPANY
AND
CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P.,
AND
STRATEGIC ASSOCIATES, L.P.
AS THE PURCHASERS
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 1 Definitions 1
1.1. Defined Terms 1
1.2. Other Defined Terms 5
1.3. Other Definitional Provisions 6
SECTION 2 Authorization and Sale of the Company's Securities 7
2.1. Authorization and Certain Terms of the Debentures 7
2.2. Authorization and Certain Terms of the Warrants 7
2.3. Authorization of the Common Stock. 8
2.4. Sale and Purchase of the Debentures. 8
2.5. Sale and Purchase of the Warrants 9
2.6. Use of Proceeds 9
SECTION 3 Closing Date; Delivery 9
3.1. Closing Date 9
3.2. Delivery 9
SECTION 4 Representations and Warranties of the Company 10
4.1. Organization, Good Standing and Qualification. 10
4.2. Capitalization 10
4.3. Subsidiaries. Schedule 4.3 11
4.4. Partnerships, Joint Ventures 12
4.5. Authorization 12
4.6. Governmental Consents 12
4.7. Conformity with Law; Absence of Litigation 12
4.8. Insurance 13
4.9. Patents and Trademarks 13
4.10. Compliance with Other Instruments and Legal Requirements 13
4.11. Material Agreements; Action 14
4.12. Registration Rights 14
4.13. Corporate Documents 15
4.14. Real Property 15
4.15. Tangible Personal Property 16
4.16. Environmental Matters 16
4.17. Company SEC Reports and Financial Statements 17
4.18. Changes 18
4.19. Employee Benefit Plans 19
4.20. Taxes 22
4.21. Labor and Employment Matters 22
4.22. No Pending Transactions 23
4.23. Disclosure 23
4.24. Minute Books 23
</TABLE>
<PAGE>
<TABLE>
<S> <C>
4.25. Brokers' Fees 23
4.26. Not an Investment Company 23
4.27. Real Property Holding Company 24
4.28. Litigation 24
4.29. Indebtedness 24
SECTION 5 Representations and Warranties of the Purchasers 24
5.1. Accredited Investor; Experience; Risk 24
5.2. Authorization 25
5.3. Governmental Consents 25
5.4. Organization, Good Standing and Qualification 25
SECTION 6 Conditions to Closing of Purchasers 26
6.1. Debenture and Warrant Closing 26
6.2. Company Put Option Closing. 28
SECTION 7 Conditions to Closing of the Company 30
7.1. Representations 30
7.2. Purchase Price 30
7.3. Certificate 30
7.4. State Securities Laws 30
SECTION 8 Covenants of the Company 30
8.1. Regulatory Matters 30
8.2. Accreditation and Certification in Future Acquisitions. 31
8.3. Replacement of Debenture or Warrant 31
8.4. Registration, etc. 31
8.5. Notice to Purchasers Upon an Event of Default 32
8.6. Proceeds from Qualified Public Offering 32
8.7. Issuance of Warrant Shares 32
8.8. Use of Proceeds 32
8.9. Restrictive Covenants 32
SECTION 9 Company Put Option 33
9.1. Company Put Option 33
9.2. Exercise of Company Put Option 33
SECTION 10 Events of Default; Subordination 34
10.1. Events of Default 34
10.2. Annulment of Defaults 36
10.3. Subordinate to Senior Indebtedness 36
SECTION 11 Miscellaneous 37
11.1. Amendment; Waiver 37
11.2. Notices 37
11.3. Severability 38
</TABLE>
<PAGE>
<TABLE>
<S> <C>
11.4. Successors and Assigns 38
11.5. Survival of Representations, Warranties and Covenants 39
11.6. Entire Agreement 39
11.7. Choice of Law 39
11.8. Counterparts 39
11.9. Costs and Expenses 39
11.10. No Third-Party Beneficiaries 39
11.11. Indemnification 40
SECURITIES PURCHASE AGREEMENT SIGNATURE PAGE 42
Exhibit A Initial Investment 43
Exhibit B Registration Rights Agreement 44
Exhibit C Investor Rights Agreement 45
Exhibit D Form of Debenture 46
Exhibit E Form of Warrant 47
Exhibit F Accreditation and State Licensure/Approval 48
</TABLE>
<PAGE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT dated as of September 4, 1998 (this
"Agreement"), is entered into by and among TOUCHSTONE APPLIED SCIENCE
- ----------
ASSOCIATES, INC., a Delaware corporation (the "Company"), CAHILL, WARNOCK
-------
STRATEGIC PARTNERS FUND, L.P., a limited partnership organized under the laws of
the State of Delaware, and STRATEGIC ASSOCIATES, L.P., a limited partnership
organized under the laws of the State of Delaware (each a "Purchaser" and
---------
collectively the "Purchasers").
----------
W I T N E S S E T H
WHEREAS, the Company has issued and outstanding the shares of capital stock
described in Section 4.2 hereof and the Company has reserved for issuance
additional shares of capital stock upon the exercise of the outstanding
convertible securities, including rights, options and warrants, identified in
Section 4.2; and
WHEREAS, the Company proposes to issue and sell, and the Purchasers desire
to purchase from the Company, severally and in the amounts set forth on Exhibit
-------
A hereto, debentures and warrants of the Company and, upon exercise of the
- -
Company Put Option (as defined herein), shares of the Company's common stock,
par value $.0001 per share, all on the terms and conditions set forth herein;
and
WHEREAS, as a condition precedent to closing under this Agreement and to
induce the Purchasers into entering into this Agreement, the Company and the
Purchasers shall have entered into (i) a registration rights agreement (the
"Registration Rights Agreement") in the form attached hereto as Exhibit B and
- ------------------------------ ---------
(ii) an investor rights agreement (the "Investor Rights Agreement") in the form
-------------------------
attached hereto as Exhibit C.
---------
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties hereto agree as follows:
SECTION 1
Definitions
-----------
1.1 Defined Terms. The following terms are defined as follows:
-------------
"Affiliate" means, with respect to any Person, (i) any Person that holds
---------
direct or indirect beneficial ownership (as defined in Rule 13d-3 under the
Exchange Act) of voting securities or other voting interests representing at
least 5% of the outstanding voting power of a Person or equity securities or
other equity interests representing at least 5% of the outstanding equity
securities or equity interests in a Person, (ii) any brother,
<PAGE>
sister, parent, child or spouse of such Person or any Person described in clause
(i), and (iii) any Person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
such entity.
"Benefit Arrangement" means any benefit arrangement, obligation, custom, or
-------------------
practice, whether or not legally enforceable, to provide benefits, other than
salary, as compensation for services rendered, to present or former directors,
employees, agents, or independent contractors, other than any obligation,
arrangement, custom or practice that is an Employee Benefit Plan, including,
without limitation, employment agreements, severance agreements, executive
compensation arrangements, incentive programs or arrangements, sick leave,
vacation pay, severance pay policies, plant closing benefits, salary
continuation for disability, consulting, or other compensation arrangements,
workers' compensation, retirement, deferred compensation, bonus, stock option or
purchase, hospitalization, medical insurance, life insurance, tuition
reimbursement or scholarship programs, employee discounts, any plans subject to
Section 125 of the Code, and any plans providing benefits or payments in the
event of a change of control, change in ownership, or sale of a substantial
portion (including all or substantially all) of the assets of any business or
portion thereof, in each case with respect to any present or former employees,
directors, or agents.
"Company Put Option Percentage" shall mean the percentage set forth on
-----------------------------
Exhibit A for each Purchaser which will be multiplied by the number of Option
- ---------
Shares to determine such Purchaser's obligation with respect to the Company Put
Option.
"Code" means the Internal Revenue Code of 1986 (or any successor thereto),
----
as amended from time to time.
"Common Stock" means the Common Stock, par value $.0001 per share, of the
------------
Company.
"Company Benefit Arrangement" means any Benefit Arrangement sponsored or
---------------------------
maintained by the Company or its Subsidiaries or with respect to which the
Company or a Subsidiary has or may have any liability (whether actual,
contingent, with respect to any of its assets or otherwise) as of the Closing
Date, in each case with respect to any present or former directors, employees,
or agents of the Company or the Subsidiaries.
"Company Plan" means, as of the Closing Date, any Employee Benefit Plan for
------------
which the Company or any Subsidiary is the "plan sponsor" (as defined in Section
3(16)(B) of ERISA) or any Employee Benefit Plan maintained by the Company or any
Subsidiary or to which the Company or any Subsidiary is obligated to make
payments, in each case with respect to any present or former employees of the
Company or the Subsidiaries.
"Employee Benefit Plan" has the meaning given in Section 3(3) of ERISA.
---------------------
<PAGE>
"Environmental Law" means any applicable foreign, federal, state or local
-----------------
statute, regulation, ordinance or rule of common law as now in effect in any way
relating to the protection of human health and the environment including,
without limitation, the Comprehensive Environmental Response, Compensation and
Liability Act (42 U.S.C. (S)(S) 9601 et seq.), the Hazardous Materials
-- ----
Transportation Act (49 U.S.C. App. (S)(S) 1801 et seq.), the Resource
-- ----
Conservation and Recovery Act (42 U.S.C. (S)(S) 6901 et seq.), the Clean Water
-- ----
Act (33 U.S.C. (S)(S) 1251 et seq.), the Clean Air Act (42 U.S.C. (S)(S) 7401 et
-- ---- --
seq.), the Toxic Substances Control Act (15 U.S.C. (S)(S) 2601 et seq.), the
- ---- -- ----
Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. (S)(S) 136 et
--
seq.), and the Occupational Safety and Health Act (29 U.S.C. (S)(S) 651 et
- ---- --
seq.), regulations promulgated pursuant to these statutes, and common law
- ----
principles of tort liability.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time, and any regulation or rule issued thereunder.
"ERISA Affiliate" means any Person that together with the Company, would be
---------------
or was at any time treated as a single employer under Section 414 of the Code or
Section 4001 of ERISA and any general partnership of which the Company is or has
been a general partner.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"GAAP" means generally accepted accounting principles.
----
"Hazardous Material" means any substance, material or waste that is
------------------
regulated by the United States, the foreign jurisdictions in which the Company
or its Subsidiaries conducts business, or any applicable state or local
governmental authority including, without limitation, petroleum and its by-
products, asbestos, and any material or substance that is defined as a
"hazardous waste," "hazardous substance," "hazardous material," "restricted
hazardous waste," "industrial waste," "solid waste," "contaminant," "pollutant,"
"toxic waste" or "toxic substance" under any provision of Environmental Law.
"Indebtedness" shall mean, as to any Person, all items that would, in
------------
conformity with generally accepted accounting principles, be classified as
liabilities or contingent liabilities of such Person, but in any event including
without limitation (a) all obligations under leases that have been, or under
generally accepted accounting principles are required to be, capitalized, (b)
all indebtedness endorsed (other than for collection or deposit in the ordinary
course of business) or discounted with recourse, and (c) all indebtedness in
effect guaranteed, directly or indirectly, by such Person.
"Knowledge" or derivations thereof shall mean information known or should
---------
have been known by the officers of the Company and each Subsidiary, and, with
respect to Sections 4.19 and 4.21, each person who conducts human resource and
employee benefits management functions for the Company or any Subsidiary,
whether or not an officer of the Company or such Subsidiary.
<PAGE>
"Lien" means any lien, pledge, mortgage, deed of trust, security interest,
----
claim, lease, charge, option, right of first refusal, easement, servitude,
transfer restriction under any shareholder or similar agreement, encumbrance or
any other restriction or limitation whatsoever.
"Mildred Elley Business School" means the company which operates the two
-----------------------------
proprietary post-secondary schools in Albany, New York and Pittsfield,
Massachusetts.
"Multiemployer Plan" means any Employee Benefit Plan described in Section
------------------
3(37) of ERISA.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
----
succeeding to any or all of its functions under ERISA.
"Permits" means any approvals, authorizations, consents, licenses, permits
-------
or certificates.
"Person" means an individual, partnership, limited liability company,
------
corporation, joint stock company, trust, unincorporated association, joint
venture or other entity, or a government or any political subdivision or agency
thereof.
"Qualified Plan" means any Employee Benefit Plan that meets, purports to
--------------
meet, or is intended to meet the requirements of Section 401(a) of the Code.
"Release" means any release, spill, emission, leaking, pumping, injection,
-------
deposit, disposal, discharge, dispersal or leaching into the indoor or outdoor
environment, or into or out of any property;
"Remedial Action" means all actions to (x) clean up, remove, treat or in
---------------
any other way address any Hazardous Material; (y) prevent the Release of any
Hazardous Material so it does not endanger or threaten to endanger public health
or welfare or the indoor or outdoor environment; or (z) perform pre-remedial
studies and investigations or post-remedial monitoring and care.
"SEC" means the United States Securities and Exchange Commission.
---
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Series A Preferred Stock" means the 1,500 shares of preferred stock, par
------------------------
value $.0001 per share, designated by the Company as Series A Preferred Stock in
the Series A Certificate of Designation.
"Series A Certificate of Designation" means the certificate of designation
-----------------------------------
filed by the Company with the State of Delaware, Office of the Secretary of
State, on March 24, 1995 setting forth the rights and preferences of the Series
A Preferred Stock.
"Subsidiaries" means each corporation in which the Company owns or
------------
controls, directly or indirectly, capital stock or other equity interests
representing at least 50% of the outstanding voting stock or other equity
interests, including without limitation Beck Evaluation & Testing
<PAGE>
Associates, Inc., a New York corporation, and Modern Learning Press, Inc., a
Delaware corporation.
"Warrant Shares" means the shares of Common Stock issued or issuable upon
--------------
exercise of the Warrants.
"Welfare Plan" means any Employee Benefit Plan described in Section 3(1) of
------------
ERISA.
1.2 Other Defined Terms. The following terms shall have the meanings
-------------------
assigned to them in the identified Sections of this Agreement.
"Agreement" as defined in the recitals to this Agreement.
---------
"Balance Sheet" as defined in Section 4.17.
-------------
"Balance Sheet Date" as defined in Section 4.17.
------------------
"Change of Control" as defined in Section 10.1(g).
-----------------
"Closing" as defined in Section 3.1.
-------
"Closing Date" as defined in Section 3.1.
------------
"Company" as defined in the recitals to this Agreement.
-------
"Company Property" as defined in Section 4.14.
----------------
"Company Put Option" as defined in Section 9.1.
------------------
"Company SEC Reports" as defined in Section 4.17.
-------------------
"Debentures" as defined in Section 2.1(a).
----------
"Existing Indebtedness" as defined in Section 10.3.
---------------------
"Event of Default" as defined in Section 10.1.
----------------
"Exercise Price" as defined in Section 2.2(b)(iii).
--------------
"Indemnified Party" as defined in Section 11.11(a).
-----------------
"Intellectual Property" as defined in Section 4.9.
---------------------
"Investor Rights Agreement" as defined in the recitals to this Agreement.
-------------------------
"IRS" as defined in Section 4.19(b)(i).
---
<PAGE>
"Leased Properties" as defined in Section 4.14.
-----------------
"Loss" as defined in Section 11.11(a).
----
"One Million Dollar Debt Basket" as defined in Section 10.1(i).
------------------------------
"One Million Dollar Senior Debt Basket" as defined in Section 10.3(c).
-------------------------------------
"Option Notice" as defined in Section 9.2(a).
-------------
"Option Purchase Price" as defined in Section 9.1.
---------------------
"Option Share Price" as defined in Section 9.1.
------------------
"Option Shares" as defined in Section 9.1.
-------------
"Owned Properties" as defined in Section 4.14.
----------------
"Personal Property Leases" as defined in Section 4.15.
------------------------
"Purchasers" as defined in the recitals to this Agreement.
----------
"Qualified Public Offering" as defined in Section 8.6.
-------------------------
"Real Property Leases" as defined in Section 4.14.
--------------------
"Registration Rights Agreement" as defined in the recitals to this
-----------------------------
Agreement.
"Title II" as defined in Section 10.1(e).
--------
"Transaction Documents" as defined in Section 4.5.
---------------------
"Warrants" as defined in Section 2.2.
--------
1.3 Other Definitional Provisions. Any additional capitalized terms shall
-----------------------------
have the meanings assigned to them in the text of this Agreement. Terms defined
in the singular shall have a comparable meaning when used in the plural and vice
versa.
SECTION 2
Authorization and Sale of the Company's Securities
--------------------------------------------------
<PAGE>
2.1 Authorization and Certain Terms of the Debentures.
--------------------------------------------------
(a) At Closing, the Company will have authorized the issuance and sale
to the Purchasers of debentures in the form attached hereto as Exhibit D (the
---------
"Debentures") in the aggregate original principal amount of Four Million Dollars
- -----------
($4,000,000). The Debentures shall be repayable at the times and under the
terms and conditions specified herein and therein.
(b) All principal, interest and amounts outstanding under the
Debentures shall be due and payable in full on the fifth (5th) anniversary date
of the Closing Date (the "Maturity Date"). The Debentures shall bear interest
-------------
at an annual rate of eight percent (8%). Accrued and unpaid interest shall be
due and payable quarterly in arrears on the last day of each January, April,
July and October until repaid in full. The Debentures may be prepaid or
redeemed, in whole or in part (in minimum denominations equal to one-fourth of
the original principal amount), by the Company prior to maturity, without
penalty, with twenty-five (25) days prior written notice thereof to the
Purchaser. The Debentures must be prepaid in full upon: (i) the occurrence or
existence of an Event of Default or (ii) the consummation of a Qualified Public
Offering. Payments of principal and interest on the Debentures shall be made in
U.S. dollars directly by wire transfer to an account designated by the Purchaser
in immediately available funds by written notice to the Company or by check duly
mailed or delivered to the Purchaser at its address set forth in Section 11.2 of
this Agreement. Except as set forth in Section 11.4, the Debentures (and any
rights of the Purchaser hereunder or related thereto) are non-transferable
except to a person or entity controlled by, or under common control with, the
Purchaser. No sinking fund or similar provision shall be required to fund
payment of principal or interest under the Debentures. Except as set forth in
Section 10.3, the Debentures shall rank senior to or pari passu to all other
Indebtedness of the Company whether now outstanding or hereafter incurred.
2.2 Authorization and Certain Terms of the Warrants.
------------------------------------------------
(a) At Closing, the Company will have authorized the issuance and sale
to the Purchasers of warrants, substantially in the form of Exhibit E hereto
---------
(the "Warrants"), which in the aggregate entitle the Purchasers to acquire
--------
2,760,918 shares of the Company's Common Stock, which constitutes on the Closing
Date and giving effect to the transactions contemplated hereby, twenty percent
(20%) of the Company's issued and outstanding capital stock on a fully diluted
basis. The Company has reserved a sufficient number of shares of Common Stock
for issuance upon exercise of the Warrants.
(b) The Warrants contain the following terms and conditions:
(i) Except as set forth below in Section 2.2(b)(ii), the date on
which the registered holder of the Warrant (the "Holder") may first elect
------
to exercise all or part of each Warrant is:
(A) the Closing Date with respect to Warrant No. 1;
(B) the Closing Date with respect to Warrant No. 2;
<PAGE>
(C) the eighteen (18) month anniversary date of the Closing
Date with respect to Warrant No. 3; and
(D) the eighteen (18) month anniversary date of the Closing
Date with respect to Warrant No. 4.
(ii) Each of the Warrants shall become immediately exercisable
upon the occurrence or existence of an Event of Default (the earlier of the
applicable date in Paragraph (i) above and the date of the occurrence or
existence of an Event of Default shall be referred to as such Warrant's
"Effective Date").
---------------
(iii) Each Warrant shall be exercisable, in whole or in part,
for a period of five (5) years, subject to Section 2.6 of the Warrant, from
the Effective Date of that Warrant (such period being referred to as the
"Exercise Period") and entitles the Holder to purchase the number of
----------------
shares of the Company's Common Stock indicated in such Warrant at an
exercise price of $0.35 per share, as adjusted pursuant to Section 3.3 of
the Warrant (the "Exercise Price").
--------------
(c) If the Company satisfies all obligations under the Debentures and
hereunder (including without limitation paying in full all principal and accrued
interest) prior to the Effective Date of a Warrant, then each such Warrant which
is not yet effective shall immediately and automatically terminate and
thereafter be null and void ab initio. Satisfaction of all obligations under
the Debentures and hereunder by the Company on or after the Effective Date of a
Warrant shall not affect such Warrant, which shall remain in full force and
effect until the earlier of the exercise of the Warrant in full or the
termination of the Exercise Period.
(d) During each Warrant's Exercise Period, such Warrant may be
exercised in whole or in part by payment in cash, bank cashier's check,
certified check, or, at the option of the Purchaser, by reduction in the
principal amount of the Debenture (or forgiveness of any accrued and unpaid
interest thereon), in an amount equal to the product of (i) the Exercise Price
multiplied by (ii) the number of Warrant Shares being purchased.
2.3 Authorization of the Common Stock. At Closing, the Company will have
----------------------------------
authorized: (i) the issuance and sale to the Purchasers of Common Stock upon the
exercise of the Company Put Option as set forth in Section 9; and (ii) the
issuance to the Purchasers of the Warrant Shares.
2.4 Sale and Purchase of the Debentures. In reliance on the
------------------------------------
representations and warranties of the Company contained herein and subject to
the terms and conditions hereof, at the Closing, the Purchasers agree to
purchase from the Company, severally and in the amounts set forth on Exhibit A
---------
hereto, and the Company agrees to sell to the Purchasers Debentures in an
aggregate original principal amount of FOUR MILLION DOLLARS ($4,000,000).
<PAGE>
2.5 Sale and Purchase of the Warrants. As additional consideration for
---------------------------------
purchasing the Debentures, the Company agrees to issue to the Purchasers,
severally and in the amounts set forth on Exhibit A hereto, Warrants to acquire
---------
an aggregate of 2,760,918 shares of the Company's Common Stock, which represents
20% of the issued and outstanding capital stock of the Company at the Closing
Date on a fully diluted basis (assuming, without limitation, the exercise of all
warrants and options held by and distributed to the Company's agents and
management, and after giving effect to the transactions contemplated by this
Agreement).
2.6 Use of Proceeds. The Company agrees to use the proceeds from the sale
---------------
of the Debentures to acquire the Mildred Elley Business School. With the prior
written consent of the Purchasers, the Company may use a portion of the proceeds
hereunder solely for other acquisitions of comparable educational institutions
or entities which have been approved by the Purchasers.
SECTION 3
Closing Date; Delivery
----------------------
3.1 Closing Date.
------------
(a) The closing of the purchase and sale of the Debentures and
Warrants (the "Closing") shall be held at the offices of Christy & Viener, 620
-------
Fifth Avenue, New York City, on such date and at such place as the Purchasers
and the Company shall mutually agree (the date of the Closing being referred to
herein as the "Closing Date").
------------
(b) The closing of the purchase and sale of the Common Stock pursuant
to the Company Put Option set forth in Section 9 shall be at such time, date and
location as agreed to by the parties.
3.2 Delivery.
--------
(a) At the Closing, the Company shall deliver to each Purchaser
certificates evidencing the Debentures and Warrants being purchased by it
registered in such Purchaser's name against delivery to the Company of payment
in an amount equal to the full purchase price of the Debentures and Warrants
being purchased by such Purchaser in U.S. Dollars by wire transfer to an account
designated by the Company. The parties shall also deliver the other documents,
certificates and instruments required under this Agreement.
(b) At the closing of the Company Put Option, the Company shall
deliver to each Purchaser a certificate or certificates evidencing the Option
Shares being purchased by it registered in such Purchaser's name against
delivery to the Company of
<PAGE>
payment in an amount equal to the full purchase price of the Option Shares being
purchased by such Purchaser in U.S. Dollars by wire transfer to an account
designated by the Company. The parties shall also deliver the other documents,
certificates and instruments required under this Agreement.
SECTION 4
Representations and Warranties of the Company
---------------------------------------------
The Company hereby represents and warrants to, and agrees with, the
Purchasers as follows:
4.1 Organization, Good Standing and Qualification. Each of the Company
----------------------------------------------
and its Subsidiaries (i) is an entity duly organized, validly existing and in
good standing under the laws of the jurisdiction of its organization, (ii) has
all requisite power and authority to carry on its business, (iii) is duly
qualified to transact business and is in good standing in all jurisdictions
where its ownership, lease or operation of property or the conduct of its
business requires such qualification, except where the failure to do so would
not have a material adverse effect on the business or financial condition of the
Company and its Subsidiaries taken as a whole. The Company and its Subsidiaries
have the corporate power and authority and are in possession of all material
franchises, grants, authorizations, licenses, permits, easements, consents,
certificates, approvals and orders to (i) own, lease and operate its properties
and to carry on its business as now being conducted, and (ii) with respect to
the Company, execute and deliver this Agreement and the documents and
instruments contemplated hereby and to consummate the transactions contemplated
hereby, except to the extent of additional approvals required in connection with
the acquisition of the Mildred Elley Business School.
4.2 Capitalization.
--------------
(a) The authorized capital stock of the Company consists of 25,000,000
shares, of which 20,000,000 shares are common stock, par value $.0001 per share
("Common Stock"). There are 8,567,222 shares of Common Stock issued and
------------
outstanding. No shares of Common Stock are held in treasury. There are
authorized 5,000,000 shares of Preferred Stock, par value $.0001 per share (the
"Preferred Stock"), of which 1,500 shares have been designated as Series A
---------------
Preferred Stock. There are 1,500 shares of Series A Preferred Stock issued and
outstanding. In connection with the transactions set forth herein, the Company
intends to issue to management options to acquire an aggregate of 277,500 shares
of Common Stock at an exercise price per share equal to the closing market price
per share on the date of issuance, which shall be the later of November 1, 1998
or the Closing Date. Except as set forth above, there are no shares of capital
stock of the Company authorized or, as of the date hereof, issued or
outstanding. The issued and outstanding shares of capital stock of the Company
are duly authorized, validly issued, fully paid and non-assessable.
(b) Except as listed on Schedule 4.2, there are outstanding (a) no
------------
shares of capital stock or other voting stock of the Company, (b) no securities
of the
<PAGE>
Company, any Subsidiary or any Person convertible into or exchangeable for
shares of capital stock or voting securities of the Company, (c) no options,
warrants or other rights to acquire from the Company or any Subsidiary
(including any rights issuable or issued under any shareholder rights plan or
similar arrangement), and no obligations, contingent or otherwise, of the
Company or any Subsidiary to issue any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting
securities of the Company or any Subsidiary, (d) no equity equivalent in the
earnings or ownership of the Company, any Subsidiary or any Person or any
similar rights to share earnings or ownership and (e) no outstanding obligations
of the Company to repurchase, redeem or otherwise acquire any of its securities
or to make any investment (by loan, capital contribution or otherwise) in any
entity or Person. Except as set forth on Schedule 4.2, the Company has no
------------
employee stock purchase plans, stock option plans or other form of company
benefit plan which provides for the issuance, exchange or distribution of
capital stock. All outstanding options, rights and warrants have been duly and
validly issued and are in full force and effect. All shares of capital stock
subject to issuance upon exercise of any options, rights or warrants or
otherwise, upon issuance pursuant to the instruments under which they are
issuable, shall be duly authorized, validly issued, fully paid and non-
assessable and free of all preemptive rights. No outstanding options, warrants
or other securities exercisable for or convertible into shares of capital stock
of the Company require anti-dilution adjustments by reason of the consummation
of the transactions contemplated hereby.
(c) The Company has reserved for issuance 2,760,918 shares of Common
Stock upon exercise of the Warrants. The shares of Common Stock to be issued
pursuant to Section 9 of this Agreement, upon delivery to the Purchasers of
certificates therefor against payment in accordance with the terms of this
Agreement and the Warrant Shares (i) will be validly issued, fully paid and non-
assessable, (ii) will be free and clear of all Liens, except for restrictions on
transfer under federal and applicable state securities laws, and (iii) assuming
that the representations of the Purchasers in Section 5 hereof are true and
correct, will be issued in compliance with all applicable federal and state
securities laws.
4.3 Subsidiaries. Schedule 4.3 sets forth a complete and accurate list of
------------ ------------
all Subsidiaries of the Company, showing (as to each such Subsidiary) the date
of its incorporation, the jurisdiction of its incorporation, the number of
shares of its authorized capital stock, the number and class of shares thereof
duly issued and outstanding, the names of all stockholders of such Subsidiaries
and the number and percentage of the outstanding shares of each such class
owned, directly or indirectly, by all such stockholders, including the Company.
At Closing, all of the outstanding capital stock of, or other ownership
interests in, each Subsidiary, is owned by the Company, directly or indirectly,
free and clear of any Lien or any other limitation or restriction (including
restrictions on the right to vote), except as disclosed on Schedule 4.3. All
------------
outstanding shares of the capital stock of the Company and any Subsidiary have
been duly authorized and validly issued and are fully paid and non-assessable
and are free of any preemptive rights. There are no outstanding securities of
any Subsidiary convertible into or evidencing the right to purchase or subscribe
for any shares of capital stock of any
<PAGE>
Subsidiary, there are no outstanding or authorized options, warrants, calls,
subscriptions, rights, commitments or any other agreements of any character
obligating any Subsidiary to issue any shares of its capital stock or any
securities convertible into or evidencing the right to purchase or subscribe for
any shares of such stock, and there are no agreements or understandings with
respect to the voting, sale, transfer or registration of any shares of capital
stock of any Subsidiary, except as disclosed on Schedule 4.3.
------------
4.4 Partnerships, Joint Ventures. Schedule 4.4 sets forth a complete
---------------------------- ------------
and accurate list of all partnerships, limited partnerships, limited liability
companies or joint venture of any kind in which the Company or any Subsidiary
holds any interests, showing the date of its incorporation, the jurisdiction of
its incorporation, the number of shares of its authorized capital stock, the
number and class of shares thereof duly issued and outstanding, the names of all
stockholders (or other equity interest holders) of such entity and the number
and percentage of the outstanding shares or interests of each such class owned,
directly or indirectly, by all such stockholders, including the Company. At
Closing, such capital stock of, or other ownership interests in, each entity as
set forth in Schedule 4.4 is owned by the Company, directly or indirectly, free
------------
and clear of any Lien or any other limitation or restriction (including
restrictions on the right to vote). Except as set forth on Schedule 4.4, the
Company is not a party to, and does not hold, any equity interests in any
partnership, limited partnership, limited liability company or other joint
venture of any kind.
4.5 Authorization. The Company has all requisite corporate power and
-------------
authority to execute and deliver this Agreement and each agreement, document or
instrument adopted, entered into or delivered by it as contemplated herewith
(the "Transaction Documents") and to perform its obligations hereunder and
---------------------
thereunder. The execution, delivery and performance of the Agreement and the
transactions contemplated hereby have been duly authorized by all necessary
corporate, including stockholder (if required), action on the part of the
Company. Each Transaction Document to which the Company is a party has been
duly and validly executed and delivered by the Company and constitutes the
legal, valid and binding obligation of the Company, enforceable against it in
accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally, and subject, as to enforceability, to
general principles of equity, including principles of commercial reasonableness,
good faith and fair dealing (regardless of whether enforcement is sought in a
proceeding at law or in equity).
4.6 Governmental Consents. No consent, approval, order or authorization
---------------------
of, or registration, qualification, designation, declaration or filing with, any
federal, state, or local governmental authority on the part of the Company is
required in connection with the valid execution and delivery by the Company of
the Transaction Documents to which it is a party, or the consummation by the
Company of the transactions contemplated by the Transaction Documents to which
it is a party, except for (i) filings pursuant to federal or state securities
laws, and (ii) the filing of registration statements with the SEC and any
applicable state securities commission.
<PAGE>
4.7 Conformity with Law; Absence of Litigation. To the Company's
------------------------------------------
Knowledge, none of the Company or its Subsidiaries has violated any law or
regulation or any order of any court or federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality
having jurisdiction over it which would have a material adverse effect on the
business or financial condition of the Company and its Subsidiaries taken as a
whole. Except as set forth on Schedule 4.7, there are no claims, actions, suits,
------------
proceedings or investigations pending or, to the Knowledge of the Company,
threatened against the Company or any of its Subsidiaries, or any properties or
rights of the Company or its Subsidiaries, before any court, arbitrator or
administrative, governmental or regulatory authority or body, domestic or
foreign.
4.8 Insurance. Schedule 4.8 sets forth a complete and accurate list of all
--------- -----------
material policies of insurance covering the Company, its Subsidiaries and any of
their respective employees, properties or assets, including, without limitation,
policies of life, disability, fire, theft, workers compensation, employee
fidelity and other casualty and liability insurance. All such policies are in
full force and effect and are of a nature and provide such coverage as is
sufficient and as is customarily carried by companies of the size and character
of the Company and its Subsidiaries. None of the Company or any of its
Subsidiaries is in default of any policies of insurance. None of the Company or
any of its Subsidiaries has been refused insurance or had any policy of
insurance terminated (other than at its request).
4.9 Patents and Trademarks. The Company and its Subsidiaries have
----------------------
sufficient title and ownership of (or rights under license agreements to use)
all patents, trademarks, service marks, trade names, copyrights, trade secrets,
proprietary rights and processes ("Intellectual Property") necessary for their
---------------------
businesses. Except as set forth on Schedule 4.9, there are no outstanding
------------
options, licenses or agreements of any kind relating to the foregoing, nor is
the Company or any of its Subsidiaries bound by or a party to any options,
licenses or agreements of any kind with respect to the patents, trademarks,
service marks, trade names, copyrights, trade secrets, proprietary rights and
processes of any other Person. A list of all patents, patent applications,
registered trademarks, trademark applications, registered copyrights and
copyright applications owned by the Company or any of its Subsidiaries is set
forth on Schedule 4.9. Within the past five years, the Company has not received
------------
any communications alleging that the Company or any of its Subsidiaries has
violated or, by conducting its business as proposed, would violate any of the
patents, trademarks, service marks, trade names, copyrights, trade secrets,
proprietary rights and processes of any other Person, nor does the Company have
Knowledge of any such violations.
4.10 Compliance with Other Instruments and Legal Requirements.
---------------------------------------------------------
(a) None of the Company or any of its Subsidiaries is in
violation or default of any provisions of its certificate of incorporation, by-
laws, or comparable organizational documents. None of the Company or any of its
Subsidiaries is in violation or default in any respect under any provision,
instrument, judgment, order, writ, decree, contract or agreement to which it is
a party or by which it is bound or of any provision of
<PAGE>
any federal, state or local statute, rule or regulation applicable to the
Company or any of its Subsidiaries (including, without limitation, any law, rule
or regulation relating to protection of the environment and the maintenance of
safe and sanitary premises) that would have a material adverse effect on the
Company and its Subsidiaries taken as a whole. The execution, delivery and
performance by the Company of each Transaction Document and the consummation of
the transactions contemplated hereby and thereby will not result in any such
violation or be in conflict with or constitute, with or without the passage of
time or giving of notice, either a default under or give rise to any obligations
under, the certificate of incorporation or by-laws of the Company, or any note,
bond, mortgage, indenture, lease, license, permit, contract, agreement or other
instrument or obligation, decree or order to which the Company or any Subsidiary
is a party or by which the Company or any Subsidiary or its properties or assets
is or may be bound, or to the Knowledge of the Company violate any law, order,
rule or regulation applicable to the Company or any Subsidiary, and does not
require any consent, waiver or approval thereunder, or constitute an event that
results in the creation of any Lien upon any assets of the Company or any of its
Subsidiaries.
(b) The Company and its Subsidiaries have all material Permits of all
governmental entities required to conduct their respective businesses as
currently conducted.
(c) The transactions contemplated by this Agreement and the
Transaction Documents will not constitute a change of control under any Employee
Benefit Plan, rights plan, contract or agreement to which it is a party.
4.11 Material Agreements; Action. Except as set forth on Schedule 4.11,
--------------------------- -------------
there are no material contracts, agreements, commitments, understandings or
proposed transactions, whether written or oral, to which the Company or any of
its Subsidiaries is a party or by which it is bound that involve or relate to:
(i) any of their respective officers, directors, stockholders (or other equity
interest holder) or partners or any Affiliate thereof; (ii) the sale of any of
the assets of the Company or any of its Subsidiaries other than in the ordinary
course of business; (iii) covenants of the Company or any of its Subsidiaries
not to compete in any line of business or with any Person in any geographical
area or covenants of any other Person not to compete with the Company or any of
its Subsidiaries in any line of business or in any geographical area; (iv) the
acquisition by the Company or any of its Subsidiaries of any operating business
or the capital stock of any other Person; (v) the borrowing of money; (vi) the
expenditure of more than $50,000 in the aggregate or the performance by the
Company or any Subsidiary extending for a period more of than one year from the
date hereof, other than in the ordinary course of business, or (vii) the license
of any Intellectual Property or other material proprietary right to or from the
Company or any of its Subsidiaries. There have been made available to the
Purchasers and its representatives true and complete copies of all such
agreements. All such agreements are in full force and effect and are the legal,
valid and binding obligation of the Company or its Subsidiaries, enforceable
against them in accordance with their terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting creditors'
rights and remedies
<PAGE>
generally and subject, as to enforceability, to general principles of equity
(regardless of whether enforcement is sought in a proceeding at law or in
equity). None of the Company or any of its Subsidiaries is in default under any
such agreements nor, to the Knowledge of the Company, is any other party to any
such agreements in default thereunder in any material respect.
4.12 Registration Rights. Except as set forth in the Registration Rights
-------------------
Agreement and except as set forth on Schedule 4.12, the Company has not granted
-------------
or agreed to grant any registration rights, including piggyback registration
rights, to any Person.
4.13 Corporate Documents. True and correct copies of the certificate of
-------------------
incorporation and the by-laws of the Company, as amended and as are currently in
effect, have been delivered to the Purchasers.
4.14 Real Property.
-------------
(a) Schedule 4.14(a) sets forth a complete list of all real property and
-------------
interests in real property owned (the "Owned Properties") or leased (the "Leased
---------------- ------
Properties") by the Company and its Subsidiaries as lessee or lessor (the Leased
- ----------
Properties together with the Owned Properties, being referred to herein
individually as a "Company Property" and collectively as the "Company
---------------- -------
Properties"). The Company Property constitutes all interests in real property
- ----------
currently used or currently held for use in connection with the businesses of
the Company and its Subsidiaries and which are necessary for the continued
operation of the businesses of the Company and its Subsidiaries as such
businesses are currently conducted. The Company and its Subsidiaries have a
valid and enforceable leasehold interest under each of the leases for Leased
Property (the "Real Property Leases"), and none of the Company or any of its
--------------------
Subsidiaries has received any written notice of any default or event which, with
notice or lapse of time, or both, would constitute a default by the Company or
any of its Subsidiaries under any of the Real Property Leases. All of the
Company Property, buildings, fixtures and improvements thereon owned or leased
by the Company and its Subsidiaries are in good operating condition and repair
(subject to normal wear and tear). The Company has delivered or otherwise made
available to the Purchasers true, correct and complete copies of the Real
Property Leases, together with all amendments, modifications or supplements, if
any, thereto.
(b) The Company and its Subsidiaries have all certificates of
occupancy and Permits of any governmental body necessary or useful for the
current use and operation of each Company Property, and the Company and its
Subsidiaries have fully complied with all conditions of the Permits applicable
to them. No default or violation, or event which, with the lapse of time or
giving of notice or both would become a default or violation, has occurred in
the due observance of any such Permit.
(c) There does not exist any actual, or to the Knowledge of the
Company, threatened or contemplated, condemnation or eminent domain proceedings
that affect any Company Property or any part thereof, and none of the Company or
any of
<PAGE>
its Subsidiaries has received any notice, oral or written, of the intention of
any governmental body or other Person to take or use all or any part thereof.
(d) None of the Company or any of its Subsidiaries has received any
written notice from any insurance company that has issued a policy with respect
to any Company Property requiring performance of any structural or other repairs
or alterations to such Company Property.
(e) None of the Company or any of its Subsidiaries owns or holds, and
is obligated under or a party to, any option, right of first refusal or other
contractual right to purchase, acquire, sell, assign or dispose of any real
estate or any portion thereof or interest therein.
4.15 Tangible Personal Property.
--------------------------
(a) Schedule 4.15(a) sets forth all leases of tangible personal property
-------------
("Personal Property Leases") involving annual payments in excess of $15,000
------------------------
relating to tangible personal property used in the business of the Company and
its Subsidiaries or to which the Company or any of its Subsidiaries is a party
or by which the properties or assets of the Company or any of its Subsidiaries
is bound. The Company has delivered or otherwise made available to the
Purchasers true, correct and complete copies of the Personal Property Leases,
together with all amendments, modifications or supplements, if any, thereto.
(b) Each of the Company and its Subsidiaries has a valid
leasehold interest under each of the Personal Property Leases under which it is
a lessee, and there is no default under any Personal Property Lease by the
Company or any of its Subsidiaries, by any other party thereto, and no event has
occurred which, with the lapse of time or the giving of notice or both would
constitute a default thereunder.
(c) Except as set forth on Schedule 4.15(c), each of the Company
and its Subsidiaries has good and marketable title to all of the items of
tangible personal property reflected in the balance sheets referred to in
Section 4.17 (except as sold or disposed of subsequent to the date thereof in
the ordinary course of business consistent with past practice), free and clear
of any and all Liens. All such items of tangible personal property that,
individually or in the aggregate, are material to the operation of the business
of the Company and its Subsidiaries are in good condition and in a state of good
maintenance and repair (ordinary wear and tear excepted) and are suitable for
the purposes used.
(d) All of the items of tangible personal property used by the
Company and its Subsidiaries under the Personal Property Leases are in good
condition and repair (ordinary wear and tear excepted) and are suitable for the
purposes used.
4.16 Environmental Matters.
---------------------
<PAGE>
Except as set forth on Schedule 4.16:
-------------
(a) The operations of each of the Company and its
Subsidiaries are in material compliance with all applicable Environmental Laws
and all Permits issued pursuant to Environmental Laws or otherwise;
(b) Each of the Company and its Subsidiaries has obtained
all Permits required under all applicable Environmental Laws necessary to
operate its business;
(c) None of the Company or any of its Subsidiaries is the
subject of any outstanding written order, agreement or arrangement with any
governmental authority or Person respecting (i) Environmental Laws, (ii)
Remedial Action or (iii) any Release or threatened Release of a Hazardous
Material;
(d) None of the Company or any of its Subsidiaries has
received any written communication alleging either or both that the Company or
any of its Subsidiaries may be in violation of any Environmental Law, or any
Permit issued pursuant to Environmental Law, or may have any liability under any
Environmental Law;
(e) At Closing, none of the Company or any of its
Subsidiaries has any current contingent liability in connection with any Release
of any Hazardous Materials into the indoor or outdoor environment (whether on-
site or off-site) and has no reason to believe that such contingent liability
exists;
(f) The Company has no Knowledge of any investigations of
the business, operations, or currently or previously owned, operated or leased
property of the Company or any of its Subsidiaries pending or, to its Knowledge,
threatened that could lead to the imposition of any liability pursuant to
Environmental Law;
(g) There is not located at any of the properties owned or
operated, or to the knowledge of the Company, leased by the Company or any of
its Subsidiaries any (i) underground storage tanks, (ii) asbestos-containing
material, (iii) equipment containing polychlorinated biphenyls, (iv) Hazardous
Materials located at any Company Property (other than for Hazardous Materials
used or stored by the Company or any Subsidiary in the ordinary course of
business and in material compliance with applicable Environmental Laws and
Permits); and
(h) The Company has provided to the Purchasers all
environmentally related audits, studies, reports, analyses and results of
investigations, if any, that have been performed with respect to the currently
or previously owned, leased or operated properties of the Company or any of its
Subsidiaries.
4.17 Company SEC Reports and Financial Statements.
--------------------------------------------
<PAGE>
(a) The Company has made available to Purchasers true and complete
copies of all periodic reports, statements and other documents that the Company
has filed with the SEC under the Exchange Act since January 1, 1996
(collectively, the "Company SEC Reports"), each in the form (including exhibits
-------------------
and any amendments thereto) required to be filed with the SEC. As of their
respective dates, each of the Company's SEC Reports (i) complied in all respects
with all applicable requirements of the Securities Act and the Exchange Act, and
the rules and regulations promulgated thereunder, respectively, (ii) were filed
in a timely manner, and (iii) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading. None of the Subsidiaries is required to
file any forms, reports or other documents with the SEC.
(b) The audited consolidated financial statements of the Company
(including any related notes and schedules thereto) included in its Annual
Report on Form 10-KSB for the fiscal year ended October 31, 1997 (the "Balance
-------
Sheet Date"), are accurate and complete and present fairly, in conformity with
- ----------
GAAP applied on a consistent basis throughout the periods involved (except as
may be noted therein), and in conformity with the SEC's Regulation S-X, the
consolidated financial position of the Company and its consolidated subsidiaries
as of its date and the consolidated results of operations and changes in
financial position for the period then ended.
(c) None of the Company or any of its Subsidiaries has incurred any
liability or obligation of any nature whatsoever (whether due or to become due,
accrued, fixed, contingent, liquidated, unliquidated or otherwise) that would be
required by GAAP to be accrued on, reflected on, or reserved against it, on a
consolidated balance sheet (the "Balance Sheet") (or in the applicable notes
-------------
thereto) of the Company or any of its Subsidiaries prepared in accordance with
GAAP consistently applied as of the date and for the period required.
4.18 Changes. Except as set forth on Schedule 4.18, since October 31,
------- -------------
1997, there has not been:
(a) any change, by itself or together with other changes, that has
affected adversely, or is likely to affect adversely, the assets, liabilities,
financial condition or operating results of the Company or any of its
Subsidiaries, except changes in the ordinary course of business;
(b) any material damage, destruction or loss, whether or not covered
by insurance;
(c) any waiver by the Company or any of its Subsidiaries of a valuable
right or of a debt owed to it outside of the ordinary course of business;
<PAGE>
(d) any satisfaction or discharge of any Lien or prepayment of any
obligation by the Company or any of its Subsidiaries, other than in the ordinary
course of business;
(e) any change or amendment to a contract or arrangement by which the
Company or any of its Subsidiaries or any of their respective assets or
properties is bound or subject;
(f) other than in the ordinary course of business, any material
increase in excess of $35,000 annually in any compensation arrangement or
agreement with any employee of the Company or any of its Subsidiaries receiving
compensation;
(g) any events or circumstances that otherwise could reasonably be
expected, individually or in the aggregate, to have a material adverse effect on
the Company and its Subsidiaries taken as a whole; and
(h) none of the Company or any of its Subsidiaries has (i) declared or
paid any dividends, or authorized or made any distribution upon or with respect
to any class or series of its capital stock or equity interests, (ii) incurred
any Indebtedness for money borrowed in excess of $15,000, excluding trade
payables incurred in the ordinary course of business, (iii) made any loans or
advances to any Person, other than ordinary advances for travel expenses not
exceeding $15,000, or (iv) sold, exchanged or otherwise disposed of any of its
assets or rights for consideration in excess of $15,000 in any one transaction
or series of related transactions other than in the ordinary course of business.
4.19 Employee Benefit Plans.
----------------------
(a) Schedule 4.19(a) contains a complete and accurate list of all
----------------
Company Plans and Company Benefit Arrangements. Schedule 4.19(a) specifically
----------------
identifies all Company Plans (if any) that are Qualified Plans.
(b) With respect, as applicable, to Employee Benefit Plans and Benefit
Arrangements:
(i) true, correct, and complete copies of all of the following
documents with respect to each Company Plan and Company Benefit
Arrangement, to the extent applicable, have been delivered to the
Purchasers: (A) all documents constituting the Company Plans and Company
Benefit Arrangements, including, but not limited to, trust agreements,
insurance policies, service agreements, and formal and informal amendments
thereto; (B) the most recent Forms 5500 or 5500 C/R and any financial
statements attached thereto for the prior three years; (C) the most recent
Internal Revenue Service (the "IRS") determination letter and the latest
---
IRS determination letter that covered the qualification of the entire
Company Plan (if different), and copies of the materials submitted by the
Company to obtain those letters; (D) the most recent summary plan
descriptions ; (E) the most recent written descriptions of all non-written
agreements
<PAGE>
relating to any such plan or arrangement (if such documents or writings
exist), (F) all reports submitted within the four years preceding the date
of this Agreement by third-party administrators, actuaries, investment
managers, consultants, or other independent contractors; (G) all notices
that were given to the Company within the three years preceding the date of
this Agreement by the IRS, Department of Labor, or any other governmental
agency or entity with respect to any plan or arrangement; and (H) employee
manuals or handbooks containing personnel or employee relations policies;
(ii) neither the Company nor any Subsidiary has ever maintained,
contributed to, or been obligated to contribute to any Qualified Plan.
(iii) the Company and the Subsidiaries have never sponsored or
maintained, had any obligation to sponsor or maintain, or had any liability
(whether actual or contingent, with respect to any of its assets or
otherwise) with respect to any Employee Benefit Plan subject to Section 302
of ERISA or Section 412 of the Code or Title IV of ERISA (including any
Multiemployer Plan);
(iv) each Company Plan and each Company Benefit Arrangement has
been operated in material compliance with its constituent documents and
with all applicable provisions of the Code, ERISA and other laws, including
federal and state securities laws;
(v) there are no pending claims or lawsuits by, against, or
relating to any Employee Benefit Plans or Benefit Arrangements that are
Company Plans or Company Benefit Arrangements that would, if successful,
result in material liability of the Company, and no claims or lawsuits have
been asserted, instituted or to the Company's Knowledge threatened by,
against, or relating to any Company Plan or Company Benefit Arrangement,
against the assets of any trust or other funding arrangement under any such
Company Plan, by or against the Company or the Subsidiaries with respect to
any Company Plan or Company Benefit Arrangement, or by or against the plan
administrator or any fiduciary of any Company Plan or Company Benefit
Arrangement, and the Company and the Subsidiaries do not have Knowledge
that could form the basis for any such claim or lawsuit. The Company Plans
and Company Benefit Arrangements are not presently under audit or
examination (nor has notice been received of a potential audit or
examination) by the IRS, Department of Labor, or any other governmental
agency or entity;
(vi) no Company Plan or Company Benefit Arrangement contains any
provision or is subject to any law that would prohibit the transactions
contemplated by this Agreement or that would give rise to any vesting of
benefits, severance, termination, or other payments or liabilities as a
result of the transactions contemplated by this Agreement;
(vii) with respect to each Company Plan, there has occurred no
non-exempt "prohibited transaction" (within the meaning of Section 4975 of
the Code) or transaction prohibited by Section 406 of ERISA or breach of
any fiduciary duty described in Section
<PAGE>
404 of ERISA that would, if successful, result in any liability for the
Company or any officer, director, or employee of the Company;
(viii) all reporting, disclosure, and notice requirements of
ERISA and the Code have been fully and completely satisfied with respect to
each Company Plan and each Company Benefit Arrangement;
(ix) all amendments and actions required to bring the Company
Benefit Plans into conformity with the applicable provisions of ERISA, the
Code, and other applicable laws have been made or taken except to the
extent such amendments or actions (A) are not required by law to be made or
taken until after the Closing Date and (B) are disclosed on Schedule
--------
4.19(b)(ix);
-----------
(x) payment has been made of all amounts that the Company and
each Subsidiary is required to pay as contributions to the Company Benefit
Plans as of the last day of the most recent fiscal year of each of the
plans ended before the date of this Agreement; all benefits accrued under
any unfunded Company Plan or Company Benefit Arrangement will have been
paid, accrued, or otherwise adequately reserved in accordance with GAAP as
of the Balance Sheet Date; and all monies withheld from employee paychecks
with respect to Company Plans have been transferred to the appropriate plan
within 30 days of such withholding;
(xi) except as disclosed on Schedule 4.19(b)(xi), the Company
--------------------
and the Subsidiaries have not prepaid or prefunded any Welfare Plan through
a trust, reserve, premium stabilization, or similar account, nor do they
provide benefits through a voluntary employee beneficiary association as
defined in Section 501(c)(9);
(xii) no statement, either written or oral, has been made by
the Company or any Subsidiaries to any Person with regard to any Company
Plan or Company Benefit Arrangement that was not in accordance with the
Company Plan or Company Benefit Arrangement and that would result in a
material adverse economic consequence to the Company or the Subsidiaries;
(xiii) the Company and the Subsidiaries have no liability
(whether actual, contingent, with respect to any of its assets or
otherwise) with respect to any Employee Benefit Plan or Benefit Arrangement
that is not a Company Benefit Arrangement or with respect to any Employee
Benefit Plan sponsored or maintained (or which has been or should have been
sponsored or maintained) by any ERISA Affiliate;
(xiv) all group health plans of the Company and its ERISA
Affiliates have been operated in material compliance with the requirements
of Sections 4980B (and its predecessor) and 5000 of the Code; and
(xv) no employee or former employee of the Company or
beneficiary of any such employee or former employee is, by reason of such
employee's or former employee's employment, entitled to receive any
benefits, including, without limitation,
<PAGE>
death or medical benefits (whether or not insured) beyond retirement or
other termination of employment as described in Statement of Financial
Accounting Standards No. 106, other than (i) death or retirement benefits
under a Qualified Plan, (ii) deferred compensation benefits accrued as
liabilities on the Closing Statement or (iii) continuation coverage
mandated under Section 4980B of the Code or other applicable law.
(c) Schedule 4.19(c) hereto sets forth an accurate list, as of the
----------------
date hereof, of all officers, directors, and key employees of the Company and
lists all employment agreements with such officers, directors, and key employees
and the rate of compensation (and the portions thereof attributable to salary,
bonus, and other compensation respectively) of each such Person as of (a)
October 31, 1997 and (b) the date hereof.
(d) Except as set forth in Schedule 4.19(d), the Company has not
----------------
declared or paid any bonus compensation in contemplation of the transactions
contemplated by this Agreement.
4.20 Taxes. All federal, state and local and foreign tax returns, reports
-----
and statements required to be filed by the Company and its Subsidiaries have
been filed or have been caused to be filed with the appropriate governmental
agencies in all jurisdictions in which such returns, reports and statements are
required to be filed and all such returns, reports and statements are true,
complete and correct in all respects. All taxes, charges and other impositions
due and payable by the Company and its Subsidiaries have been paid in full on a
timely basis except where contested in good faith and by appropriate proceedings
if adequate reserves therefor have been established on the books and records of
the Company or Subsidiary in accordance with GAAP. The provision for taxes of
each of the Company and its Subsidiaries is sufficient for all unpaid taxes,
charges and other impositions of any nature due or accrued as of the date
thereof, whether or not assessed or disputed. Proper and accurate amounts have
been withheld by the Company and its Subsidiaries from their respective
employees for all periods in full and complete compliance with the tax, social
security and unemployment withholding provisions of applicable federal, state,
local and foreign law and such withholdings have been timely paid to the
respective governmental agencies. Except as set forth on Schedule 4.20, the
-------------
Company has not received notice of any audit or of any proposed deficiencies
from any governmental authority, and no controversy with respect to taxes of any
type is pending or to its Knowledge threatened. Except for routine filing
extensions granted as a matter of right under applicable law, none of the
Company or any of its Subsidiaries has executed or filed with the IRS or any
other governmental authority any agreement or other document extending, or
having the effect of extending, the period of assessment or collection of any
taxes, charges or other impositions. None of the Company or any of its
Subsidiaries has agreed or is required to make any adjustment under Section
481(a) of the Code by reason of a change in accounting method or otherwise.
Further, none of the Company or any of its Subsidiaries has any obligation under
any tax-sharing agreement.
4.21 Labor and Employment Matters. With respect to employees of and
-----------------------------
service providers to the Company and the Subsidiaries: (a) the Company and the
Subsidiaries are
<PAGE>
and have been in compliance in all material respects with all applicable laws
respecting employment and employment practices, terms and conditions of
employment and wages and hours, including without limitation any such laws
respecting employment discrimination, workers' compensation, family and medical
leave, the Immigration Reform and Control Act, and occupational safety and
health requirements, and have not and are not engaged in any unfair labor
practice; (b) there is not now, nor within the past three years has there been,
any unfair labor practice complaint against the Company or any Subsidiary
pending or, to the Company's or any Subsidiary's Knowledge, threatened before
the National Labor Relations Board or any other comparable authority; (c) there
is not now, nor within the past three years has there been, any labor strike,
slowdown or stoppage actually pending or, to the Company's or any Subsidiary's
Knowledge, threatened against or directly affecting the Company or any
Subsidiary; (d) to the Company's or any Subsidiary's Knowledge, no labor
representation organization effort exists nor has there been any such activity
within the past three years; (e) no grievance or arbitration proceeding arising
out of or under collective bargaining agreements is pending and, to the
Company's or any Subsidiary's Knowledge, no claims therefor exist or have been
threatened; (f) the employees of the Company and the Subsidiaries are not and
have never been represented by any labor union, and no collective bargaining
agreement is binding and in force against the Company or any Subsidiary or
currently being negotiated by the Company or any Subsidiary; and (g) all Persons
classified by the Company or its Subsidiaries as independent contractors do
satisfy and have satisfied the requirements of law to be so classified, and the
Company and its Subsidiaries have fully and accurately reported their
compensation on IRS Forms 1099 when required to do so.
4.22 No Pending Transactions. Except for the transactions contemplated by
-----------------------
this Agreement, neither the Company nor any Subsidiary is a party to or bound by
or the subject of any agreement, undertaking, commitment or discussions or
negotiations with any Person that could result in (i) the sale, merger,
consolidation or recapitalization of the Company or any Subsidiary, (ii) the
sale of all or substantially all of the assets of the Company or any Subsidiary,
or (iii) a change of control of more than five percent of the outstanding
capital stock of the Company or any Subsidiary.
4.23 Disclosure. All written agreements, lists, schedules, instruments,
----------
exhibits, documents, certificates, reports, statements and other writings
furnished to the Purchasers pursuant hereto or in connection with this Agreement
or the transactions contemplated hereby, are and will be complete and accurate
in all material respects. No representation or warranty by the Company
contained in this Agreement, in the schedules attached hereto or in any
certificate furnished or to be furnished by the Company to the Purchasers in
connection herewith or pursuant hereto contains or will contain any untrue
statement or a material fact or omits or will omit to state any material fact
necessary in order to make any statement contained herein or therein not
misleading in any material respect. There is no fact known to the officers and
directors of the Company that has specific application to the Company (other
than general economic or industry conditions) and that materially adversely
affects or, as far as such officers and directors can reasonably foresee,
materially threatens, the assets, business, prospects, financial condition, or
results of
<PAGE>
operations of the Company that has not been set forth in this Agreement or any
schedule hereto.
4.24 Minute Books. The minute books of the Company and each of its
------------
Subsidiaries contain a complete summary of all material actions by their
respective directors and stockholders since the date of their respective
incorporation and reflect all transactions referred to in such minutes
accurately in all material respects.
4.25 Brokers' Fees. Except as set forth on Schedule 4.25, no broker,
------------- -------------
finder, investment banker or other Person is entitled to any brokerage fee,
finder's fee or other commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by the Company.
4.26 Not an Investment Company. The Company is not an Investment Company
-------------------------
within the meaning of the Investment Company Act of 1940, as amended.
4.27 Real Property Holding Company. The Company is not a United States
-----------------------------
Real Property Holding Corporation within the meaning of Section 897(c)(2) of the
Code.
4.28 Litigation. All pending claims, suits, or proceedings against the
----------
Company, its Subsidiaries, and its schools are set forth in Schedule 4.28. None
-------------
of the pending claims, suits, or proceedings listed in Schedule 4.28 will hinder
-------------
the consummation of this Agreement or related agreements, nor will any pending
claims, suits or proceedings adversely affect the operation or financial
condition of, or result in the payment of substantial damages by, the Company,
its Subsidiaries or any of the schools. The payment of any liabilities or
damages resulting from such claims, suits and proceedings will be covered by
adequate insurance proceeds. The Company, its Subsidiaries, and the schools
represent that each of the claims, suits, and proceedings or litigation
contained in Schedule 4.28 is without merit and agree to vigorously defend the
-------------
Company, the affected Subsidiary or the affected school in all matters
pertaining to such claims, suits or proceedings. Except as set forth in
Schedule 4.28, there are no other pending or threatened claims, suits or
- -------------
proceedings against the Company, its Subsidiaries or its schools. Moreover,
there is no investigation by any governmental agency pending or threatened
against the Company, its Subsidiaries, or its Schools which might result in any
such suit, action or other proceeding.
4.29 Indebtedness. The Company and its Subsidiaries have no Indebtedness
------------
of any type except as set forth on Schedule 4.29 and Indebtedness with the
-------------
Purchasers pursuant to this Agreement. Upon consummation of the transactions
hereunder, except as set forth on Schedule 4.29 and except as permitted pursuant
-------------
to Section 10.3, the Debentures will rank senior to, or pari passu with, all
other Indebtedness of the Company and its Subsidiaries.
1
<PAGE>
Representations and Warranties of the Purchasers
------------------------------------------------
Each of the Purchasers (severally and not jointly), hereby represents and
warrants to and agrees with the Company, as follows:
5.1 Accredited Investor; Experience; Risk.
-------------------------------------
(a) Such Purchaser is an "accredited investor" (as such term is
defined in Rule 501 promulgated under the Securities Act) and has been
advised and understands that the Debentures, Warrants, Common Stock and
Warrant Shares have not been registered under the Securities Act, on the
basis that no public offering of the Debentures, Warrants, Common Stock and
the Warrant Shares is to be effected, except in compliance with the
applicable securities laws and regulations or pursuant to an exemption
therefrom; provided, however, that nothing in this Section 5.1 shall limit
-------- -------
the Purchasers' right to convert the Warrants for Warrant Shares as set
forth in this Agreement or the Warrants.
(b) Such Purchaser is purchasing the Debentures, Warrants and
Warrant Shares for investment purposes, for its own account and not with a
view to, or for sale in violation of federal or state securities laws.
(c) Such Purchaser has such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and risks
of the purchase of the Debentures, Warrants, Common Stock and the Warrant
Shares pursuant to this Agreement.
(d) The certificates representing the Debentures, Warrants,
Warrant Shares and any Common Stock shall bear a legend evidencing such
restriction on transfer substantially in the following form:
"The securities represented by this certificate have been acquired for
investment and have not been registered under the Securities Act of 1933,
as amended (the "Act") or the securities laws of any state and may not be
---
sold or transferred except pursuant to registration under the Act or an
exemption therefrom."
(e) Each Purchaser has received information regarding the Company
and its Subsidiaries to enable it to make a meaningful investment decision
with respect to the purchase of the Debentures, Warrants, the Common Stock
and the Warrant Shares.
5.2 Authorization. Such Purchaser has all requisite power and authority
-------------
to execute and deliver this Agreement and each of the Transaction Documents
to which it is a party and to perform its obligations hereunder and
thereunder. The execution, delivery and performance of the Agreement and
the transactions contemplated hereby have been duly authorized by all
necessary, action on the part of such Purchaser. Each Transaction Document
to which such Purchaser is a party has been duly and validly executed and
<PAGE>
delivered by such Purchaser and constitutes the legal, valid and binding
obligation of such Purchaser, enforceable against it in accordance with its
terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally, and subject, as to enforceability, to general
principles of equity, including principles of commercial reasonableness,
good faith and fair dealing (regardless of whether enforcement is sought in
a proceeding at law or in equity).
5.3 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration
or filing with, any federal, state, or local governmental authority on the
part of such Purchaser is required in connection with the valid execution
and delivery by such Purchaser of the Transaction Documents to which it is
a party, or the consummation by such Purchaser of the transactions
contemplated by the Transaction Documents to which it is a party, except
for such filings as have been made prior to the Closing.
5.4 Organization, Good Standing and Qualification. Such Purchaser
----------------------------------------------
(i) is a limited partnership duly organized, validly existing and in good
standing under the laws of the State of Delaware, (ii) has all requisite
power and authority to carry on its business, (iii) is duly qualified to
transact business and is in good standing in all jurisdictions where its
ownership, lease or operation of property or the conduct of its business
requires such qualification, except where the failure to do so would not be
material to the Purchaser. Such Purchaser has the power and authority and
is in possession of all material franchises, grants, authorizations,
licenses, permits, easements, consents, certificates, approvals and orders
to (i) own, lease and operate its properties and to carry on its business
as now being conducted and (ii) execute and deliver this Agreement and the
documents and instruments contemplated hereby and to consummate the
transactions contemplated hereby. The principal place of business for such
Purchaser is in Baltimore, Maryland.
SECTION 6
Conditions to Closing of Purchasers
-----------------------------------
6.1 Debenture and Warrant Closing. Each Purchaser's obligation to
-----------------------------
purchase the Debentures and Warrants at the Closing is, at the option of such
Purchaser, subject to the fulfillment on or prior to the applicable Closing Date
of the following conditions:
(a) Representations and Warranties Correct. The representations
---------------------------------------
and warranties made by the Company in Section 4 hereof shall be true and
correct when made, and shall be true and correct on the Closing Date with
the same force and effect as if they had been made on and as of such date,
and any litigation disclosed pursuant to Section 4.7 shall have been
settled to the reasonable satisfaction of the Purchasers.
<PAGE>
(b) Covenants. All covenants, agreements and conditions contained in
---------
this Agreement to be performed by the Company on or prior to the Closing Date
shall have been performed or complied with in all respects.
(c) Opinion of Company's Counsel. The Purchasers shall have received
----------------------------
from Christy & Viener, counsel to the Company, an opinion addressed to the
Purchasers, dated the Closing Date, that is customary for a transaction of this
type.
(d) No Material Adverse Change. Since October 31, 1997, there shall
--------------------------
not have occurred any events or circumstances that has had, individually or in
the aggregate, a material adverse effect on the Company and its Subsidiaries
taken as a whole, except as otherwise disclosed on Schedule 4.18.
(e) Series A Preferred Stock Redemption Notice. The Company shall
------------------------------------------
mail all required notices of redemption to the holders of Series A Preferred
Stock pursuant to the Series A Certificate of Designation, setting the
redemption date no later than the 31st day after the Closing Date.
(f) State Securities Laws. All registrations, qualifications and
---------------------
Permits required under applicable state securities laws, if any, shall have been
obtained for the lawful execution, delivery and performance of this Agreement
(other than those required to be obtained after the closing of the acquisition
of the Mildred Elley Business School).
(g) Issuance of Debentures and Warrants. The Company shall have: (i)
-----------------------------------
issued the Debentures and Warrants at the Closing pursuant to this Agreement,
and shall have delivered to each Purchaser instruments representing such
Purchaser's Debenture and Warrants; and (ii) upon exercise of the Company Put
Option in Section 9, issued the shares of Common Stock and delivered to each
Purchaser a stock certificate representing such Purchasers shares of Common
Stock.
(h) Officer's Certificate. Each of the Purchasers shall have received
---------------------
a certificate of the President or a Vice President of the Company to the effect
set forth in Sections 6.1(a), 6.1(b), 6.1(d) and 6.1(f).
(i) Due Diligence. Purchasers shall have completed their due
-------------
diligence review of the Company and Mildred Elley Business School (including
without limitation the audited financial data of Mildred Elley Business School
for fiscal year 1997) and determined in Purchasers' sole discretion to proceed
with the Closing hereunder.
(j) Registration Rights Agreement. The Company and any other parties
-----------------------------
thereto shall have executed and delivered the Registration Rights Agreement in
the form of Exhibit B hereto to Purchasers.
---------
(k) Corporate Documents. The Company shall have delivered or caused
-------------------
to be delivered to each Purchaser:
<PAGE>
(i) a certificate of the Secretary of State of the Company's
state of incorporation dated not earlier than the tenth (10th) day preceding the
Closing Date, to the effect that the Company is a corporation validly existing
and in good standing under the laws of such state as of such date;
(ii) a certificate of the Secretary of State of each state where
the Company is required to qualify to do business dated not earlier than the
tenth (10th) day preceding the Closing Date, to the effect that the Company is a
corporation duly licensed or qualified to do business in such state and is in
good standing as a foreign corporation under the laws of such state as of such
date; and
(iii) certificates of the Secretary or Assistant Secretary, or
such other authorized officer, of the Company including (A) copies of the
certificate of incorporation, bylaws and other governing documents of the
Company as then in effect or a certification that there has been no change in
such instruments since the last such certification delivered to the Purchasers
pursuant to this Agreement, (B) duly enacted resolutions of the Company's board
of directors in form and substance satisfactory to the Purchasers approving the
Transaction Documents and authorizing officers of the Company to execute and
deliver instruments required to be delivered hereunder as a condition precedent
to the Closing, and (C) specimen signatures of the officers of the Company
authorized to sign such instruments to the extent such specimen signatures have
not previously been delivered to the Purchasers.
(l) Consent and Waiver Letter from Beck. The Purchasers shall have
-----------------------------------
received a validly executed consent and waiver letter from Michael D. Beck
("Beck") stating that the transactions contemplated in the Transaction Documents
----
shall not constitute a "change of control" of Beck Evaluation & Testing
Associates, Inc. ("BETA") or otherwise trigger Beck's rights to repurchase BETA.
----
(m) Consent and Waiver Letters from Employees. The Purchasers shall
-----------------------------------------
have received a validly executed consent and waiver letter from each of the
Company's employees who has entered into an employment agreement with the
Company stating that the transactions contemplated in the Transaction Documents
shall not constitute a "change of control" of the Company.
(n) Appointment of Directors. David Warnock and an individual
------------------------
designated by the Purchasers shall each have been duly appointed and elected as
a member of the Company's Board of Directors; provided, however, that the
-------- -------
failure of the Purchasers to designate another individual shall not constitute a
failure of this condition precedent.
(o) No Event of Default. No Event of Default shall have occurred or
-------------------
then exist.
(p) Investor Rights Agreement. The Company and the other parties
-------------------------
thereto shall have executed and delivered the Investor Rights Agreement in the
form of Exhibit C hereto to Purchasers.
---------
<PAGE>
6.2 Company Put Option Closing. Each Purchaser's obligation to
--------------------------
purchase the Common Stock pursuant to Section 9 at a subsequent closing, is, at
the option of such Purchaser, subject to the fulfillment on or prior to the
applicable closing of the sale of the Option Shares (the "Option Closing Date")
-------------------
of the following conditions:
(a) Representations and Warranties Correct. The representations and
--------------------------------------
warranties made by the Company in Section 4 hereof shall be true and correct
when made, and shall be true and correct on the Option Closing Date with the
same force and effect as if they had been made on and as of such date (except to
the extent of developments in the Company's business which have occurred in the
ordinary course of business and except that in Sections 4.17 and 4.18, the
reference date shall be "October 31, 1998" instead of "October 31, 1997"), and
any litigation disclosed pursuant to Section 4.7 shall have been settled to the
satisfaction of the Purchasers.
(b) Covenants. All covenants, agreements and conditions contained in
---------
this Agreement to be performed by the Company on or prior to the Option Closing
Date shall have been performed or complied with in all respects.
(c) Opinion of Company's Counsel. The Purchasers shall have received
----------------------------
from Christy & Viener, counsel to the Company, an opinion addressed to the
Purchasers, dated the Option Closing Date, that is customary for a transaction
of this type.
(d) No Material Adverse Change. Since October 31, 1998, there shall
--------------------------
not have occurred any events or circumstances that has had, individually or in
the aggregate, a material adverse effect on the Company and its Subsidiaries
taken as a whole, except as otherwise disclosed on Schedule 4.18.
(e) State Securities Laws. All registrations, qualifications and
---------------------
Permits required under applicable state securities laws, if any, shall have been
obtained for the lawful execution, delivery and performance of this Agreement.
(f) Issuance of Common Stock. The Company shall have issued the
------------------------
shares of Common Stock and delivered to each Purchaser a stock certificate
representing such Purchasers shares of Common Stock.
(g) Officer's Certificate. Each of the Purchasers shall have received
---------------------
a certificate of the President or a Vice President of the Company to the effect
set forth in Sections 6.2(a), 6.2(b), 6.2(d) and 6.2(f).
(h) Corporate Documents. The Company shall have delivered or caused
-------------------
to be delivered to each Purchaser:
(i) a certificate of the Secretary of State of the Company's
state of incorporation dated not earlier than the tenth (10th) day
preceding the Option Closing Date, to the effect that the Company is a
corporation validly existing and in good standing under the laws of such
state as of such date;
<PAGE>
(ii) a certificate of the Secretary of State of each state where
the Company is required to qualify to do business dated not earlier than
the tenth (10th) day preceding the Option Closing Date, to the effect that
the Company is a corporation duly licensed or qualified to do business in
such state and is in good standing as a foreign corporation under the laws
of such state as of such date; and
(iii) certificates of the Secretary or Assistant Secretary, or
such other authorized officer, of the Company including (A) copies of the
certificate of incorporation, bylaws and other governing documents of the
Company as then in effect or a certification that there has been no change
in such instruments since the last such certification delivered to the
Purchasers pursuant to this Agreement, (B) duly enacted resolutions of the
Company's board of directors in form and substance satisfactory to the
Purchasers approving the Transaction Documents and authorizing officers of
the Company to execute and deliver instruments required to be delivered
hereunder as a condition precedent to the Closing, and (C) specimen
signatures of the officers of the Company authorized to sign such
instruments to the extent such specimen signatures have not previously been
delivered to the Purchasers.
(j) No Event of Default. No Event of Default shall have occurred or
-------------------
then exist.
SECTION 7
Conditions to Closing of the Company
------------------------------------
The Company's obligation to issue and sell the Debentures and Warrants at the
Closing, and the shares of Common Stock pursuant to Section 9, is, at the option
of the Company, subject to the fulfillment of the following conditions prior to
the applicable Closing Date:
7.1 Representations. The representations and warranties made by the
---------------
Purchasers in Section 5 hereof shall be true and correct when made, and shall be
true and correct on the Closing Date with the same force and effect as if they
had been made on and as of such date.
7.2 Purchase Price. The Purchasers shall have tendered the
--------------
purchase price for the Debentures and Warrants of Four Million Dollars
($4,000,000), and pursuant to Section 9, upon exercise of the Company Put
Option for the Common Stock, shall have tendered the purchase price of Two
Million Dollars ($2,000,000).
7.3 Certificate. The Company shall have received a certificate
-----------
from the Purchasers to the effect set forth in Section 7.1.
7.4 State Securities Laws. All registrations, qualifications
---------------------
and Permits required under applicable state securities laws, if any, shall
have been obtained for the lawful execution, delivery and performance of
this Agreement.
<PAGE>
SECTION 8
Covenants of the Company
------------------------
8.1 Regulatory Matters. Each of the Company and Purchasers will (i) make
------------------
on a prompt and timely basis all governmental or regulatory notifications,
filings or submissions, as necessary for the consummation of the transactions
contemplated hereby, including any filings required pursuant to the Hart-Scott-
Rodino Antitrust Act, if required, (ii) use all reasonable efforts to cooperate
with the other and its representatives in (A) determining which notifications,
filings and submissions are required to be made prior to the Closing Date with,
and which consents, approvals, permits or authorizations are required to be
obtained prior to the Closing Date from, any governmental authority in
connection with the execution, delivery and performance of this Agreement and
the transactions contemplated hereby, and (B) timely making of all such
notifications, filings or submissions and timely seeking all such consents,
approvals, permits or authorizations, and (iii) use all reasonable efforts to
take, or cause to be taken, all other action and do, or cause to be done, all
other reasonable things necessary or appropriate to consummate the transactions
contemplated by this Agreement. The Purchasers shall have no obligation to
expend any funds in connection with the action to be taken by the Company
pursuant to this section.
8.2 Accreditation and Certification in Future Acquisitions. The
------------------------------------------------------
Company shall include in all material respects (and except as otherwise
approved by Purchasers) the representations and warranties set forth in
Exhibit F in all acquisition documents of educational entities, including,
but not limited to, the acquisition of Mildred Elley Business School, and
shall use its best efforts to make Purchasers a third-party beneficiary of
each such agreement with respect to these representations and warranties.
8.3 Replacement of Debenture or Warrant. Upon receipt of evidence
-----------------------------------
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Debenture or Warrant and, in the case of any such loss,
theft or destruction, upon delivery of an indemnity bond or other agreement
or security reasonably satisfactory in form and amount to the Company, or,
in the case of any such mutilation, upon surrender and cancellation of such
Debenture or Warrant, the Company will issue a new Debenture or Warrant, of
like tenor and amount, in lieu of such lost, stolen, destroyed or mutilated
Debenture or Warrant; provided, however, if any Debenture or Warrant held
-------- -------
by the Purchaser, its affiliate, or the registered holder is lost, stolen
or destroyed, the affidavit of such principal or general partner or any
principal or corporate officer of such holder setting forth the
circumstances with respect to such loss, theft or destruction, together
with an agreement to indemnify the Company with respect thereto shall be
accepted as satisfactory evidence thereof, and no indemnity bond or other
security shall be required as a condition to the execution and delivery by
the Company of a new Debenture or Warrant in replacement of such lost,
stolen or destroyed Debenture or Warrant.
8.4 Registration, etc. The Company shall maintain at its principal
------------------
office a register with respect to the Debentures and Warrants and shall
record therein the name(s) and address(es) of the respective registered
holder(s) thereof, to which notices are to be sent
<PAGE>
and the address(es) to which payments (in the case of the Debentures) are to be
made as designated by the registered holder if other than the address of such
holder, and the particulars of all permitted transfers, exchanges and
replacements of the Debentures and Warrants. Provided that such transfer is
permitted herein, the Company shall record on such register any and all
transfers of the Debentures and Warrants by or for the registered holder or such
holder's executors or administrators or their duly appointed attorney, in form
reasonably satisfactory to the Company, in order to maintain an accurate record
of the holder(s) thereof. Each Debenture and Warrant issued hereunder, whether
originally or upon transfer, exchange or replacement, shall be registered on the
date of execution thereof by the Company. The registered holder of Debentures
and Warrants issued hereunder shall be that individual, corporation,
partnership, joint venture, trust or unincorporated organization or other entity
(a "Person") in whose name the Debentures and Warrants has been so registered by
------
the Company. A registered holder shall be deemed the owner of a Debenture or
Warrant for all purposes of this Agreement and, subject to the provisions
hereof, shall be entitled to all of the benefits thereof and rights thereunder
free from all equities or rights of set off or counterclaim between the Company
and the transferor of such registered holder or any previous registered holder
of such Debenture or Warrant.
8.5 Notice to Purchasers Upon an Event of Default. Upon the occurrence or
---------------------------------------------
existence of an Event of Default (including without limitation an event of
default with respect to any other Indebtedness) and prior to the expiration of
any applicable cure period, the Company shall provide prompt notice of such
Event of Default to the Purchaser pursuant to Section 11.2 hereof.
8.6 Proceeds from Qualified Public Offering. The Company will apply, at
---------------------------------------
the request of the Purchaser, the proceeds of a Qualified Public Offering to
prepay the unpaid principal amount and outstanding interest on the Debentures.
"Qualified Public Offering" means a registered underwritten public offering
-------------------------
pursuant to an effective registration statement under the Securities Act
covering the offer and sale of Common Stock to the public for the account of the
Company in which net proceeds to the Company of the public offering equals or
exceeds $25 million and the offering price per share is at least $5.00.
8.7 Issuance of Warrant Shares. The Company shall issue Warrant Shares to
--------------------------
the Purchaser immediately upon payment by the Purchaser for such Warrant Shares.
The Warrant Shares shall be duly authorized, validly issued, fully paid and non-
assessable; will be free and clear of all Liens; and assuming that the
representations of the Purchasers in Section 5 hereof are true and correct, will
be issued in compliance with all applicable federal and state securities laws.
8.8 Use of Proceeds. The Company shall apply the proceeds received as a
---------------
result of the transactions contemplated hereunder as set forth in Section 2.6.
8.9 Restrictive Covenants. From the date hereof through the Closing Date
---------------------
(except for the Warrant Share adjustment in clause (a) below which shall survive
the Closing),
<PAGE>
without the prior written consent of the Purchasers, the Company and its
Subsidiaries shall not:
(a) issue any equity securities of the Company (other than
securities issued pursuant to outstanding options) or any Subsidiary or any
securities convertible into equity securities of the Company (other than
the Warrants), or any Subsidiary; provided, however, that the Company may
-------- -------
issue employee stock options pursuant to the Company's acquisitions of the
Mildred Elley Business School so long as the Company sdjusts the number of
Warrants Shares so that the aggregate number of Warrant Shares held by the
Purchasers shall constitute twenty percent (20%) of the Company's issued
and outstanding capital stock on a fully diluted basis after giving effect
to all such employee stock options;
(b) operate the business of the Company and each Subsidiary
in any manner not in the ordinary course of business; or
(c) take any of the actions set forth in Section 5.6 of the
Investor Rights Agreement attached hereto as Exhibit C, which Section is
---------
expressly incorporated herein by reference.
SECTION 9
Company Put Option
------------------
9.1 Company Put Option. Subject to the terms and conditions hereunder, in
------------------
the event that the Company has achieved the projections set forth in the
operating budget as delivered to the Purchasers no later than thirty (30) days
following the closing of the Mildred Elley Business School acquisition and
agreed to by the Purchasers for its acquisitions and base business for the
Company's fiscal year 1999, the Company shall have the right to sell (the
"Company Put Option") to the Purchasers, and the Purchasers agree to purchase,
------------------
severally and not jointly, the number of shares of Common Stock equal to the
aggregate purchase price of TWO MILLION DOLLARS ($2,000,000) (the "Option
------
Purchase Price") divided by the Option Share Price (the "Option Shares")
- -------------- -------------
multiplied by the applicable Company Put Option Percentage for such Purchaser
set forth on Exhibit A. The "Option Share Price" shall be the greater of (i) $1
--------- ------------------
per share or (ii) an amount equal to the average closing price as reported on
Nasdaq per share for the preceding thirty days discounted by twenty percent
(20%).
9.2 Exercise of Company Put Option.
------------------------------
(a) The Company Put Option may be exercised by the Company by
delivering a written notice ("Option Notice") to each of the Purchasers at
-------------
its address set forth in Section 11.2. Such notice must be signed by the
Company and shall constitute an irrevocable obligation on the part of the
Company to sell the Option Shares against payment therefor. The Option
Notice shall set forth the date of the sale, which date shall be (i) no
more than sixty (60) days after the date of the Option Notice and (ii) no
less than forty-five (45) days after the date of the Option Notice. The
Company Put
<PAGE>
Option Notice shall also set forth the Option Share Price, number of Option
Shares to be sold and data supporting such calculations.
(b) At the closing of the sale of the Option Shares, the Company shall
deliver to each Purchaser a stock certificate or certificates representing
the number of Option Shares purchased by each Purchaser determined by
multiplying the total number of Option Shares by such Purchaser's Company
Put Option Percentage as set forth on Exhibit A free and clear of any
---------
Liens, and any other documents, instruments, or certificates (including
without limitation a bring-down certificate with respect to the
representations, warranties and covenants hereunder) requested by the
Purchasers in order to satisfy the conditions set forth in Section 6.
(c) At the closing of the sale of the Option Shares, each Purchaser
shall pay to the Company the purchase price for such Option Shares as set
forth on Exhibit A hereto.
---------
(d) The Company shall be responsible for the payment of all expenses
incurred by the Purchasers with respect to the sale of the Option Shares,
including without limitation any reasonable attorneys' fees, transfer
taxes, notarial fees or other similar costs and expenses.
(e) Unless otherwise agreed to in writing by the Purchasers, the
Company may exercise the Company Put Option on only one occasion and the
Company Put Option must be exercised in its full amount. If the Company Put
Option has not been exercised by the Company within one hundred thirty-five
(135) days after the first anniversary date of the Closing Date, the
Company Put Option shall immediately expire in its entirety without any
further action by the parties.
SECTION 10
Events of Default; Subordination
--------------------------------
10.1 Events of Default. For so long as any indebtedness under the
-----------------
Debentures shall be outstanding, each of the following events shall constitute
an event of default hereunder (each an "Event of Default"):
(a) The Company shall fail to pay any installment of principal of
or interest on the Debentures when due and any such failure shall not be
cured by full performance thereof within five (5) days after written notice
thereof shall have been given to the Company by a Purchaser; or
(b) The Company shall default in the performance of any covenant
contained in Section 8 of this Agreement (including without limitation
Section 8.8 regarding application of the use of proceeds) any covenant in
any other loan agreement or any covenant in the Registration Rights
Agreement, and any such failure
<PAGE>
shall not be cured by full performance thereof within ten (10) days after
written notice thereof shall have been given to the Company by either Purchaser;
or
(c) Any representation or warranty made by the Company or any
Subsidiary in this Agreement or by the Company or any Subsidiary (or any
officers of the Company or any Subsidiary) in any certificate, instrument or
written statement contemplated by or made or delivered pursuant to or in
connection with this Agreement, or the Registration Rights Agreement, shall
prove to have been incorrect when made in any material respect; or
(d) The Company or any Subsidiary shall fail to perform or observe any
other term, covenant or agreement contained in the Investor Rights Agreement,
the Registration Rights Agreement, the Debentures, or the Warrants on its part
to be performed or observed and any such failure shall not be cured or by full
performance thereof within ten (10) days after written notice thereof shall have
been given to the Company by a Purchaser; or
(e) The Company or any Subsidiary shall (i) admit in writing its
inability to pay its debts generally as they become due; (ii) commence a
voluntary case under Title 11 of the United States Code as from time to time in
effect ("Title 11"), or authorize, by appropriate proceedings of its Board of
--------
Directors or other governing body, the commencement of such a voluntary case;
(iii) file an answer or other pleading omitting or failing to deny the material
allegations of a petition filed against it commencing an involuntary case under
such Title 11, or seek, consent to or acquiesce in the relief therein provided,
or fail to controvert timely the material allegations of any such petition; (iv)
suffer the entry of an order for relief in any involuntary case commenced under
said Title 11; (v) seek relief as a debtor under any applicable law, other than
said Title 11, of any jurisdiction relating to the liquidation or reorganization
of debtors or to the modification or alteration of the rights of creditors, or
consent to or acquiesce in such relief; (vi) suffer the entry of an order by a
court of competent jurisdiction (A) finding it to be bankrupt or insolvent, (B)
ordering or approving its liquidation, reorganization or any modification or
alteration of the rights of its creditors, or (C) assuming custody of, or
appointing a receiver or other custodian for, all or a substantial part of its
property (not otherwise covered by subsection (g) below); or (vii) make an
assignment for the benefit of, or enter into a composition with, its creditors,
or appoint or consent to the appointment of a receiver or other custodian for
all or a substantial part of its property; or
(f) Any judgment, writ, warrant of attachment or execution or similar
process shall be issued or levied against the property of the Company or any
Subsidiary in an aggregate amount which exceeds $250,000 and such judgment,
writ, or similar process shall not be released, vacated or fully bonded or
stayed pending appeal within sixty (60) days after its issue or levy; or
(g) Upon a Change of Control (as defined below) of the Company not
involving the Purchaser and/or an Affiliate of the Purchaser. "Change of
---------
Control" means any event or series of events by which (A) any Person or group
- -------
obtains a majority
<PAGE>
(by voting or otherwise) of the securities of the Company ordinarily having the
right to vote in the election of directors; (B) during any two year period,
individuals who at the beginning of any such two year period constituted the
Board of Directors of the Company (together with any new directors whose
election by such Board of Directors or whose nomination for election by the
stockholders of the Company was approved by a vote of the majority of the
directors then still in office who were either directors at the beginning of
such period or whose election, recommendation, or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company then in office; (C) the merger, consolidation,
reorganization, recapitalization, dissolution or liquidation of the Company if,
as a result, the current stockholders no longer own more than 50% of the voting
securities of the Company; (D) any sale, lease, exchange or other transfer of
all, or substantially all, of the assets of the Company; or (E) the adoption of
a plan leading to the liquidation or dissolution of the Company; or
(h) Upon the existence or occurrence of an event of default, which is
not cured or waived, with respect to any Indebtedness (other than the
Debentures) of the Company or any Subsidiary, which event of default has
resulted in the acceleration of such other Indebtedness; or
(i) If the Company and/or any of its Subsidiaries, without the prior
consent of the Purchasers, incur, issue, guarantee or assume any Indebtedness
(excluding (x) the $4 million of Debentures acquired hereunder, (y) trade
---------
payables incurred in the ordinary course of business, and (z) up to $1 million
of assumed liability pursuant to the acquisition of the Mildred Elley Business
School) in an aggregate amount in excess of $1,000,000 (the "One Million Dollar
------------------
Debt Basket"); provided, however, that any Indebtedness ranking senior to or
- ----------- -------- -------
pari passu with the Debentures incurred pursuant to the acquisition of the
Mildred Elley Business School shall be included in the calculation of the One
Million Dollar Debt Basket; and provided further that any Indebtedness up to $1
-------- -------
million ranking junior to the Debentures incurred pursuant to the acquisition of
the Mildred Elley Business School shall not be included in the calculation of
the One Million Dollar Debt Basket; or
(j) Upon the removal of David Warnock or the other member of the Board
of Directors who was designated by the Purchasers, or any replacement designated
by the Purchasers, from the Company's Board of Directors, except as contemplated
by the Transaction Documents.
Upon the occurrence or existence of any Event of Default, and in any such event,
the Purchaser or any other holder of at least 25% of the outstanding principal
amount of all Debentures may, by notice to the Company, declare the entire
unpaid principal amount of such Debenture, all interest accrued and unpaid
thereon and all other amounts payable to such holder under such Debenture or
this Agreement to be forthwith due and payable, whereupon such Debenture, all
such accrued interest and all such amounts shall become and be forthwith due and
payable (unless there shall have occurred an Event of Default under Section
10.1(e) in which case all such accounts shall automatically become due and
<PAGE>
payable without such declaration), without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived by the
Company with respect to itself and its Subsidiaries. Upon the occurrence or
existence of any Event of Default, the Warrants shall all immediately become
exercisable, in whole or in part, at the option of the Holder, for that number
of shares of Common Stock issuable upon exercise of the Warrants.
10.2 Annulment of Defaults. Section 10.1 is subject to the condition that,
---------------------
if at any time after the principal of the Debentures shall have become due and
payable, and before any judgment or decree for the payment of the moneys so due
shall have been entered, all arrears of interest upon such Debentures and all
other sums payable to the holder of the Debentures under or the Debentures and
under this Agreement (except the principal amount which by such declaration
shall have become payable) shall have been duly paid, and every other default
and Event of Default shall have been made good or cured, then and in every such
case the holder of the Debentures, by written instrument delivered to the
Company, may rescind and annul such declaration and its consequences; provided,
--------
however, that no such rescission or annulment shall extend to or affect any
- -------
other or subsequent default or Event of Default or impair any right of the
holders of any other Debentures consequent thereon; and provided further that
-------- -------
once an Event of Default occurs or exists, all of the Warrants shall become
immediately exercisable in whole or in part and the Warrants shall remain in
full force and effect until the end of the respective Exercise Period regardless
of whether the Event of Default is cured or waived.
10.3 Subordinate to Senior Indebtedness.
----------------------------------
(a) The Company agrees, and each Purchaser by its acceptance hereof
likewise agrees, that the payment of the principal of and interest on the
Debentures is hereby expressly made subordinate and junior in right of payment
to the prior payment in full of all principal of and interest on all Senior
Indebtedness (as defined below) whether now outstanding or hereafter incurred,
created or assumed.
(b) The term "Senior Indebtedness," as used in this Agreement, shall
-------------------
mean: (i) the principal, interest and other amounts outstanding at the date of
execution of this Agreement as set forth and identified as "Senior Debt" on
Schedule 4.29 (the "Existing Indebtedness") or (ii) the principal, interest and
- ------------- ---------------------
other amounts incurred, created, assumed, modified, renewed or extended after
the Closing Date on the following: (w) secured indebtedness of the Company for
money borrowed (including any bank loan or credit facility) approved by the
Board of Directors; (x) obligations of the Company as lessee under any lease of
property which is reflected on the Company's balance sheet as a capitalized
lease in accordance with GAAP; (y) guarantees by the Company of indebtedness
for money borrowed by a Subsidiary or of any obligations of a Subsidiary under
any lease of property which is reflected on the Subsidiary's balance sheet as a
capitalized lease in accordance with GAAP; and (z) unsecured indebtedness of the
Company approved by the Company's Board of Directors and which is issued
following the Purchasers' execution of a subordination agreement on terms and
conditions acceptable to the Purchasers.
<PAGE>
(c) Notwithstanding the foregoing provisions, the total
aggregate amount of Senior Indebtedness shall not, at any time, without the
written consent of the Purchasers, exceed the sum of the Existing
Indebtedness plus $1,000,000 (the "One Million Dollar Senior Debt Basket");
-------------------------------------
provided, however, that any Indebtedness ranking senior to the Debentures
-------- -------
issued, incurred or guaranteed by the Company or any Subsidiary pursuant to
the acquisition of the Mildred Elley Business School shall be included in
the calculation of the One Million Dollar Senior Debt Basket and shall also
be included in the calculation of the One Million Dollar Debt Basket.
Failure to comply with this Section 10.3 shall constitute an Event of
Default.
SECTION 11
Miscellaneous
-------------
11.1 Amendment; Waiver. Neither this Agreement nor any provision hereof
-----------------
may be amended, modified, supplemented or waived, except by a written instrument
executed by (i) the Company and (ii) the Purchasers;
11.2 Notices. Any notices or other communications required or
-------
permitted hereunder shall be sufficiently given if in writing and delivered
in Person, transmitted by facsimile transmission (fax) or sent by
registered or certified mail (return receipt requested) or recognized
overnight delivery service, postage pre-paid, addressed as follows, or to
such other address as such party may notify to the other parties in
writing:
(a) if to the Company:
Touchstone Applied Science Associates, Inc.
P.O. Box 382
4 Hardscrabble Heights
Brewster, New York 10509
Attn: Andrew L. Simon
Telephone No.: 914-277-8100
Facsimile No.: 914-277-3548
with a copy to:
Christy & Viener
620 Fifth Avenue
New York, New York 10020
Attn: Steven R. Berger, Esq.
Telephone No.: 212-632-5500
Facsimile No.: 212-632-5555
(b) if to the Purchasers:
<PAGE>
c/o Cahill, Warnock & Company, L.L.C.
One South Street, Suite 2150
Baltimore, MD 21202
Attn: David L. Warnock
Telephone No.: 410-895-3800
Facsimile No.: 410-895-3805
with a copy to:
Wilmer, Cutler & Pickering
100 Light Street
Baltimore, MD 21202
Attn: George P. Stamas, Esq.
Telephone No.: 410-986-2800
Facsimile No.: 410-986-2828
A notice or communication will be effective (i) if delivered in Person or by
overnight courier, on the business day it is delivered, (ii) if transmitted by
telecopier, on the business day of actual confirmed receipt by the addressee
thereof, and (iii) if sent by registered or certified mail, three (3) business
days after dispatch.
11.3 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 will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
11.4 Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors and permitted assigns of the parties hereto. The Company shall not
have the right to assign its rights or delegate its obligations under this
Agreement without the prior written consent of the Purchasers. Each Purchaser
may assign its rights only to one or more of its Affiliates; provided, however,
-------- -------
that this Agreement, the Debentures, and the Warrants and all rights hereunder
and thereunder shall be freely assignable (subject to applicable state and
federal securities laws) to any Person by the Purchaser upon the occurrence of
an Event of Default without the consent of the Company. The parties hereto
agree that the Warrants are attached to the Debentures and may not be assigned
separately from the Debentures.
11.5 Survival of Representations, Warranties and Covenants. All
-----------------------------------------------------
representations and warranties made in, pursuant to or in connection with this
Agreement shall survive the execution and delivery of this Agreement, any
investigation at any time made by or on behalf of any Purchaser, and the sale
and purchase of the Debentures, Warrants and any Common Stock, and payment
therefor for a period of two (2) years; provided, however, that the
-------- -------
representations and warranties made in Sections 4.16 (Environmental),
<PAGE>
4.19 (Benefits) and 4.20 (Taxes) shall survive the applicable statutory period
of limitations with respect to any liabilities covered thereby. Unless otherwise
provided in this Agreement, the covenants and agreements set forth in Sections
8, 9 and 10 shall survive and remain in force so long as any Debenture or
Warrant remains issued and outstanding.
11.6 Entire Agreement. This Agreement and the other documents delivered
----------------
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subject matter hereof and thereof and
supersede and cancel all prior representations, alleged warranties, statements,
negotiations, undertakings, letters, acceptances, understandings, contracts and
communications, whether verbal or written, among the parties hereto and thereto
or their respective agents with respect to or in connection with the subject
matter hereof.
11.7 Choice of Law. This Agreement shall be governed by, and construed
-------------
in accordance with, the laws of the State of New York, without regard to
principles of conflict of laws.
11.8 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties hereto in separate counterparts, with the
same effect as if all parties had signed the same document. All such
counterparts shall be deemed an original, shall be construed together and shall
constitute one and the same instrument.
11.9 Costs and Expenses. Promptly after the Closing, the Company shall
------------------
pay the reasonable fees and disbursements incurred by the Purchasers (including
without limitation reasonable attorneys' and consultants' fees) in connection
with the due diligence review and Closing under this Agreement and the
transactions contemplated hereby (including without limitation the due diligence
review and attorneys' fees incurred in preparation for the transactions in
connection with the Drake Business School as previously contemplated); provided,
--------
however, that the parties shall bear their own costs and expenses if the Closing
- -------
hereunder fails to take place.
11.10 No Third-Party Beneficiaries. Nothing in this Agreement will confer
----------------------------
any third party beneficiary or other rights upon any Person (specifically
including any employees of the Company and its Subsidiaries) or entity that is
not a party to this Agreement.
11.11 Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless the Purchasers
and their Affiliates, and their respective partners, co-investors, officers,
directors, employees, agents, consultants, attorneys and advisers (each, an
"Indemnified Party"), from and against any and all actual losses, claims,
- ------------------
damages, liabilities, costs and expenses (including, without limitation,
environmental liabilities, costs and expenses and all reasonable fees, expenses
and disbursements of counsel), joint or several (hereinafter collectively
referred to as a "Loss"), which may be incurred by or asserted or awarded
----
against any Indemnified Party in connection with or in any manner arising out of
or
<PAGE>
relating to any investigation, litigation or proceeding or the preparation of
any defense with respect thereto, arising out of or in connection with or
relating to this Agreement, the other Transaction Documents or the transactions
contemplated hereby or thereby or any use made or proposal to be made with the
proceeds of the Purchasers' purchase of the Debentures, Warrants, Common Stock
and Warrant Shares pursuant to this Agreement, whether or not such
investigation, litigation or proceeding is brought by the Company, any of its
Subsidiaries, shareholders or creditors, whether or not any of the transactions
contemplated by this Agreement or the other Transaction Documents are
consummated, except to the extent such Loss is found in a final judgment by a
court of competent jurisdiction to have resulted from such Indemnified Party's
gross negligence or willful misconduct.
(b) An Indemnified Party shall give written notice to the Company of
any claim with respect to which it seeks indemnification within ten (10) days
after the discovery by such parties of any matters giving arise to a claim for
indemnification pursuant to Section 11.11(a); provided that the failure of any
--------
Indemnified Party to give notice as provided herein shall not relieve the
Company of its obligations under this Section 11.11, except to the extent that
the Company is actually prejudiced by such failure to give notice. In case any
such action or claim is brought against any Indemnified Party, the Company shall
be entitled to participate in and, unless in the reasonable good faith judgment
of the Indemnified Party a conflict of interest between such Indemnified Party
and the Company may exist in respect of such action or claim, to assume the
defense thereof, with counsel satisfactory to the Indemnified Party and after
notice from the Company to the Indemnified Party of its election so to assume
the defense thereof, the Company 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. In any event, unless and until the Company elects in writing to
assume and does so assume the defense of any such action or claim the
Indemnified Party's costs and expenses arising out of the defense, settlement or
compromise of any such action or claim shall be Losses subject to
indemnification hereunder. If the Company elects to defend any such action or
claim, then the Indemnified Party shall be entitled to participate in such
defense with counsel of its choice at its sole cost and expense. The Company
shall not be liable for any settlement of any action or claim effected without
its written consent. Anything in this Section 11.11 to the contrary
notwithstanding, the Company shall not, without the Indemnified Party's prior
written consent, settle or compromise any claim or consent to entry of any
judgment in respect thereof that imposes any future obligation on the
Indemnified Party or that does not include, as an unconditional term thereof,
the giving by the claimant or the plaintiff to the Indemnified Party, a release
from all liability in respect of such claim.
(c) The Company agrees that no Indemnified Party shall have any
liability (whether direct or indirect, in contract, tort or otherwise) to the
Company or any of its Subsidiaries, shareholders or creditors for or in
connection with the transactions contemplated by this Agreement or the other
Transaction Documents, except to the extent such liability is found in a final
judgment by a court of competent jurisdiction to have resulted from such
Indemnified Party's gross negligence or willful misconduct or the
<PAGE>
misrepresentations of the Indemnified Party, but in no event shall an
Indemnified Party be liable for punitive, exemplary or consequential damages.
(Signature Page Follows)
<PAGE>
SECURITIES PURCHASE AGREEMENT
SIGNATURE PAGE
IN WITNESS WHEREOF, the Company and the Purchasers have caused this
Agreement to be executed effective as of the date first above written.
THE COMPANY:
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
By:
Name: Andrew L. Simon
Title: President and Chief Executive Officer
PURCHASERS:
CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P.
By: CAHILL WARNOCK STRATEGIC PARTNERS, L.P.,
its General Partner
By:________________________________
Name: David L. Warnock
Title: a General Partner
STRATEGIC ASSOCIATES, L.P.
By: CAHILL, WARNOCK & COMPANY, LLC,
By:________________________________
Name: David L. Warnock
Title: Managing Member
EXHIBIT A
---------
Initial Investment
------------------
Original Principal Amount Number of
Purchaser of Debentures Warrant Shares
--------- -------------- --------------
Cahill, Warnock Strategic
<PAGE>
Partners Fund, L.P. $3,790,000 2,615,970
Strategic Associates, L.P. $ 210,000 144,948
Company Put Option
------------------
Purchaser Company Put Option Percentage Total Cost
--------- ----------------------------- ----------
Cahill, Warnock Strategic
Partners Fund, L.P. 94.75% $1,895,000
Strategic Associates, L.P. 5.25% $ 105,000
<PAGE>
EXHIBIT B
---------
Registration Rights Agreement
<PAGE>
EXHIBIT C
---------
Investor Rights Agreement
<PAGE>
EXHIBIT D
---------
Form of Debenture
<PAGE>
EXHIBIT E
---------
Form of Warrant
<PAGE>
EXHIBIT F
---------
Accreditation and State Licensure/Approval.
------------------------------------------
(a) Schedule 4.28 contains a complete and accurate statement of the
-------------
accreditation granted to each of the schools of the Company and its
Subsidiaries, the date that accreditation was last granted, and the current
term of accreditation. None of the schools or educational and training
programs of the Company and its Subsidiaries are on probation or warning,
have been directed to show cause why accreditation should not be revoked,
or are subject to an action by an accrediting agency to withdraw or deny
accreditation. To the knowledge of the Company and its Subsidiaries, there
are no facts, circumstances, or omissions concerning their schools that
could lead to such actions by an accrediting agency.
(b) The Company, its Subsidiaries, and its schools have complied with all
stipulations, conditions and other requirements imposed by the schools'
accrediting agencies at the time of, or since, the last grant of
accreditation, including but not limited to the timely filing of all
required reports and responses.
(c) The Company, its Subsidiaries, and its schools have secured all
requisite approvals from its institutional accrediting agencies for the
educational and training programs currently offered.
(d) The Company, its Subsidiaries, and its schools have secured all
requisite licenses to operate in the states in which they are located and
all requisite approvals from such states for the educational and training
programs currently offered.
U.S. Department of Educational Certification and Eligibility.
------------------------------------------------------------
(a) Schedule 4.29 contains a complete and accurate statement of the U.S.
-------------
Department of Education certification and eligibility status for each of
the schools owned by the Company and its Subsidiaries, including the date
that certification was last granted and the current term of certification.
Each of the schools listed in Schedule 4.29 is certified by the U.S.
-------------
Department of Education to participate in the programs authorized by Title
IV of the Higher Education Act of 1965, as amended. None of the schools are
subject to limitation, suspension or termination proceedings, or subject to
any other action or proceeding by the U.S. Department of Education that
could result in the loss of certification or eligibility or a material
liability or fine. To the Knowledge of the Company and its Subsidiaries,
there are no facts, circumstances, or omissions concerning the schools that
could lead to such an action by the U.S. Department of Education.
(b) Each of the schools owned by the Company and its Subsidiaries is in
material compliance with all rules, regulations and requirements
established by the U.S. Department of Education pertaining to each school's
eligibility to participate in the programs authorized by Title IV of the
Higher Education Act of 1965, as amended, and
<PAGE>
other federal student financial aid funding programs set forth at 34 C.F.R.
(S)(S) 600 et seq. The Company and its Subsidiaries are aware of no facts,
------
circumstances, or omissions concerning the schools that might result in a
finding of material non-compliance with regard to such rules, regulations
and requirements. Without limiting the foregoing, the Company, its
Subsidiaries also represent that:
(i) Each of the schools satisfies the standards of financial
responsibility and administrative capability, as established by the U.S.
Department of Education and as set forth at 34 C.F.R. (S)(S) 668.15-668.16,
and each program offered by the schools is an eligible program in
accordance with the requirements of 34 C.F.R. (S) 668.8.
(ii) Each of the schools receives no greater than eighty-five
percent (85%) of its revenues from programs authorized by Title IV of the
Higher Education Act of 1965, as amended, or other federal student
financial aid funds, and satisfies the requirements regarding tuition
revenue established by the Department of Education as set forth at 34
C.F.R. (S) 600.5. Schedule 4.29 contains a correct statement of each
-------------
school's percentage of revenue from such federal funding sources.
(iii) The final cohort default rates published by the U.S.
Department of Education for fiscal years 1992 through 1995 for the schools
of the Company and its Subsidiaries are listed in Schedule 4.29.
-------------
(iv) Each of the schools has established a default reduction
plan and submitted such plans to the U.S. Department of Education in
accordance with 34 C.F.R. (S) 674.6.
(v) Each of the schools disburses federal Pell Grant payments
in accordance with procedures that comply with 34 C.F.R. (S) 690.63.
(c) U.S. Department of Education program reviews and compliance audits
conducted at each of the schools since 1992 have not materially adversely
affected the Company, its Subsidiaries or its schools nor has any program
review or compliance audit resulted in the imposition of any material
liability, financial or otherwise, affecting the Company, its Subsidiaries
or its schools. The Company, its Subsidiaries, and its schools have
complied with all the findings and conditions arising from the program
reviews and compliance audits. To the extent that any program review or
audit remains pending or unresolved, there are no issues or findings of
non-compliance which, to the knowledge of the Company, its Subsidiaries, or
its schools, could result in the loss of certification or eligibility or a
material liability or fine.
<PAGE>
EXHIBIT 4
---------
INVESTOR RIGHTS AGREEMENT
DATED AS OF SEPTEMBER 4, 1998
BY AND AMONG
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.,
AS THE COMPANY
AND
CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P.,
AND
STRATEGIC ASSOCIATES, L.P.
AS THE PURCHASERS
AND
THE INDIVIDUAL SHAREHOLDERS IDENTIFIED HEREIN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1 Definitions 1
1.1. Defined Terms 1
1.2. Other Defined Terms 3
1.3. Other Definitional Provisions 4
SECTION 2 Representations by the Company 4
SECTION 3 Representations of the Investors 4
SECTION 4 Representations and Warranties of the Individual Shareholders 5
4.1. Authority; Validity 5
4.2. No Conflicts 5
4.3. Consents and Approvals 5
4.4. Stock Ownership 5
SECTION 5 Covenants of the Company 5
5.1. Information 5
5.2. Regulatory Matters 7
5.3. Access 8
5.4. Directors' and Officers' Insurance 8
5.5. Confidentiality 8
5.6. Restrictive Covenants 8
5.7. Publicity 9
5.8. Nasdaq Filings 9
5.9. Redemption of Preferred Stock 10
5.10. Use of Proceeds. 10
5.11. Dealings with Affiliates 10
5.12. Maintenance of Properties, etc. 10
5.13. Maintenance of Board Representation 10
5.14. Payment of Taxes 10
5.15. Maintenance of Insurance 10
5.16. Preservation of Corporate Existence 11
5.17. Compliance with Laws 11
5.18. Keeping of Records and Books of Account 11
SECTION 6 Election of Directors 11
6.1. Board of Directors 11
6.2. Nomination and Election of Directors 12
6.4. Vacancy 12
6.5. Termination 13
SECTION 7 Miscellaneous 13
</TABLE>
<PAGE>
<TABLE>
<S> <C>
7.1. Amendment; Waiver 13
7.2. Restriction on Transfer of Voting Securities 13
7.3. Voting 13
7.4. Notices 13
7.5. Severability 14
7.6. Successors and Assigns 15
7.7. Survival of Representations, Warranties and Covenants 15
7.8. Entire Agreement 15
7.9. Choice of Law 15
7.10. Counterparts 15
7.11. Costs and Expenses 15
7.12. No Third-Party Beneficiaries 15
7.13. Indemnification 16
7.14. Specific Performance 17
INVESTOR RIGHTS AGREEMENT SIGNATURE PAGE 18
Exhibit A Individual Shareholders 19
</TABLE>
<PAGE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
INVESTOR RIGHTS AGREEMENT
INVESTOR RIGHTS AGREEMENT dated as of September 4, 1998 (this "Agreement"),
---------
is entered into by and among TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC., a
Delaware corporation (the "Company"), CAHILL, WARNOCK STRATEGIC PARTNERS FUND,
-------
L.P., a limited partnership organized under the laws of the State of Delaware,
and STRATEGIC ASSOCIATES, L.P., a limited partnership organized under the laws
of the State of Delaware (each an "Investor" and collectively the "Investors"),
-------- ---------
and the individual shareholders identified on Exhibit A hereto (each an
---------
"Individual Shareholder" and collectively the "Individual Shareholders").
- ----------------------- -----------------------
W I T N E S S E T H
WHEREAS, the Company and the Investors have entered into a Securities
Purchase Agreement, dated as of September 4, 1998 (the "Securities Purchase
-------------------
Agreement") pursuant to which the Investors have acquired debentures (the
- ---------
"Debentures") and warrants (the "Warrants") of the Company; and
- ----------- --------
WHEREAS, as a condition precedent to closing under the Securities Purchase
Agreement, the Company and the Individual Shareholders have agreed to grant the
Investors the rights set forth herein in order to induce the Investors into
entering into the Securities Purchase Agreement.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties hereto agree as follows:
SECTION 1
Definitions
-----------
1.1 Defined Terms. The following terms are defined as follows:
-------------
"Affiliate" means, with respect to any Person, (i) any Person that holds
---------
direct or indirect beneficial ownership (as defined in Rule 13d-3 under the
Exchange Act) of voting securities or other voting interests representing at
least 5% of the outstanding voting power of a Person or equity securities or
other equity interests representing at least 5% of the outstanding equity
securities or equity interests in a Person, (ii) any brother, sister, parent,
child or spouse of such Person or any Person described in clause (i), and (iii)
any Person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, such entity.
<PAGE>
"Code" means the Internal Revenue Code of 1986 (or any successor thereto),
----
as amended from time to time.
"Common Stock" means the Common Stock, par value $.0001 per share, of the
------------
Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"GAAP" means generally accepted accounting principles.
----
"Indebtedness" shall mean, as to any Person, all items that would, in
------------
conformity with generally accepted accounting principles, be classified as
liabilities or contingent liabilities of such Person, but in any event including
without limitation (a) all obligations under leases that have been, or under
generally accepted accounting principles are required to be, capitalized, (b)
all indebtedness endorsed (other than for collection or deposit in the ordinary
course of business) or discounted with recourse, and (c) all indebtedness in
effect guaranteed, directly or indirectly, by such Person.
"Knowledge" or derivations thereof shall mean the knowledge of the officers
---------
of the Company and each Subsidiary, and, with respect to Sections 4.19 and 4.21,
each person who conducts human resource and employee benefits management
functions for the Company or any Subsidiary, whether or not an officer of the
Company or such Subsidiary.
"Permits" means any approvals, authorizations, consents, licenses, permits
-------
or certificates.
"Person" means an individual, partnership, limited liability company,
------
corporation, joint stock company, trust, unincorporated association, joint
venture or other entity, or a government or any political subdivision or agency
thereof.
"SEC" means the United States Securities and Exchange Commission.
---
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Subsidiaries" means each corporation in which the Company owns or
------------
controls, directly or indirectly, capital stock or other equity interests
representing at least 50% of the outstanding voting stock or other equity
interests, including without limitation Beck Evaluation & Testing Associates,
Inc., a New York corporation, and Modern Learning Press, Inc., a Delaware
corporation.
"Voting Securities" means any share of Common Stock and/or other voting
-----------------
security in the Company.
"Warrant Shares" means the shares of Common Stock issued or issuable upon
--------------
exercise of the Warrants.
1.2 Other Defined Terms. The following terms shall have the meanings
-------------------
assigned to them in the identified Sections of this Agreement.
<PAGE>
"Agreement" as defined in the recitals to this Agreement.
---------
"Closing Date" as defined in Section 5.1.
------------
"Company" as defined in the recitals to this Agreement.
-------
"Company Director" as defined in Section 6.2(b).
----------------
"Company SEC Reports" as defined in Securities Purchase Agreement.
-------------------
"Debentures" as defined in Section 2.
----------
"Director" as defined in Section 6.1(a).
--------
"Event of Default" as defined in Section 10.1 of the Securities Purchase
----------------
Agreement.
"Indemnified Party" as defined in Section 7.13(a).
-----------------
"Individual Shareholder" and "Individual Shareholders" as defined in the
---------------------- -----------------------
recitals to this Agreement.
"Investor" and "Investors" as defined in the recitals to this Agreement.
-------- ---------
"Investor Director" as defined in Section 6.2(a).
-----------------
"Investor Rights Agreement" as defined in the recitals to this Agreement.
-------------------------
"Loss" as defined in Section 7.13(a).
----
"One Million Dollar Debt Basket" as defined in Section 5.6(h).
------------------------------
"Investors" as defined in the recitals to this Agreement.
---------
"Qualified Public Offering" as defined in Section 6.5(b).
-------------------------
"Registration Rights Agreement" as defined in the recitals to this
-----------------------------
Agreement.
"Warrants" as defined in the recitals to this Agreement.
--------
1.3 Other Definitional Provisions. Any additional capitalized terms shall
-----------------------------
have the meanings assigned to them in the Securities Purchase Agreement unless
otherwise defined in text of this Agreement. Terms defined in the singular shall
have a comparable meaning when used in the plural and vice versa.
<PAGE>
SECTION 2
Representations by the Company
------------------------------
The Company represents and warrants to the Investors that: (a) the
execution, delivery and performance by the Company of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action; (b) this Agreement has been duly executed and
delivered by the Company, and constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, subject to applicable bankruptcy, insolvency, moratorium and other
laws affecting creditors' rights generally and to general principles of equity;
(c) the execution, delivery and performance of this Agreement do not conflict
with, violate, breach or constitute a default under, the Company's Certificate
of Incorporation or By-Laws or any indenture, lease, agreement or other
instrument to which the Company is a party or by which it or any of its assets
is bound, or any decree, judgment, order, statute, rule or regulation applicable
to the Company.
SECTION 3
Representations of the Investors
--------------------------------
Each Investor, jointly and severally, represents and warrants to the
Company that: (a) the execution, delivery and performance by each Investor of
this Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary action; (b) this Agreement has been duly
executed and delivered by each Investor, and constitutes the legal, valid and
binding obligation of each Investor, enforceable against such Investor in
accordance with its terms, subject to applicable bankruptcy, insolvency,
moratorium and other laws affecting creditors' rights generally and to general
principles of equity; (c) the execution, delivery and performance of this
Agreement do not conflict with, violate, breach or constitute a default under,
the organizational documents of either Investor or any indenture, lease,
agreement or other instrument to which either Investor is a party or by which
either Investor or any of its assets is bound, or any decree, judgment, order,
statute, rule or regulation applicable to either Investor.
SECTION 4
Representations and Warranties of the Individual Shareholders
-------------------------------------------------------------
Each of the Individual Shareholders (severally and not jointly), hereby
represents and warrants to and agrees with the Investors, as follows:
4.1 Authority; Validity. Such Individual Shareholder has the full legal
-------------------
right, power, authority and capacity to enter into this Agreement and to vote
its shares of capital stock in accordance with the terms of this Agreement. This
Agreement has been duly and validly executed by such Individual Shareholder and
this Agreement constitutes a legal, valid and binding obligation of such
Individual Shareholder, enforceable in accordance with its terms.
<PAGE>
4.2 No Conflicts. The execution, delivery and performance of this
------------
Agreement and the consummation of the transactions by such Individual
Shareholder contemplated hereby will not conflict with, violate or result in a
breach or constitute a default under any order, decree, statute, ordinance,
regulation or other law applicable to such Individual Shareholder.
4.3 Consents and Approvals. No consent, approval, order or authorization
----------------------
of, or registration, declaration or filing with, any governmental authority or
any third party is required in connection with the execution, delivery and
performance of this Agreement by such Individual Shareholder and the
consummation of the transactions by such Individual Shareholder hereunder.
4.4 Stock Ownership. That such Individual Shareholder is the beneficial
---------------
owner and has the right to vote all of the shares of capital stock set forth on
Exhibit A hereto.
- ---------
SECTION 5
Covenants of the Company
------------------------
5.1 Information. Commencing on the date on which the transactions under
-----------
the Securities Purchase Agreement are consummated (the "Closing Date") and so
------------
long as the Debenture or any Warrant is outstanding and held by the Investors,
the Company shall deliver to the Investors the information specified in this
Section 5.1 unless any such Investor at any time specifically requests that such
information not be delivered to it:
(a) Monthly Financial Statements. As soon as available, but in any
----------------------------
event not later than forty-five (45) days after the end of each fiscal month the
unaudited consolidated balance sheet of the Company and its Subsidiaries as at
the end of each such period and the related unaudited consolidated statements of
income and cash flows of the Company and its Subsidiaries for such period and
for the elapsed period in such fiscal year, all in reasonable detail and stating
in comparative form (i) the figures as of the end of and for the comparable
periods of the preceding fiscal year and (ii) if available, the figures
reflected in any operating budget for such period. All such financial
statements shall be prepared in accordance with GAAP applied on a consistent
basis throughout the periods reflected therein except as stated therein and
shall be accompanied by a certificate of the Company's president or chief
financial officer to such effect.
(b) Quarterly Financial Statements. As soon as available, but in any
------------------------------
event not later than forty-five (45) days after the end of each fiscal quarter
the unaudited consolidated balance sheet of the Company and its Subsidiaries as
at the end of each such period and the related unaudited consolidated statements
of income and cash flows of the Company and its Subsidiaries for such period and
for the elapsed period in such fiscal year, all in reasonable detail and stating
in comparative form (i) the figures as of the end of and for the comparable
periods of the preceding fiscal year and (ii) if available, the figures
reflected in any operating budget for such period. All such financial
statements shall be prepared in accordance with GAAP applied on a consistent
basis throughout the periods reflected therein except as stated therein and
shall be accompanied by a certificate of the Company's president or chief
financial officer to such effect.
<PAGE>
(c) Annual Financial Statements. As soon as available, but in any
---------------------------
event within one hundred twenty days (120) days after the end of each fiscal
year of the Company, a copy of the audited consolidated balance sheets of the
Company and its Subsidiaries as at the end of such fiscal year and the related
audited consolidated statements of operations, stockholders' equity and cash
flows of the Company and its Subsidiaries for such fiscal year, all in
reasonable detail and stating in comparative form the figures as at the end of
and for the immediately preceding fiscal year, accompanied (in the case of the
audited consolidated financial statements) by an opinion of an accounting firm
of recognized national standing selected by the Company, which opinion shall
state that such accounting firm's audit was conducted in accordance with
generally accepted auditing standards. All such financial statements shall be
prepared in accordance with GAAP applied on a consistent basis throughout the
periods reflected therein except as stated therein.
(d) Material Litigation. Within ten (10) days after the Company
-------------------
learns of the commencement or receives a written threat of commencement of any
litigation or proceeding against the Company or any of its Subsidiaries or any
of their respective assets that could reasonably be expected to have a material
adverse effect on the Company and its Subsidiaries taken as a whole, written
notice of the nature and extent of such litigation or proceeding.
(e) Material Agreements. Within ten (10) days after the receipt by
-------------------
the Company of written notice of a default by the Company or any of its
Subsidiaries under any material contract, agreement or document to which it is a
party or by which it is bound, written notice of the nature and extent of such
default.
(f) Other Reports and Statements. Promptly upon any distribution to
----------------------------
its stockholders generally or to the financial community of an annual report,
quarterly report, proxy statement, registration statement or other similar
report or communication, a copy of each such annual report, quarterly report,
proxy statement, registration statement or other similar report or communication
and promptly upon filing by the Company with the SEC or with The Nasdaq Stock
Market, the National Association of Securities Dealers, Inc. or any national
securities exchange or other market system of any all regular and other reports
or applications (including without limitation listing applications), a copy of
each such report or application; and a copy of such report or statement and
copies of all press releases and other statements made available generally by
the Company to the public concerning material developments in the Company.
(g) Accountants' Management Letters, Etc. Promptly after receipt by
-------------------------------------
the Company, copies of all accountants' management letters and all management
and board responses to such letters, and copies of all certificates as to
compliance, defaults, material adverse changes, material litigation or similar
matters relating to the Company and its Subsidiaries, which shall be prepared by
the Company or its officers and delivered to the third parties.
(h) Stockholders' Lists. Unless otherwise provided at an earlier
-------------------
date during each fiscal year, within sixty (60) days after the end of each
fiscal year, a list of all stockholders of record, showing the authorized and
outstanding shares by class (including the Common Stock equivalents of any
convertible security), the holders of all outstanding shares and all outstanding
<PAGE>
options, warrants and convertible securities, and detailing all options and
warrants granted, exercised or lapsed (including in each case, without
limitation, all option and warrant exercise prices, stock issuance prices' and
other terms) and all shares issued or sold (whether to directors or managers, in
connection with financing or otherwise).
(i) Annual Budget. As soon as available, but in any event not later
-------------
than thirty (30) days prior to the beginning of each fiscal year of the Company,
the financial plan of the Company for such fiscal year, including without
limitation, a cash flow projection and operating budget, calculated quarterly,
as contained in it's operating plan approved by the Company's Board of Directors
as well as any updates or revisions to such plan as soon as available.
(j) Other Information. From time to time, and promptly, such
-----------------
additional information regarding results of operations, financial condition or
business of the Company and its Subsidiaries, including without limitation, cash
flow analysis, projections and minutes of any meetings of the Board of
Directors, as the Investors may reasonably request.
5.2 Regulatory Matters. Each of the Company and Purchasers will (i) make
------------------
on a prompt and timely basis all governmental or regulatory notifications,
filings or submissions, as necessary for the consummation of the transactions
contemplated hereby, including any filings required pursuant to the Hart-Scott-
Rodino Antitrust Act, if required, (ii) use all reasonable efforts to cooperate
with the other and its representatives in (A) determining which notifications,
filings and submissions are required to be made prior to the Closing Date with,
and which consents, approvals, permits or authorizations are required to be
obtained prior to the Closing Date from, any governmental authority in
connection with the execution, delivery and performance of this Agreement and
the transactions contemplated hereby, and (B) timely making of all such
notifications, filings or submissions and timely seeking all such consents,
approvals, permits or authorizations, and (iii) use all reasonable efforts to
take, or cause to be taken, all other action and do, or cause to be done, all
other reasonable things necessary or appropriate to consummate the transactions
contemplated by this Agreement. The Purchasers shall have no obligation to
expend any funds in connection with the action to be taken by the Company
pursuant to this section.
5.3 Access. From time to time and subject to the provisions of Section
------
5.5 hereof, upon the reasonable prior written request of the Investors, the
Company shall promptly afford the Investors and its accountants, counsel and
other representatives, full access during normal business hours to all of its
properties, books, contracts, commitments and records, permit them to copy or
make extracts therefrom and, the Company shall furnish promptly to Investors all
information concerning its business, properties and personnel as Investors may
reasonably request; provided, however, that no investigation pursuant to this
-------- -------
Section 5.3 shall affect any representations or warranties of either party
hereunder.
5.4 Directors' and Officers' Insurance. The Company shall maintain a
----------------------------------
directors' and officers' liability insurance policy providing coverage in the
amount of not less than $2.0 million and having such other terms as are
reasonably acceptable to Investors.
<PAGE>
5.5 Confidentiality. From and after the date of this Agreement, each of
---------------
the Company and Investors agree to hold, and will cause its respective
employees, agents and representatives to hold, in confidence, unless compelled
to disclose by judicial or administrative process or, in the written opinion of
their counsel, by other requirements of law, information furnished by the
Company, on the one hand, to Investors and information furnished by Investors,
on the other hand, to the Company in connection with the transactions
contemplated by this Agreement, and each of such persons agree that they shall
not release or disclose such information to any other person, except their
respective officers, directors, partners, employees, auditors, attorneys,
financial advisors and other consultants, advisors and representatives who need
to know such information and who have been informed of the confidential nature
of such information and have been directed to treat such information as
confidential. The foregoing provisions of this Section 8.5 shall not apply to
any such information which (i) becomes generally available to the public other
than as a result of a disclosure by any person bound hereunder, (ii) was
available to a person bound hereunder on a non-confidential basis prior to its
disclosure hereunder, or (iii) becomes available to any person bound hereunder
on a non-confidential basis by virtue of the disclosure thereof by a source
other than the party providing such information in reliance upon the protection
of confidentiality reposed hereby.
5.6 Restrictive Covenants. Without the written consent of the Investors,
---------------------
the Company and its Subsidiaries shall not:
(a) issue any class or series of equity securities as to payment of
dividends or as to payments on dissolution, liquidation or winding-up of the
Company or a Subsidiary;
(b) enter into any agreement or arrangement of any kind that would
restrict the Company's ability to perform under this Agreement or the
Transaction Documents;
(c) amend the certificate of incorporation or by-laws of the Company
(or any such analogous formation document of any Subsidiary) in any manner that
would impair, reduce or affect the rights of the Investors;
(d) increase the size of the Company's Board of Directors, except as
contemplated by the Transaction Documents;
(e) merge or consolidate with any other entity such that the Company
or, if a transaction by a Subsidiary, such Subsidiary is not the surviving
entity or sell all or substantially all of its assets;
(f) enter into any transaction with any of its officers, directors,
employees (or relative of any of the foregoing), or Affiliates, other than
transactions in the ordinary course of its business and on terms and conditions
at least as favorable as could be negotiated with an unrelated third party;
(g) liquidate, dissolve or wind-up (including without limitation
through the filing of a voluntary bankruptcy petition); or
<PAGE>
(h) incur, issue, guarantee or assume any Indebtedness (excluding (x)
---------
the $4 million of Debentures acquired hereunder, (y) trade payables incurred in
the ordinary course of business, and (z) up to $1 million of assumed liability
pursuant to the acquisition of the Mildred Elley Business School) in an
aggregate amount in excess of $1,000,000 (the "One Million Dollar Debt Basket");
------------------------------
provided, however, that any Indebtedness ranking senior to or pari passu with
- -------- -------
the Debentures incurred pursuant to the acquisition of the Mildred Elley
Business School shall be included in the calculation of the One Million Dollar
Debt Basket; and provided further that any Indebtedness up to $1 million ranking
-------- -------
junior to the Debentures incurred pursuant to the acquisition of the Mildred
Elley Business School shall not be included in the calculation of the One
Million Dollar Debt Basket.
5.7 Publicity. Except as may be required by law or applicable
---------
regulations, the Company shall not use the name of, or make reference to, any
Investor or any of its Affiliates in any press release or in any public manner
without such Investor's prior written consent.
5.8 Nasdaq Filings. As soon as possible, but in any case not later than
--------------
20 days after the Closing, the Company shall file all necessary documents and
information with the Nasdaq Stock Market in order to maintain listing thereon of
the Company's Common Stock; provided, however, that failure of the Company's
-------- -------
Common Stock to sustain a minimum trading price shall not constitute a default
hereunder. The Company also shall use its best efforts to qualify for listing on
the Nasdaq National Stock Market and shall file all necessary documents and
information with Nasdaq not later than 20 days after qualifying for listing
thereon, although the foregoing does not constitute a representation that the
Company is currently eligible for listing on the Nasdaq National Stock Market or
that it will be able to maintain its listing on the Nasdaq SmallCap Market.
5.9 Redemption of Preferred Stock. By no later than the 31st day after
-----------------------------
the Closing Date, the Company shall redeem all shares of the Series A Preferred
Stock.
5.10 Use of Proceeds. The Company shall apply the proceeds received as a
----------------
result of the transactions contemplated under the Securities Purchase Agreement
as set forth therein.
5.11 Dealings with Affiliates. Except for employee or director
------------------------
compensation, stock bonus, stock option or similar plans or arrangements
approved by the Board of Directors, the Company will not enter or permit any
Subsidiary to enter into any transaction with any holder of five percent (5%) or
more of any class of capital stock of the Company, or any member of their
families or any corporation or other entity in which any one or more of such
stockholders or members of their immediate families directly or indirectly holds
five percent (5%) or more of any class of capital stock except in the ordinary
course of business and on terms not less favorable to the Company or the
Subsidiary than it would obtain in a transaction between unrelated parties.
5.12 Maintenance of Properties, etc. The Company shall maintain and
-------------------------------
preserve, and cause each Subsidiary to maintain and preserve, all of its
properties, necessary or useful in the proper
<PAGE>
conduct of its business, in good repair, working order and condition, ordinary
wear and tear excepted, except as otherwise determined by the Board of
Directors.
5.14 Maintenance of Board Representation. The Company shall use its best
-----------------------------------
efforts to nominate and recommend that David Warnock, or a replacement
designated by him, shall be a member of the Company's Board of Directors.
5.15 Payment of Taxes. The Company shall pay and discharge, and cause each
----------------
Subsidiary to pay and discharge, all material taxes, assessments and
governmental charges or levies imposed on it or upon its income or profits or
business, or upon any properties belonging to it, prior to the date on which
penalties attach thereto, and all lawful claims which, if unpaid, is reasonably
likely (in the Company's good faith opinion) to become a lien or charge upon any
properties of the Company or any Subsidiary, provided that neither the Company
nor the Subsidiary shall be required to pay any such tax, assessment, charge,
levy or claim which is being contested and/or negotiated in good faith and by
appropriate proceedings if the Company or Subsidiary concerned shall have set
aside on its books adequate (in the Company's opinion) reserves with respect
thereto. The Company shall pay, when due, or in conformity with customary trade
terms, all material lease obligations, all material trade debt, and all other
material indebtedness incident to the operations of the Company, except such as
are being contested in good faith and by appropriate proceedings if the Company
shall have set aside on its books adequate reserves with respect thereto.
5.16 Maintenance of Insurance. The Company shall maintain, and cause each
------------------------
Subsidiary to maintain, insurance with responsible and reputable insurance
companies or associations in such amounts and covering such risks as is usually
carried by companies engaged in similar businesses and owning similar properties
in the same general areas in which the Company or such Subsidiary operates.
5.17 Preservation of Corporate Existence. The Company shall preserve and
-----------------------------------
maintain, and cause each Subsidiary to preserve and maintain, its corporate
existence, rights, franchises and privileges in the jurisdiction of its
incorporation, and qualify and remain qualified, and cause each Subsidiary to
qualify and remain qualified, as a foreign corporation in each jurisdiction in
which such qualification is necessary or desirable in view of its business and
operations or the ownership of its properties; the Company shall preserve and
maintain, and cause each Subsidiary to preserve and maintain, all licenses and
other rights to use patents, processes, licenses, trademarks, trade names,
inventions, intellectual property rights or copyrights owned or used by and
necessary to the conduct of its business; provided, however, that the Company
-------- -------
shall not be required to preserve any such Subsidiary, license or right if the
Board of Directors shall reasonably determine that the preservation is no longer
desirable in the conduct of the Company's business and that the loss thereof is
not likely to cause a material adverse effect on the Company and its
Subsidiaries taken as a whole.
5.18 Compliance with Laws. The Company shall comply, and cause each
--------------------
Subsidiary to comply, with all applicable laws, rules, regulations and orders of
any governmental authority, noncompliance with which could materially adversely
affect the Company's business or condition, financial or otherwise of the
Company and its Subsidiaries taken as a whole. The
<PAGE>
Company shall file all reports and other information and documents which it is
required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange
Act.
5.19 Keeping of Records and Books of Account. The Company shall keep, and
---------------------------------------
cause each Subsidiary to keep, adequate records and books of account, in which
complete entries shall be made in accordance with generally accepted accounting
principles consistently applied, reflecting all financial transactions of the
Company and such Subsidiary, and in which, for each fiscal year, all proper
reserves for depreciation, depletion, obsolescence, amortization, taxes, bad
debts and other purposes in connection with its business shall be made.
SECTION 6
Election of Directors
---------------------
6.1 Board of Directors.
------------------
(a) The Company shall be governed by a Board of Directors consisting,
as of the date hereof, of nine members (each a "Director"). Without the consent
--------
of the Investor Directors (as hereinafter defined), the number of Directors
constituting the full Board of Directors shall not be increased beyond nine;
without the consent of the Company Directors (as hereinafter defined), the
number of Directors constituting the full Board of Directors shall not be
reduced below six. Regular meetings of the Board shall be held at least two
times per year, on a semi-annual basis.
6.2 Nomination and Election of Directors.
------------------------------------
(a) The Investors shall have the right to nominate two Directors
(each, an "Investor Director").
-----------------
(b) The Company agrees that it shall cause the Board of Directors in
office immediately prior to the execution and delivery of this Agreement to
increase the size of the Board of Directors by two, and to elect the nominees
designated by the Investors as Directors, to serve as Directors until their
respective successors are elected and qualified. The Board of Directors (other
than the Investor Directors) shall have the right to nominate no less than four
nor more than seven Directors (each a "Company Director"), to serve until their
----------------
respective successors are elected and qualified. The initial Company Directors
shall be the incumbent Board of Directors as of the date of execution and
delivery of this Agreement.
(c) On the date hereof and at each annual meeting of stockholders of
the Company or any special meeting called for the purpose of electing directors
of the Company or at such other time or times as directors may be elected in
accordance with the Company's By-Laws and the General Corporation Law of the
State of Delaware, the Investors agree to cast all of their eligible votes in
favor of the nominees for Directors nominated pursuant to paragraphs (a) and (b)
hereof, and for no other persons.
<PAGE>
6.3 Removal. The Investor Directors shall at all times have the right to
-------
recommend the removal, with or without cause, of an Investor Director only, and
the Company Directors shall at all time have the right to recommend the removal,
with or without cause, of a Company Director only. If a Director's removal
shall have been recommended in accordance with the preceding sentence, then the
Board of Directors shall take such corporate actions as may be required under
the Company's By-Laws and the General Corporation Law of the State of Delaware
to effect such removal.
6.4 Vacancy. If any vacancy occurs in the Board of Directors because of
-------
the death, disability, resignation, retirement or removal of an Investor
Director, then the Investors shall nominate a successor, and the Board of
Directors shall vote to elect such successor to the Board, or if a vote of the
stockholders of the Company is held, the Board of Directors shall recommend to
the stockholders that such successor be elected to the Board of Directors. If
any vacancy occurs in the Board of Directors because of the death, disability,
resignation, retirement or removal of a Company Director, then the Company
Directors shall either (i) nominate a successor, and the Board of Directors
shall vote to elect such successor to the Board, or if a vote of the
stockholders of the Company is held, the Board of Directors shall recommend to
the stockholders that such successor be elected to the Board of Directors, or
(ii) decide expressly not to fill such vacancy at such time.
6.5 Termination. Article 6 shall terminate and thereafter be of no force
-----------
and effect, except as set forth below, upon the earlier to occur of the
following:
(a) Investors shall cease to own of record at least 50% of the aggregate of:
(i) after the exercise of the Warrants, the Warrant Shares, and (ii) if the
Company exercises the Company Put Option, the Option Shares; or
(b) the closing of a public offering of the Common Stock of the Company
which results in net proceeds to the Company of at least $25,000,000 with an
offering price of at least $5.00 per share (a "Qualified Public Offering"); or
-------------------------
(c) the twenty-nine (29) month anniversary date of the Closing Date;
provided, however, that nothing in this provision shall terminate the Investors'
- -------- -------
right to nominate two Directors to the Company's Board of Directors so long as
the Investors continue to own of record at least 50% of the aggregate of: (i)
after the exercise of the Warrants, the Warrant Shares, and (ii) if the Company
exercises the Company Put Option, the Option Shares.
SECTION 7
Miscellaneous
-------------
7.1 Amendment; Waiver. Neither this Agreement nor any provision hereof
-----------------
may be amended, modified, supplemented or waived, except by a written instrument
executed by all of the parties hereto.
<PAGE>
7.2 Restriction on Transfer of Voting Securities. Each Individual
--------------------------------------------
Shareholder agrees and acknowledges that it shall be a condition precedent to
any transfer of a Voting Security held by such Individual Shareholder that the
transferee become a party to this Agreement and failure to comply with this
condition shall render the transfer void ab initio.
7.3 Voting. Each Individual Shareholder agrees to vote all of its Voting
------
Securities in such a manner as to cause the Company to comply with the covenants
set forth in Section 5 of this Agreement.
7.4 Notices. Any notices or other communications required or permitted
-------
hereunder shall be sufficiently given if in writing and delivered in Person,
transmitted by facsimile transmission (fax) or sent by registered or certified
mail (return receipt requested) or recognized overnight delivery service,
postage pre-paid, addressed as follows, or to such other address has such party
may notify to the other parties in writing:
(a) if to the Company or any of the Individual Shareholders:
Touchstone Applied Science Associates, Inc.
P.O. Box 382
4 Hardscrabble Heights
Brewster, New York 10509
Attn: Andrew L. Simon
Telephone No.: 914-277-8100
Facsimile No.: 914-277-3548
with a copy to:
Christy & Viener
620 Fifth Avenue
New York, New York 10020
Attn: Steven R. Berger, Esq.
Telephone No.: 212-632-5500
Facsimile No.: 212-632-5555
(b) if to the Investors:
c/o Cahill, Warnock & Company, L.L.C.
One South Street, Suite 2150
Baltimore, MD 21202
Attn: David L. Warnock
Telephone No.: 410-895-3800
Facsimile No.: 410-895-3805
with a copy to:
Wilmer, Cutler & Pickering
<PAGE>
100 Light Street
Baltimore, MD 21202
Attn: George P. Stamas, Esq.
Telephone No.: 410-986-2800
Facsimile No.: 410-986-2828
A notice or communication will be effective (i) if delivered in Person or by
overnight courier, on the business day it is delivered, (ii) if transmitted by
telecopier, on the business day of actual confirmed receipt by the addressee
thereof, and (iii) if sent by registered or certified mail, three (3) business
days after dispatch.
7.5 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 will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
7.6 Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors and permitted assigns of the parties hereto. The Company shall not
have the right to assign its rights or delegate its obligations under this
Agreement without the prior written consent of the Investors. Each Investor may
assign its rights hereunder to any transferee(s) of the Debentures and Warrants
without the consent of any other party hereto.
7.7 Survival of Representations, Warranties and Covenants. All
-----------------------------------------------------
representations and warranties made in, pursuant to or in connection with this
Agreement shall survive the execution and delivery of this Agreement. Unless
otherwise provided in this Agreement, the covenants and agreements set forth in
Sections 5 and 6 shall survive and remain in force so long as the Investors and
any of their transferees hold in the aggregate Warrants and/or Common Stock
representing 10% of the Company's capital stock on a fully diluted basis or upon
a Qualified Public Offering.
7.8 Entire Agreement. This Agreement and the other documents delivered
----------------
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subject matter hereof and thereof and
supersede and cancel all prior representations, alleged warranties, statements,
negotiations, undertakings, letters, acceptances, understandings, contracts and
communications, whether verbal or written, among the parties hereto and thereto
or their respective agents with respect to or in connection with the subject
matter hereof.
7.9 Choice of Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of New York, without regard to principles
of conflict of laws.
7.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties hereto in separate counterparts, with the
same effect as if all parties had signed the same document. All such
counterparts shall be deemed an original, shall be construed together and shall
constitute one and the same instrument.
<PAGE>
7.11 Costs and Expenses. Promptly after the Closing, the Company shall pay
------------------
the reasonable fees and disbursements incurred by the Investors (including
without limitation reasonable attorneys' and consultants' fees) in connection
with the due diligence review and Closing under this Agreement and the
transactions contemplated hereby (including without limitation the due diligence
review and attorneys' fees incurred in preparation for the transactions as
previously contemplated); provided, however, that the parties shall bear their
-------- -------
own costs and expenses if the Closing hereunder fails to take place.
7.12 No Third-Party Beneficiaries. Nothing in this Agreement will confer
----------------------------
any third party beneficiary or other rights upon any Person (specifically
including any employees of the Company and its Subsidiaries) or entity that is
not a party to this Agreement.
7.13 Indemnification.
---------------
(a) The Company [and each Individual Shareholder] agree to indemnify
and hold harmless the Investors and their Affiliates, and their respective
partners, co-investors, officers, directors, employees, agents, consultants,
attorneys and advisers (each, an "Indemnified Party"), from and against any and
-----------------
all actual losses, claims, damages, liabilities, costs and expenses (including,
without limitation, environmental liabilities, costs and expenses and all
reasonable fees, expenses and disbursements of counsel), joint or several
(hereinafter collectively referred to as a "Loss"), which may be incurred by or
----
asserted or awarded against any Indemnified Party in connection with or in any
manner arising out of or relating to any investigation, litigation or proceeding
or the preparation of any defense with respect thereto, arising out of or in
connection with or relating to this Agreement, the other Transaction Documents
or the transactions contemplated hereby or thereby or any use made or proposal
to be made with the proceeds of the Investors' purchase of the Debentures,
Warrants, Common Stock and Conversion Shares pursuant to this Agreement, whether
or not such investigation, litigation or proceeding is brought by the Company,
any of its Subsidiaries, shareholders or creditors, whether or not any of the
transactions contemplated by this Agreement or the other Transaction Documents
are consummated, except to the extent such Loss is found in a final judgment by
a court of competent jurisdiction to have resulted from such Indemnified Party's
gross negligence or willful misconduct.
(b) An Indemnified Party shall give written notice to the Company of
any claim with respect to which it seeks indemnification within ten (10) days
after the discovery by such parties of any matters giving arise to a claim for
indemnification pursuant to Section 7.13(a); provided that the failure of any
--------
Indemnified Party to give notice as provided herein shall not relieve the
Company of its obligations under this Section 7.13, except to the extent that
the Company is actually prejudiced by such failure to give notice. In case any
such action or claim is brought against any Indemnified Party, the Company shall
be entitled to participate in and, unless in the reasonable good faith judgment
of the Indemnified Party a conflict of interest between such Indemnified Party
and the Company may exist in respect of such action or claim, to assume the
defense thereof, with counsel satisfactory to the Indemnified Party and after
notice from the Company to the Indemnified Party of its election so to assume
the defense thereof, the Company 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
<PAGE>
costs of investigation. In any event, unless and until the Company elects in
writing to assume and does so assume the defense of any such action or claim the
Indemnified Party's costs and expenses arising out of the defense, settlement or
compromise of any such action or claim shall be Losses subject to
indemnification hereunder. If the Company elects to defend any such action or
claim, then the Indemnified Party shall be entitled to participate in such
defense with counsel of its choice at its sole cost and expense. The Company
shall not be liable for any settlement of any action or claim effected without
its written consent. Anything in this Section 7.13 to the contrary
notwithstanding, the Company shall not, without the Indemnified Party's prior
written consent, settle or compromise any claim or consent to entry of any
judgment in respect thereof that imposes any future obligation on the
Indemnified Party or that does not include, as an unconditional term thereof,
the giving by the claimant or the plaintiff to the Indemnified Party, a release
from all liability in respect of such claim.
(c) The Company agrees that no Indemnified Party shall have any
liability (whether direct or indirect, in contract, tort or otherwise) to the
Company or any of its Subsidiaries, shareholders or creditors for or in
connection with the transactions contemplated by this Agreement or the other
Transaction Documents, except to the extent such liability is found in a final
judgment by a court of competent jurisdiction to have resulted from such
Indemnified Party's gross negligence or willful misconduct or the
misrepresentations of the Indemnified Party, but in no event shall an
Indemnified Party be liable for punitive, exemplary or consequential damages.
7.14 Specific Performance. The parties hereto hereby declare that it is
--------------------
impossible to measure in money the damages which will accrue to a party hereto
by reason of a failure to perform any of the obligations under this Agreement.
Therefore, if any party hereto shall institute any action or proceeding to
enforce the provisions hereof, any person (including the Company) against whom
such action or proceeding is brought hereby waives all claims or defenses
therein that such party has an adequate remedy at law and such person shall not
urge in any such action or proceeding the claim or defense that such remedy at
law exists.
[Remainder of Page Intentionally Left Blank]
<PAGE>
INVESTOR RIGHTS AGREEMENT
SIGNATURE PAGE
IN WITNESS WHEREOF, the Company and the Investors have caused this
Agreement to be executed effective as of the date first above written.
THE COMPANY:
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
By:________________________________________________
Name: Andrew L. Simon
Title: President and Chief Executive Officer
INVESTORS:
CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P.
By: CAHILL WARNOCK STRATEGIC PARTNERS, L.P.,
its General Partner
By:________________________________________________
Name: David L. Warnock
Title: a General Partner
STRATEGIC ASSOCIATES, L.P.
By: CAHILL, WARNOCK & COMPANY, LLC, its
General Partner
By:________________________________________________
Name: David L. Warnock
Title: Managing Member
<PAGE>
INDIVIDUAL SHAREHOLDERS:
[ADD SIGNATURE LINES]
EXHIBIT A
---------
Individual Shareholders
-----------------------
Name of Individual Number of Shares and Type of
Shareholder Voting Security
- ----------- ---------------
<PAGE>
EXHIBIT 5
REGISTRATION RIGHTS AGREEMENT
DATED AS OF SEPTEMBER 4, 1998
BY AND AMONG
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.,
CAHILL WARNOCK STRATEGIC PARTNERS FUND, L.P.
AND
STRATEGIC ASSOCIATES, L.P.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. Definitions; Certain Rules of Construction - 1 -
1.1. "1933 Act" - 1 -
1.2. "1934 Act" - 2 -
1.3. "Board of Directors" - 2 -
1.4. "Common Shares" - 2 -
1.5. "Common Stock" - 2 -
1.6. "Company" - 2 -
1.7. "Company Indemnitees" - 2 -
1.8. "Debentures" - 2 -
1.9. "Effective Period" - 2 -
1.10. "Form S-1", "Form S-3", "Form S-4", "Form S-8" and
"Form SB-2" - 2 -
1.11. "Indemnitee" - 2 -
1.12. "Initiating Holders" - 2 -
1.13. "Investors" - 2 -
1.14. "Holder" - 2 -
1.15. "Holder Indemnitee" - 2 -
1.16. "Initial Shelf Registration" - 2 -
1.17. "Person" - 2 -
1.18. "PORTAL" - 2 -
1.19. "register", "registered" and "registration" - 3 -
1.20. "Registrable Securities" - 3 -
1.21. "Rule 144" - 3 -
1.22. "Rule 144 Information" - 3 -
1.23. "SEC" - 3 -
1.24. "Shelf Registration" - 3 -
1.25. "Securities Purchase Agreement" - 3 -
1.26. "Subsequent Shelf Registration" - 3 -
1.27. "Violation" - 3 -
1.28. "Warrant Shares" - 4 -
1.29. "Warrants" - 4 -
2. Registration Rights. - 4 -
2.1. Demand Registration - 4 -
2.2. Company Registration - 6 -
2.3. Obligations of the Company - 6 -
2.4. Furnish Information - 8 -
2.5. Expenses of Demand Registration - 8 -
2.6. Expenses of Company Registration - 8 -
2.7. Underwriting Requirements - 8 -
</TABLE>
<PAGE>
<TABLE>
<S> <C>
2.8. Indemnification - 9 -
2.9. Reports Under Securities Exchange Act of 1934 - 11 -
2.10. Form S-3 Registration; Shelf Registration - 12 -
2.11. Lock-up Agreements - 14 -
2.12. Assignment of Registration Rights - 15 -
2.13. Limitations on Subsequent Registration Rights - 15 -
3. Legend - 15 -
4. Specific Performance - 16 -
5. Notices - 16 -
6. Binding Effect; Assignment - 17 -
7. Course of Dealing; Amendments, Waivers and Consents - 17 -
8. Miscellaneous - 17 -
REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE - 19 -
</TABLE>
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement, dated as of September 4, 1998, is among
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC., a Delaware corporation (the
"Company"), CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P., a limited partnership
- --------
organized under the laws of the State of Delaware, and STRATEGIC ASSOCIATES,
L.P., a limited partnership organized under the laws of the State of Delaware
(the "Investors").
---------
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the Company and the Investors are entering into a certain Securities
Purchase Agreement dated as of September 4, 1998 (as amended and in effect from
time to time, the "Securities Purchase Agreement"), pursuant to which the
-----------------------------
Company is issuing and selling to the Investors, and the Investors are
purchasing from the Company (i) debentures with an aggregate principal balance
of Four Million Dollars ($4,000,000) (the "Debentures), (ii) warrants (the
----------
"Warrants") which are exercisable for 2,760,918 shares (or such other number of
- ---------
shares after adjustment pursuant to the terms of the Warrants) of the Company's
Common Stock (as defined below) (the "Warrant Shares"), and (iii) upon exercise
--------------
of the Company Put Option as set forth in the Securities Purchase Agreement,
shares of the Company's Common Stock (the "Common Shares");
-------------
WHEREAS, the Company desires to enter into this Agreement as an inducement
to the Investors entering into the Securities Purchase Agreement; and
WHEREAS, it is a condition to the issuance and sale by the Company, and the
purchase by the Investors, of the Debentures, Warrants and Common Shares that
the Company and the Investors enter into this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
1. Definitions; Certain Rules of Construction. Certain capitalized terms
------------------------------------------
are used in this Agreement with the specific meanings defined below in this
Section 1. Except as otherwise explicitly specified to the contrary or unless
the context clearly requires otherwise, (a) the capitalized term "Section"
refers to sections of this Agreement, (b) the capitalized term "Exhibit" refers
to exhibits to this Agreement, (c) references to a particular Section include
all subsections thereof, (d) the word "including" shall be construed as
"including without limitation", (e) references to a particular statute or
regulation include all rules and regulations thereunder and any successor
statute, regulation or rules, in each case as from time to time in effect, (f)
words in the singular or plural form include the plural and singular form,
respectively, and (g) references to a particular Person include such Person's
successors and assigns to the extent not prohibited by this Agreement.
1.1 "1933 Act" means the Securities Act of 1933, as amended and all
--------
regulations thereunder.
<PAGE>
1.2 "1934 Act" means the Securities Exchange Act of 1934, as amended and
--------
all regulations thereunder.
1.3 "Board of Directors" means the Board of Directors of the Company.
------------------
1.4 "Common Shares" is defined in the recitals to this Agreement.
-------------
1.5 "Common Stock" means the Company's common stock, par value $.0001 per
------------
share.
1.6 "Company" is defined in the recitals to this Agreement.
-------
1.7 "Company Indemnitees" is defined in Section 2.8(b).
-------------------
1.8 "Debentures" is defined in the recitals to this Agreement.
----------
1.9 "Effective Period" means the period from the date on which a shelf
----------------
registration becomes effective to the date on which all of the Registrable
Securities cease to be Registrable Securities.
1.10 "Form S-1", "Form S-3", "Form S-4", "Form S-8" and "Form SB-2" mean
-------- -------- -------- -------- ---------
such respective registration forms in effect on the date hereof (or any
successor registration forms subsequently adopted by the SEC) under the 1933
Act.
1.11 "Indemnitee" means each of the Company Indemnitees and the Holder
----------
Indemnitees.
1.12 "Initiating Holders" is defined in Section 2.1(a).
------------------
1.13 "Investors" is defined in the recitals to this Agreement.
---------
1.14 "Holder" means (a) any Person that owns, or has the right to acquire,
------
Registrable Securities and (b) any assignee thereof in accordance with Section
2.12.
1.15 "Holder Indemnitee" is defined in Section 2.8(a).
-----------------
1.16 "Initial Shelf Registration" is defined in Section 2.10(b).
--------------------------
1.17 "Person" means any present or future natural person or any
------
corporation, association, partnership, joint venture, limited liability, joint
stock or other company, business trust, trust, organization, business or
government or any governmental agency or political subdivision thereof.
1.18 "PORTAL" is defined in Section 2.9(b).
------
<PAGE>
1.19 "register", "registered" and "registration" refer to a registration
-------- ---------- ------------
effected by preparing and filing a registration statement or similar document in
compliance with the 1933 Act and the automatic effectiveness, or the declaration
or ordering of effectiveness, of such registration statement or document.
1.20 "Registrable Securities" means (a) any Common Share acquired pursuant
----------------------
to the Securities Purchase Agreement, any share of Common Stock issued or
issuable upon the exercise of the Warrants and (b) any share of Common Stock
issued as (or issuable upon the conversion or exercise of any warrant, right, or
other security which is issued as) a dividend or other distribution with respect
to, in exchange for, or in replacement of, any share of Common Stock described
in the foregoing clause (a); provided, however, that any share of Common Stock
-------- -------
previously sold to the public pursuant to a registered public offering or
pursuant to an exemption from the registration requirements of the 1933 Act
shall cease to be a Registrable Security. For purposes of this Agreement, the
number of Registrable Securities at any time outstanding shall be the sum of (i)
the number of shares of Common Stock then outstanding which are Registrable
Securities plus (ii) the number of shares of Common Stock which are issuable
----
pursuant to then exercisable or convertible securities and which upon issuance
would be Registrable Securities.
1.21 "Rule 144" is defined in Section 2.9(a).
--------
1.22 "Rule 144 Information" is defined in Section 2.9(b).
--------------------
1.23 "SEC" means the Securities and Exchange Commission.
---
1.24 "Shelf Registration" means a registration statement for an offering to
------------------
be made on a delayed or continuous basis pursuant to Rule 415 of the 1933 Act.
1.25 "Securities Purchase Agreement" is defined in the recitals to this
-----------------------------
Agreement.
1.26 "Subsequent Shelf Registration" is defined in Section 2.10(b).
-----------------------------
1.27 "Violation" means, with respect to any registration statement which
---------
includes any Registrable Securities:
(a) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto;
(b) the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading; or
(c) any violation or alleged violation by the Company of the 1933 Act,
the 1934 Act, any state securities law or any rule or regulation
promulgated under the 1933 Act, the 1934 Act or any state securities law in
connection with any matter relating to such registration statement.
<PAGE>
1.28 "Warrant Shares" means the Common Stock (or any other securities)
--------------
acquired or to be acquired upon exercise of the Warrants.
1.29 "Warrants" is defined in the recitals to this Agreement.
--------
2. Registration Rights.
-------------------
2.1 Demand Registration.
-------------------
(a) At any time after the date of this Agreement, if the Company shall
receive a written request from the Holders of a majority of the Registrable
Securities then outstanding and entitled to registration rights under this
Section 2 (the "Initiating Holders") that the Company effect the
------------------
registration under the 1933 Act of at least 50% of the Registrable
Securities then outstanding and that such registration shall have a minimum
anticipated aggregate net offering price of $5,000,000, then the Company
shall, within ten days of the receipt thereof, give written notice of such
request to all Holders and shall, subject to the limitations of this
Section 2.1, use its best efforts to effect such a registration statement
as soon as practicable and in any event to file within 75 days of the
receipt of such request a registration statement under the 1933 Act
covering all the Registrable Securities which the Holders shall in writing
request (within 20 days of receipt of the notice given by the Company
pursuant to this Section 2.1(a)) to be included in such registration and to
use its best efforts to have such registration statement become effective.
Any demand under Section 2.10 shall constitute a demand for purposes of
this Section 2.1.
(b) If the Initiating Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall
so advise the Company as part of their request made pursuant to this
Section 2.1 and the Company shall include such information in the written
notice referred to in Section 2.1(a). In such event, the right of any
Holder to include its Registrable Securities in such registration shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting
(unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting
shall (together with the Company as provided in Section 2.3(d)) enter into
an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by a majority in interest of
the Initiating Holders. The Initiating Holders shall consult with the
Board of Directors regarding the selection of an underwriter or
underwriters and approval by the Board of Directors, of any underwriter
selected by the Initiating Holders shall not be unreasonably withheld.
Notwithstanding any other provision of this Section 2.1, if, in the case of
a registration requested pursuant to Section 2.1(a), the underwriter
advises the Initiating Holders in writing that marketing factors require a
limitation of the number of shares to be underwritten, then the Initiating
Holders shall so advise the Company and all Holders of Registrable
Securities which
<PAGE>
would otherwise be underwritten pursuant hereto, and all securities other
than Registrable Securities sought to be included in the underwriting shall
first be excluded. To the extent that further limitation is required, the
number of Registrable Securities that may be included in the underwriting
shall be allocated pro rata among all Holders thereof desiring to
participate in such underwriting (according to the number of Registrable
Securities then held by each such Holder). No Registrable Securities
requested by any Holder to be included in a registration pursuant to
Section 2.1(a) shall be excluded from the underwriting unless all
securities other than Registrable Securities are first excluded.
(c) The Company is obligated to effect only two registrations pursuant
to Section 2.1(a) (which for purposes hereof shall include demands under
Section 2.10); provided, however, that no registration pursuant to Section
-------- -------
2.1(a) or Section 2.10 shall be deemed to be a registration for any purpose
of this sentence if (i) the number of Registrable Securities included in
the registration statement does not equal or exceed 35% of the number of
Registrable Securities proposed by the Holders to be included in the
offering; and provided, further, that no registration of Registrable
-------- -------
Securities which shall not have become and remained effective in accordance
with Section 2.3 shall be deemed to be a registration for any purpose of
this sentence.
(d) Notwithstanding the foregoing provisions of this Section 2.1, in
the event that the Company is requested to file any registration statement
pursuant to Section 2.1(a):
(i) the Company shall not be obligated to effect the filing of
such registration statement, during the 180 days following the
effective date of any other registration statement pertaining to a
public offering of securities for the account of the Company;
(ii) the Company shall not be obligated to effect more than one
registration pursuant to Section 2.1(a) or Section 2.10 in any 12-
month period; and
(iii) if the Company shall furnish to the Initiating Holders a
certificate signed by the president of the Company stating that, in
the good faith judgment of the Board of Directors, it would not be in
the best interests of the Company and its stockholders generally for
such registration statement to be filed, the Company shall have the
right to defer such filing for a period of not more than 90 days after
receipt of the request of the relevant Initiating Holders; provided,
--------
however, that the Company may not utilize the right set forth in this
-------
Section 2.1(d)(ii) more than once in any 12-month period.
(e) Each registration requested pursuant to Section 2.1(a) or 2.10
shall be effected by the filing of a registration statement on Form SB-2 or
Form S-3 (if applicable) (or if such form is not available, any other form
which includes substantially the same information (other than information
which is incorporated by reference) as would be
<PAGE>
required to be included in a registration statement on such form as
currently constituted), or unless another form would be equally effective.
2.2 Company Registration. If (but without any obligation to do so) the
--------------------
Company proposes to register (including for this purpose a registration effected
by the Company for stockholders other than the Holders) any of its capital stock
or other securities under the 1933 Act in connection with the public offering of
such securities solely for cash (other than a registration on Form S-8 relating
solely to the sale of securities to participants in a Company stock plan or a
registration on Form S-4), the Company shall, at such time, promptly give each
Holder written notice of such registration. Upon the written request of any
Holder given within 20 days after mailing of such notice by the Company, the
Company shall, subject to the provisions of Section 2.7, use its best efforts to
cause a registration statement covering all of the Registrable Securities that
each such Holder has requested to be registered to become effective under the
1933 Act. The majority of Holders participating in a registration under this
Section 2.2 have the right to select a co-lead underwriter, acceptable to the
Company and the lead underwriter, if such registration is for an underwritten
offering. The Company shall be under no obligation to complete any offering of
its securities it proposes to make and shall incur no liability to any Holder
for its failure to do so.
2.3 Obligations of the Company. Whenever required under this Section 2 to
--------------------------
use its best efforts to effect the registration of any Registrable Securities,
the Company shall, as expeditiously as reasonably possible, prepare and file
with the SEC a registration statement with respect to such Registrable
Securities and use its best efforts to cause such registration statement to
become effective, and, upon the request of the Holders of a majority of the
Registrable Securities to be registered thereunder, keep such registration
statement effective for up to 180 days (except with respect to any Shelf
Registration under Section 2.10(b) which may be for a longer period) or until
such Holders have informed the Company in writing that the distribution of their
Registrable Securities has been completed. In addition, the Company shall:
(a) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement, and use its best efforts to cause each such
amendment and supplement to become effective, as may be necessary to comply
with the provisions of the 1933 Act with respect to the disposition of all
securities covered by such registration statement;
(b) furnish to the Holders such reasonable number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the 1933 Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them;
(c) use its best efforts to register or qualify the securities covered
by such registration statement under such other securities or blue sky laws
of such states and jurisdictions as shall be reasonably requested by the
Holders, except that the Company
<PAGE>
shall not be required in connection therewith or as a condition thereto to
qualify to do business or file a general consent to service of process in
any such state or jurisdiction;
(d) in the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering; provided,
--------
however, that each Holder participating in such underwriting shall also
-------
enter into and perform its obligations under such an underwriting
agreement, including furnishing any opinion of counsel or entering into a
lock-up agreement reasonably requested by the managing underwriter;
(e) notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto
covered by such registration statement is required to be delivered under
the 1933 Act, of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing and promptly file such amendments and supplements which may be
required pursuant to Section 2.3(b) on account of such event and use its
best efforts to cause each such amendment and supplement to become
effective;
(f) furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to this Section 2, on the date that such
Registrable Securities are delivered to the underwriters for sale in
connection with a registration pursuant to this Section 2, if such
securities are being sold through underwriters, or, if such securities are
not being sold through underwriters, on the date that the registration
statement with respect to such securities becomes effective, (i) an opinion
or opinions, dated such date, of the counsel representing the Company for
the purposes of such registration, in form and substance as is customarily
given by company counsel to the underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities and (ii) a letter dated
such date, from the independent certified public accountant of the Company,
in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities;
(g) apply for listing and use its best efforts to list the Registrable
Securities being registered on any national securities exchange on which a
class of the Company's equity securities is listed or, if the Company does
not have a class of equity securities listed on a national securities
exchange, apply for qualification and use its best efforts to qualify the
Registrable Securities being registered for inclusion on the automated
quotation system of the National Association of Securities Dealers, Inc.;
and
(h) without in any way limiting the types of registrations to which
this Section 2 shall apply, in the event that the Company shall effect a
Shelf Registration, the Company shall take all necessary action, including
the filing of post-effective
<PAGE>
amendments, to permit the Investors to include their Registrable Securities
in such registration in accordance with the terms of this Section 2.
2.4 Furnish Information. It shall be a condition precedent to the
-------------------
obligations of the Company to take any action pursuant to this Section 2 in
respect of the Registrable Securities of any selling Holder that such selling
Holder shall furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such Registrable Securities as shall be required to effect the registration of
such Registrable Securities. The Company shall have no responsibility, to the
extent such Holder fails to provide such information in a timely manner, and if
the Company determines it appropriate, the Company may delay the filing of any
such registration statement until the Holder provides such information.
2.5 Expenses of Demand Registration. The Company shall bear all expenses
-------------------------------
relating to Registrable Securities incurred in connection with each
registration, filing or qualification pursuant to Section 2.1(a) and each
registration, filing or qualification pursuant to Section 2.10, including all
registration, filing and qualification fees, printing and accounting fees, fees
and disbursements of counsel for the Company, and the reasonable fees and
disbursements (not to exceed $20,000 per registration) of one counsel for the
selling Holders.
2.6 Expenses of Company Registration. The Company shall bear and pay all
--------------------------------
expenses incurred in connection with any registration, filing or qualification
of Registrable Securities with respect to any registration pursuant to Section
2.2 for each Holder, including all registration, filing and qualification fees,
printing and accounting fees, fees and disbursements of counsel for the Company
and the reasonable fees and disbursements of one counsel for the selling
Holders. All underwriting discounts and commissions relating to Registrable
Securities included in any registration effected pursuant to Section 2.2 will be
borne and paid ratably by the Holders of such Registrable Securities and the
Company.
2.7 Underwriting Requirements. In connection with any offering involving
-------------------------
an underwriting of securities being issued by the Company, the Company shall not
be required under Section 2.2 to include any of the Holders' securities in such
underwriting unless such Holders accept the terms of the underwriting as agreed
upon between the Company and the underwriters selected by it, and then only in
such quantity, if any, as will not, in the opinion of the underwriters,
jeopardize the success of the offering by the Company. If the managing
underwriter for the offering shall advise the Company in writing that the total
amount of securities, including Registrable Securities, requested by
shareholders to be included in such offering exceeds the amount of securities to
be sold other than by the Company that can be successfully offered, then the
Company shall be required to include in the offering only that number of such
securities, including Registrable Securities, which the managing underwriter
believes will not jeopardize the success of the offering. The securities so
included in the offering will be reduced as follows:
<PAGE>
(a) first, all securities which stockholders other than the Company
and the Holders seek to include in the offering shall be excluded from the
offering to the extent limitation on the number of shares included in the
underwriting is required; and
(b) if further limitation on the number of shares to be included in
the offering is required, then the number of shares held by Holders that
may be included in the underwriting shall be reduced pro rata among the
selling Holders in accordance with the number of shares of Registrable
Securities held by each such Holder;
provided, however, that in no event shall the amount of securities of the
- -----------------
selling Holders included in the offering be reduced below 35% of the total
amount of securities included in such offering, except if the managing
underwriter makes the determination described above and no securities other than
those of the Company are included. For purposes of the preceding sentence
concerning apportionment, for any selling stockholder which is a Holder of
Registrable Securities and which is a partnership or a corporation, the
partners, retired partners and stockholders of such Holder, or the estates and
family members of such partners and retired partners and any trusts for the
benefit of any of the foregoing persons shall collectively be deemed to be a
"selling Holder," and any pro rata reduction with respect to such "selling
Holder" shall be based upon the aggregate amount of shares carrying registration
rights owned by all entities and individuals included in such "selling Holder,"
as defined in this sentence.
2.8 Indemnification. In the event any Registrable Securities are included
---------------
in a registration statement under this Section 2:
(a) The Company will indemnify and hold harmless each Holder, the
officers, directors, partners, agents and employees of each Holder, any
underwriter (as defined in the 1933 Act) for such Holder and each person,
if any, who controls such Holder or underwriter within the meaning of the
1933 Act or the 1934 Act (collectively, the "Holder Indemnitees"), against
------------------
any losses, claims, damages or liabilities (joint or several) to which they
may become subject under the 1933 Act, the 1934 Act or any other federal or
state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any Violation.
The Company will reimburse each Holder Indemnitee for any legal or other
expenses reasonably incurred by such Holder Indemnitee in connection with
investigating or defending any such loss, claim, damage, liability or
action. The indemnity agreement contained in this Section 2.8(a) shall not
apply to amounts paid in settlement of any loss, claim, damage, liability
or action if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld), nor shall the Company
be liable to any Holder Indemnitee in any such case for any such loss,
claim, damage, liability or action (i) to the extent that it arises out of
or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in
connection with such registration by or on behalf of such Holder
Indemnitee; provided, however, that the Company shall not be required to
-------- -------
indemnify any Holder for information supplied by another Holder or (ii) in
the case of a sale directly by a Holder of Registrable Securities
(including a sale of such Registrable Securities through any underwriter
retained by such Holder engaging in a
<PAGE>
distribution solely on behalf of such Holder), such untrue statement or
alleged untrue statement or omission or alleged omission was contained in a
preliminary prospectus and corrected in a final or amended prospectus, and
such Holder failed to deliver a copy of the final or amended prospectus at
or prior to the confirmation of the sale of the Registrable Securities to
the Person asserting any such loss, claim, damage or liability in any case
in which such delivery is required by the 1933 Act.
(b) Each Holder which includes any Registrable Securities in any
registration statement (i) will indemnify and hold harmless the Company,
each of its directors, each of its officers who have signed the
registration statement, each person, if any, who controls the Company
within the meaning of the 1933 Act, each agent and any underwriter for the
Company, and any other Holder or other stockholder selling securities in
such registration statement or any of its directors, officers, partners,
agents or employees or any Person who controls such Holder or such other
stockholder or such underwriter (collectively, the "Company Indemnitees "),
--------------------
against any losses, claims, damages or liabilities (joint or several) to
which any Company Indemnitee may become subject under the 1933 Act, the
1934 Act or other federal or state law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereto) arise out of or are
based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by or on behalf of such Holder expressly for
use in connection with such registration and (ii) will reimburse any legal
or other expenses reasonably incurred by any Company Indemnitee in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the liability of any Holder
-------- -------
hereunder shall be limited to the amount of net proceeds (after deduction
of all underwriters' discounts and commissions paid by such Holder in
connection with the registration in question) received by such Holder in
the offering giving rise to the Violation; and provided, further, that the
-------- -------
indemnity agreement contained in this Section 2.8(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of such Holder
(which consent shall not be unreasonably withheld) nor, in the case of a
sale directly by the Company of its securities (including a sale of such
securities through any underwriter retained by the Company to engage in a
distribution solely on behalf of the Company), shall such Holder be liable
to the Company in any case in which such untrue statement or alleged untrue
statement or omission or alleged omission was contained in a preliminary
prospectus and corrected in a final or amended prospectus, and the Company
failed to deliver a copy of the final or amended prospectus at or prior to
the confirmation of the sale of the securities to the Person asserting any
such loss, claim, damage or liability in any case in which such delivery is
required by the 1933 Act.
(c) Promptly after receipt by any Indemnitee under this Section 2.8 of
notice of the commencement of any action (including any governmental
action), such Indemnitee will, if a claim in respect thereof is to be made
against any indemnifying party under this Section 2.8, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other
indemnifying
<PAGE>
party similarly noticed, to assume and control the defense thereof with
counsel mutually satisfactory to the parties; provided, however, that such
-------- -------
Indemnitee shall have the right to retain its own counsel, with the fees
and expenses to be paid by the indemnifying party, if representation of
such Indemnitee by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests, as reasonably
determined by either party, between such Indemnitee and any other party
represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend
such action, shall relieve such indemnifying party of any liability to the
Indemnitee under this Section 2.8 to the extent of such prejudice, but the
omission so to deliver written notice to the indemnifying party will not
relieve it of any liability that it may have to such Indemnitee otherwise
than under this Section 2.8.
(d) The obligations of the Company and the Holders under this Section
2.8 shall survive the completion of any offering of Registrable Securities
in a registration statement whether under this Section 2 or otherwise.
(e) If the indemnification provided for in this Section 2.8 is
unavailable to a party that would have been an Indemnitee under this
Section 2.8 in respect of any losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) referred to herein, then each
party that would have been an indemnifying party hereunder shall, in lieu
of indemnifying such Indemnitee, contribute to the amount paid or payable
by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such
proportion as is appropriate to reflect the relative fault of such
indemnifying party, on the one hand, and such Indemnitee, on the other
hand, in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions or proceedings in
respect thereof). The relative fault shall be determined by reference to,
among other things, whether the Violation relates to information supplied
by such indemnifying party or such Indemnitee and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such Violation. The parties agree that it would not be just and
equitable if contribution pursuant to this Section 2.8(e) were determined
by pro rata allocation or by any other method of allocation which does not
take account of the equitable considerations referred to in the preceding
sentence. The amount paid or payable by a contributing party as a result
of the losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) referred to above in this Section 2.8(e) shall include any
legal or other expenses reasonably incurred by such Indemnitee in
connection with investigating or defending any such action or claim. No
Person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any
Person who was not guilty of such fraudulent misrepresentation. The
liability of any Holder of Registrable Securities in respect of any
contribution obligation of such Holder (after deduction of all
underwriters' discounts and commissions paid by such Holder in connection
with the registration in question) arising under this Section 2.8(e) shall
not in any event exceed an amount equal to the net proceeds to such Holder
from the disposition of the Registrable Securities disposed of by such
Holder pursuant to such registration.
<PAGE>
2.9 Reports Under Securities Exchange Act of 1934.
---------------------------------------------
(a) With a view to making available to the Holders the benefits of
Rule 144 promulgated under the 1933 Act ("Rule 144") and any other rule or
--------
regulation of the SEC that may at any time permit a Holder to sell
securities of the Company to the public without registration, and with a
view to making it possible for Holders to register the Registrable
Securities pursuant to a registration on Form S-3, the Company agrees to:
(i) use its best efforts to make and keep public information
available, as those terms are understood and defined in Rule 144, at
all times;
(ii) take such action, including the voluntary registration of
its Common Stock under Section 12 of the 1934 Act or compliance with
the reporting requirements of Section 15(d) of the 1934 Act, as is
necessary to enable the Holders to utilize Form S-3 for the sale of
their Registrable Securities, for the offering of its securities to
the general public is declared effective;
(iii) use its best efforts to file with the SEC in a timely
manner all reports and other documents required of the Company under
the 1933 Act and the 1934 Act; and
(iv) furnish to any Holder, so long as such Holder owns any
Registrable Securities, forthwith upon request (A) a written statement
by the Company as to its compliance with the reporting requirements of
Rule 144, the 1933 Act and the 1934 Act, or as to its qualification as
a registrant whose securities may be resold pursuant to Form S-3, (B)
a copy of the most recent annual or quarterly report of the Company
and such other reports and documents so filed by the Company and (C)
such other information as may be reasonably requested in availing any
Holder of any rule or regulation of the SEC which permits the selling
of any such securities without registration or pursuant to such form.
(b) The Company agrees that, at all times during which the Company is
neither subject to the reporting requirement of Sections 13 or 15(d) of the
1934 Act, nor exempt from reporting pursuant to Rule 12g3-2(b) under the
1934 Act, it will provide in written form, upon the written request of any
Holder, or a prospective purchaser of securities of the Company from such
Holder, all information required by Rule 144A(d)(4)(i) of the General
Regulations promulgated by the SEC under the 1933 Act (the "Rule 144A
---------
Information"). The Company further agrees, upon written request, to
-----------
cooperate with and assist any Holder or any member of the National
Association of Securities Dealers, Inc. system for Private Offerings
Resales and Trading through Automated Linkages ("PORTAL") in applying to
------
designate and thereafter maintaining the eligibility of the Company's
securities for trading through PORTAL. With respect to each Holder, the
Company's obligations under this Section 2.9(b) shall at all times be
contingent upon such Holder's obtaining from a prospective purchaser an
agreement to
<PAGE>
take all reasonable precautions to safeguard the Rule 144A Information from
disclosure to anyone other than employees of the prospective purchaser who
require access to the Rule 144A Information for the sole purpose of
evaluating its purchase of the Company's securities.
2.10 Form S-3 Registration; Shelf Registration.
-----------------------------------------
(a) In case the Company shall receive from Holders of at least 50% of
the Registrable Securities a written request that the Company effect a
registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the Registrable Securities owned by such
Holder, the Company will:
(i) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders; and
(ii) use its best efforts to effect, as soon as practicable,
such registration, qualification or compliance as may be so requested
and as would permit or facilitate the sale and distribution of all or
such portion of such Holder's Registrable Securities as are specified
in such request, together with all or such portion of the Registrable
Securities of any other Holder joining in such request as are
specified in a written request given within 20 days after receipt of
such written notice from the Company; provided, however, that the
-------- -------
Company shall not be obligated to effect any such registration,
qualification or compliance, pursuant to this Section 2.10 if: (A)
Form S-3 is not available for such offering by the Holders; (B) the
Company has already effected one registration on Form S-3 or pursuant
to Section 2.1 within the previous twelve-month period; or (C) the
Company shall furnish to the Holders a certificate signed by the
president of the Company stating that, in the good faith judgment of
the Board of Directors, it would not be in the best interests of the
Company and its stockholders for such Form S-3 registration to be
effected at such time, in which event the Company shall have the right
to defer the filing of such Form S-3 registration for a period of not
more than 90 days after receipt of the request of the Holder or
Holders under this Section 2.10; provided, however, that the Company
-------- -------
shall not utilize this right more than once in any 12-month period and
that any demand under this Section 2.10 shall count as a demand under
Section 2.1.
(b) As soon as practicable after Closing, and in any event not more
than 45 days from the date of this Agreement, the Company shall prepare and
file with the SEC a Shelf Registration registering the resale from time to
time of all of the Registrable Securities (the "Initial Shelf
-------------
Registration") held by the Holders. The registration statement for any
------------
Shelf Registration shall be on Form S-3 or another appropriate form
permitting registration of such Registrable Securities for resale by the
Holders in the manner or manners designated by them, from time to time,
which may include an underwritten offering, subject to the underwriter
being reasonably acceptable to the Company. The Company shall use its best
efforts to cause the Initial Shelf Registration to become effective under
the 1933 Act as promptly as is practicable and to keep the Initial Shelf
<PAGE>
Registration continuously effective under the Securities Act until the end
of the Effective Period. The following provisions shall also apply with
respect to a Shelf Registration:
(i) From and after the exercise of any Warrant, in whole or in
part, within 45 days after receipt of written notice from the Holder,
the Company shall effect a Shelf Registration for all or a portion of
the Conversion Shares which have been theretofore issued to Holder;
provided, however, that (A) the number of Conversion Shares sought to
------- -------
be included in any Shelf Registration shall not be less than 50% of
the shares of Common Stock or other securities for which the Warrant
is exercisable and (B) in no event shall the Company be obligated to
effect a Shelf Registration pursuant to this paragraph on more than
one occasion in any 12-month period.
(ii) If the Initial Shelf Registration or any Subsequent Shelf
Registration (as defined below) ceases to be effective for any reason
at any time during the Effectiveness Period (other than because all
Registrable Securities shall have been sold or shall have ceased to be
Registrable Securities), the Company shall use its best efforts to
obtain the prompt withdrawal of any order suspending the effectiveness
thereof, and in any event shall within thirty (30) days of such
cessation of effectiveness amend the Shelf Registration in a manner
reasonably expected to obtain the withdrawal of the order suspending
the effectiveness thereof, or file an additional Shelf Registration
covering all of the Registrable Securities then outstanding (a
"Subsequent Shelf Registration"). If a Subsequent Shelf Registration
------------------------------
is filed, the Company shall use all reasonable efforts to cause the
Subsequent Shelf Registration to become effective as promptly as is
practicable after such filing and to keep such registration statement
continuously effective until the end of the Effectiveness Period.
(iii) The Company shall supplement and amend the Shelf
Registration if required by the rules, regulations or instructions
applicable to the registration form used by the Company for such Shelf
Registration, if required by the 1933 Act or the SEC, or if reasonably
requested by the majority of Holders or by any managing underwriter,
if any, of such Registrable Securities with respect to the offer and
sale or other disposition of the Registrable Securities during the
Effective Period.
(iv) From time to time, the Company shall (A) prepare and file
with the SEC a post-effective amendment to the Shelf Registration or a
supplement to the related prospectus or a supplement or amendment to
any document incorporated therein by reference or any other required
document, so that such registration statement will not contain any
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, so that, as thereafter delivered to purchasers
of the Registrable Securities being sold thereunder, such prospectus
will not contain any 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, in light of the circumstances under which
they were made, not misleading; (B) provide the Holders with
<PAGE>
copies of any registration statement, prospectus, document
incorporated by reference therein, or such other documents filed with
the SEC in such numbers as the Holders shall reasonably request; and
(C) inform the Holders that the Company has complied with its
obligations and that the registration statement and related prospectus
may be used for the purpose of selling all or any of such Registrable
Securities (or that, if the Company has filed a post-effective
amendment to the Shelf Registration which has not yet been declared
effective, the Company will notify the Holders to that effect, will
use its best efforts to secure the effectiveness of such post-
effective amendment and will immediately so notify the Holders when
the amendment has become effective).
2.11 Lock-up Agreements. If reasonably requested by the Company and the
------------------
managing underwriter, the Holders agree to enter into lock-up agreements
pursuant to which they will not, for a period of 180 days following the
effective date of a registration statement for a public offering of the
Company's securities, offer, sell or otherwise dispose of any Registrable
Securities (except Registrable Securities sold pursuant to such registration
statement) without the prior consent of the Company and the underwriter,
provided that the officers, directors and all holders of more than 5% of the
shares of Common Stock (calculated for the purpose as if all securities
convertible into or exercisable for Common Stock, directly or indirectly, are so
converted or exercised) of the Company enter such lock-up agreements for the
same period and on the same terms.
2.12 Assignment of Registration Rights. The rights to cause the Company to
---------------------------------
register Registrable Securities pursuant to this Section 2 may be assigned by
any Holder to a permitted transferee, and by such transferee to a subsequent
permitted transferee, but only if such rights are transferred (a) to an
affiliate, subsidiary, partner or stockholder of such Holder or transferee or an
account managed or advised by the manager or adviser of such Holder or
transferee or (b) in connection with the sale or other transfer of not less than
an aggregate of five percent (5%) of the Registrable Securities held by such
Holder or some lesser number, if such lesser number represents all the
Registrable Securities then held by such Holder; provided, however, that such
-------- -------
transfer does not constitute a "distribution" within the meaning of the 1933
Act. Any transferee to which rights under this Agreement are transferred shall:
(i) as a condition to such transfer, deliver to the Company a written instrument
by which such transferee agrees to be bound by the obligations imposed upon
Holders under this Agreement to the same extent as if such transferee were a
Holder under this Agreement; and (ii) be deemed to be a Holder hereunder.
2.13 Limitations on Subsequent Registration Rights. From and after the
---------------------------------------------
date of this Agreement, the Company shall not, without the prior written consent
of the Holders of a majority of the Registrable Securities then outstanding,
enter into any agreement with any holder or prospective holder of any securities
of the Company relating to registration rights (other than registration rights
disclosed on Schedule 4.12 to the Securities Purchase Agreement) , unless such
agreement
<PAGE>
includes (a) to the extent such agreement would allow such holder or prospective
holder to include such securities in any registration filed under Section 2.1,
2.2 or 2.10, a provision that such holder or prospective holder may include such
securities in any such registration only to the extent that the inclusion of its
securities will not reduce the amount of the Registrable Securities of the
Holders which would otherwise be included and (b) no provision which would allow
such holder or prospective holder to make a demand registration which could
result in such registration statement being declared effective prior to November
1, 2003.
3. Legend. Each certificate representing any Registrable Security shall bear
------
on its face substantially the following legends:
(a) "THESE SECURITIES ARE SUBJECT TO THE PROVISIONS OF A CERTAIN
REGISTRATION RIGHTS AGREEMENT DATED AS OF SEPTEMBER 4, 1998, AS AMENDED AND
IN EFFECT FROM TIME TO TIME, AMONG THE CORPORATION AND THE STOCKHOLDERS
NAMED THEREIN, A COPY OF WHICH IS ON FILE AT THE OFFICES OF THE
CORPORATION."
(b) Any legends required by (i) the Securities Purchase Agreement or
(ii) the laws of any applicable jurisdiction.
4. Specific Performance. The parties recognizes that their respective rights
--------------------
under this Agreement are unique, and, accordingly, each party shall, in addition
to such other remedies as may be available to it at law or in equity, have the
right to enforce its rights hereunder by actions for injunctive relief and
specific performance to the extent permitted by law. This Agreement is not
intended to limit or abridge any rights of either party which may exist apart
from this Agreement.
5. Notices. Any notices or other communications required or permitted
-------
hereunder shall be sufficiently given if in writing and delivered in Person,
transmitted by facsimile transmission (fax) or sent by registered or certified
mail (return receipt requested) or recognized overnight delivery service,
postage pre-paid, addressed as follows, or to such other address has such party
may notify to the other parties in writing:
(a) if to the Company:
Touchstone Applied Science Associates, Inc.
P.O. Box 382
4 Hardscrabble Heights
Brewster, New York 10509
Attn: Andrew L. Simon
Telephone No.: 914-277-8100
Facsimile No.: 914-277-3548
<PAGE>
with a copy to:
Christy & Viener
620 Fifth Avenue
New York, New York 10020
Attn: Steven R. Berger, Esq.
Telephone No.: 212-632-5500
Facsimile No.: 212-632-5555
(b) if to the Purchasers:
c/o Cahill, Warnock & Company, L.L.C.
One South Street, Suite 2150
Baltimore, MD 21202
Attn: David L. Warnock
Telephone No.: 410-895-3800
Facsimile No.: 410-895-3805
with a copy to:
Wilmer, Cutler & Pickering
100 Light Street
Baltimore, MD 21202
Attn: George P. Stamas, Esq.
Telephone No.: 410-986-2800
Facsimile No.: 410-986-2828
A notice or communication will be effective (i) if delivered in Person or
by overnight courier, on the business day it is delivered, (ii) if
transmitted by telecopier, on the business day of actual confirmed receipt
by the addressee thereof, and (iii) if sent by registered or certified
mail, three (3) business days after dispatch.
6. Binding Effect; Assignment. This Agreement shall be binding upon, and
--------------------------
inure to the benefit of, the parties and their respective personal
representatives, successors and permitted assigns; provided, however, that the
-------- -------
Company shall not have the right to assign its rights and obligations hereunder,
or any interest herein, without the prior written consent of the holders of a
majority of the Registrable Securities then outstanding.
7. Course of Dealing; Amendments, Waivers and Consents. No course of
---------------------------------------------------
dealing between the parties shall operate as a waiver of any party's rights
under this Agreement. Each party acknowledges that if any party, without being
required to do so by this Agreement, gives any notice or information to, or
obtains any consent from, the other party, such party shall not by implication
have amended, waived or modified any provision of this Agreement, or created any
<PAGE>
duty to give any such notice or information or to obtain any such consent on any
future occasion. No delay or omission on the part of any party in exercising any
right under this Agreement shall operate as a waiver of such right or any other
right hereunder or thereunder. A waiver on any one occasion shall not be
construed as a bar to or waiver of any right or remedy on any future occasion.
No amendment, waiver or consent with respect to this Agreement shall be binding
unless it is in writing and signed by each of the Company and the holders of a
majority of the Registrable Securities then outstanding.
8. Miscellaneous. If any provision of this Agreement shall be found by any
-------------
court of competent jurisdiction to be invalid or unenforceable, the parties
hereby waive such provision to the extent that it is found to be invalid or
unenforceable. Such provision shall, to the maximum extent allowable by law, be
modified by such court so that it becomes enforceable, and, as modified, shall
be enforced as any other provision hereof, all the other provisions hereof
continuing in full force and effect. The headings contained in this Agreement
are for reference purposes only and shall not in any way affect the meaning or
interpretation hereof. This Agreement constitutes the entire understanding of
the parties with respect to the subject matter hereof and supersedes any and all
prior understandings and agreements, whether written or oral, with respect to
such subject matter. This Agreement may be executed in counterparts, which
together shall constitute one and the same instrument. This Agreement shall be
governed by and construed in accordance with the laws (other than the conflict
of laws rules) of the State of New York.
[Remainder of page left blank intentionally -- signature page follows.]
<PAGE>
REGISTRATION RIGHTS AGREEMENT
SIGNATURE PAGE
IN WITNESS WHEREOF, the Company and the Investors have caused this
Agreement to be executed effective as of the date first above written.
THE COMPANY:
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
By:
Name: Andrew L. Simon
Title: President and Chief Executive Officer
INVESTORS:
CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P.
By: CAHILL WARNOCK STRATEGIC PARTNERS, L.P.,
its General Partner
By:________________________________
Name: David L. Warnock
Title: a General Partner
STRATEGIC ASSOCIATES, L.P.
By: CAHILL, WARNOCK & COMPANY, LLC, its
General Partner
By:________________________________
Name: David L. Warnock
Title: Managing Member
<PAGE>
EXHIBIT 6
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR UNDER APPLICABLE STATE SECURITIES LAWS. THIS DEBENTURE
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS DEBENTURE UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO THE PROVISIONS OF RULE
144 OF THE ACT.
THIS DEBENTURE IS SUBJECT TO THE PROVISIONS OF A SECURITIES PURCHASE AGREEMENT,
DATED AS OF SEPTEMBER 4, 1998, AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE
DISPOSED OF EXCEPT AS THEREIN PROVIDED.
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
8% Debenture due _________, 2003 [to be dated the Closing Date]
--------------------------------
$[4,000,000.00] ___________,
1998
FOR VALUE RECEIVED, TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC., a Delaware
corporation (the "Company"), hereby promises to pay to CAHILL, WARNOCK STRATEGIC
PARTNERS FUND, L.P., or permitted assigns ("Strategic Partners"or the "Holder"),
------------------ ------
the principal amount of [FOUR MILLION DOLLARS ($4,000,000.00)] on the fifth
anniversary date of this Debenture (the "Maturity Date"), and to pay interest on
-------------
the unpaid principal amount thereof, from the date hereof until paid in full, at
the annual rate of eight percent (8.0%). Interest shall be computed on the
basis of a 360 day year and the actual number of days elapsed. Accrued and
unpaid interest shall be due and payable quarterly in arrears on the last day of
each January, April, July and October from the date hereof until the entire
principal amount is paid. All amounts due and owing hereunder shall be payable
in lawful money of the United States of America, in immediately available funds,
at the principal office of the Holder or at such other place as the Holder may
designate from time to time in writing to the Company. Any payment on this
Debenture coming due on a Saturday, a Sunday or a day which is a legal holiday
in the place at which a payment is to be made hereunder shall be made on the
next succeeding day which is a business day in such place, and any such
extension of the time of payment shall be included in the computation of
interest hereunder. This Debenture is issued pursuant and subject to and is
entitled to the benefits of a certain Securities Purchase Agreement dated as of
September 4, 1998 by and between the Company and Strategic Partners (the
"Securities Purchase Agreement"). Capitalized words not defined herein shall
-----------------------------
have the meanings set forth in the Securities Purchase Agreement. Except as set
forth in Section 10.3 of the
<PAGE>
Securities Purchase Agreement, the Debentures shall rank senior to or pari passu
---- -----
to all other Indebtedness of the Company whether now outstanding or hereafter
incurred.
Subject to the terms of the Securities Purchase Agreement, upon the
occurrence or existence of an Event of Default (as defined in the Securities
Purchase Agreement) the Holder may, by notice to the Company, declare the entire
unpaid principal amount of this Debenture, all interest accrued and unpaid
hereon, and all other amounts payable to the Holder hereunder or under the
Securities Purchase Agreement to be forthwith due and payable, whereupon this
Debenture, all such accrued interest and all such amounts shall become and be
forthwith due and payable, and in addition thereto, and not in substitution
therefor, the Holder shall be entitled to exercise any one or more of the rights
and remedies provided by applicable law. Failure to exercise any right or
remedy under this Debenture or available under applicable law shall not
constitute a waiver of such option or such other remedies or of the right to
exercise any of the same in the event of any subsequent Event of Default. The
Company and all makers, sureties, guarantors, endorsers and other persons
assuming obligations pursuant to this Debenture hereby waive presentment,
protest, demand, notice of dishonor and all other notices and all defenses and
pleas on the grounds of any extension or extension of the time of payments or
the due dates hereof, in whole or in part, before or after maturity, with or
without notice. No renewal or extension of this Debenture, no release of any
obligor and no delay in enforcement of this Debenture or in exercising any right
or power hereunder shall affect the liability of any obligor hereunder. The
pleading of any statute of limitations as a defense to any demand against any
obligor is expressly waived.
1. Warrants. As part of the consideration for the loan evidenced by this
--------
Debenture, the Company has authorized and issued four non-detachable Warrants,
attached to this Debenture as Exhibit 1 through Exhibit 4, respectively (each a
--------- ---------
"Warrant" and collectively, the "Warrants"), to the Holder. The Warrants
------- --------
contain the following terms and conditions:
(a) Except as set forth below in Section 1(b), the date on which the
Holder may first exercise all or part of each Warrant is:
(i) the Closing Date with respect to [Warrant No. 1/Warrant No.
2]; and
(ii) the eighteen (18) month anniversary date of the Closing Date
with respect to [Warrant No. 3/Warrant No. 4].
(b) Each of the Warrants shall become immediately exercisable upon the
occurrence or existence of an Event of Default (the earlier of the
applicable date in Section 1(a) above and the date on which an Event of
Default occurs shall be referred to as the Warrant's "Effective Date").
--------------
(c) Each Warrant shall be exercisable in whole or in part for a period
of [five] years, subject to Section 2.6 of the Warrant, from the Effective
Date of that Warrant (such period being referred to as the "Exercise
--------
Period") and entitles the Holder to purchase an
------
<PAGE>
aggregate of [__________] shares of the Company's Common Stock, which
represents ______ percent (___%) of the Company's issued and outstanding
capital stock on a fully diluted basis at the date of issuance, at an
exercise price of $0.35 per share ("Exercise Price") subject to any
--------------
adjustments as set forth in Section 3.3 of the Warrant.
(d) If the Company satisfies all obligations under the Securities
Purchase Agreement and under this Debenture (including without limitation
paying in full all principal and accrued interest) prior to the Effective
Date of a Warrant, then each such Warrant which is not yet effective shall
immediately and automatically terminate and thereafter be null and void ab
initio. Satisfaction of all obligations under the Securities Purchase
Agreement and hereunder by the Company on or after the Effective Date of a
Warrant shall not affect such Warrant, which shall remain in full force and
effect until the earlier of the exercise of the Warrant in full or the
termination of the Exercise Period for such Warrant.
(e) During each Warrant's Exercise Period, the Warrant may be
exercised in whole or in part by payment in cash, bank cashier's check,
certified check, or, at the option of the Purchaser, by reduction in the
principal amount of this Debenture (or forgiveness of any accrued and
unpaid interest thereon), in an amount equal to the product of (i) the
Exercise Price multiplied by (ii) the number of Conversion Shares being
purchased.
2. Prepayment.
----------
(a) Voluntary Payment. The Company may prepay or redeem all, or part
-----------------
(in minimum denominations equal to one-fourth of the principal amount), of
this Debenture prior to the Maturity Date, without penalty, with twenty-
five (25) days' prior written notice thereof to the Holder.
(b) Mandatory Prepayment. Unless agreed to in writing by the Holder,
--------------------
the Company shall be required to prepay the Debenture upon (i) the
occurrence or existence of an Event of Default (as defined in the
Securities Purchase Agreement); or (ii) the consummation of a Qualified
Public Offering.
3. No Impairment. The Company will not, by amendment of its Certificate
-------------
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, or any other similar voluntary action, avoid
or seek to avoid the observance or performance of any of the terms of this
Debenture, 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 impairment due
to such event. Without limiting the generality of the foregoing, the Company
(a) will not increase the par value of any shares of stock receivable on
exercise of the Warrants attached hereto above the Exercise Price then in
effect, (b) will take all action that may 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 and charges with respect to the
issue thereof, on the exercise of the Warrants attached hereto from time to time
and (c) will not consolidate with or merge into any other
<PAGE>
person or permit any such person to consolidate with or merge into the Company,
unless such other person (or, in the case of a merger or consolidation in which
the Company is the surviving entity, the person issuing the securities involved
in such merger or consolidation) shall expressly assume in writing and will be
bound by all the terms of this Debenture and the Warrants attached hereto.
4. Chief Financial Officer's Certificate as Adjustments. In each case of
----------------------------------------------------
any adjustment or readjustment in the Conversion Shares issuable on the exercise
of the Warrants attached hereto, the Chief Financial Officer of the Company will
promptly compute such adjustment or readjustment in accordance with the terms of
the Warrants and prepare a certificate setting forth such adjustment or
readjustment, the Exercise Price resulting therefrom, and the increase or
decrease, if any, of the number of shares purchasable at such price upon
exercise of the Warrants showing in detail the facts and computation upon which
such adjustment or readjustment is based. The Company will forthwith mail a
copy of each such certificate to the registered holder of this Debenture, and
will, on the written request at any time of the holder of this Debenture,
furnish to such holder a like certificate setting forth the Exercise Price of
the Debenture at the time in effect and showing how it was calculated.
5. Notices of Record Date, etc. In the event the Company (a) takes 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 on, or any right 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)
consolidates or merges into, or transfers all or substantially all of its assets
to, another entity, or (c) dissolves or liquidates (each of the events described
in the foregoing clauses (b) and (c) being hereinafter referred to as a
"Fundamental Change"), then and in each such event the Company will mail or
------------------
cause to be mailed to the registered holder of this Debenture a notice
specifying (i) the date on which any such record is to be taken for the purpose
of such dividend, distribution or right, and stating the amount and character of
such dividend, distribution or right, (ii) the date on which any such
Fundamental Change is to be effected, and the time, if any to be fixed, as of
which the holders of record of Common Stock shall be entitled to exchange their
shares of Common Stock for securities or other property, if any, deliverable on
any Fundamental Change and (iii) the amount and character of any stock or other
securities, or rights or options with respect thereto, proposed to be issued or
granted, the date of such proposed issue or grant and the persons or class of
persons to whom such proposed issue or grant is to be offered or made. Such
notice shall also state that the action in question or the record date is
subject to the effectiveness of a registration statement under the Securities
Act of 1933, as amended (the "Securities Act"), or a favorable vote of
--------------
stockholders, if either is required. Such notice shall be mailed at least 15
days prior to the date specified in such notice on which any such action is to
be taken or 15 days prior to the record date therefor, whichever is earlier.
6. Reservation of Warrant Shares. The Company will at all times reserve
-----------------------------
and keep available, solely for issuance and delivery on the exercise of the
Warrants attached hereto, all Warrant Shares from time to time issuable upon
such exercise.
<PAGE>
7. Transfer. Subject to applicable federal and state securities laws,
--------
the transfer of this Debenture and all rights hereunder, in whole or in part, is
registrable at the office or agency of the Company by the registered holder
hereof in person or by his duly authorized attorney, upon surrender of this
Debenture properly endorsed; provided that this Debenture (and any rights of the
Holder hereunder) is non-transferable except to a person or entity controlled
by, or under common control with, the Holder, except that upon the occurrence or
existence of an Event of Default, the Holder may transfer this Debenture and the
attached Warrants to any Person without the consent of the Company. Each taker
and holder of this Debenture, by taking or holding the same, consents and agrees
that this Debenture, when endorsed in blank, shall be deemed negotiable, and
that the holder hereof, when this Debenture shall have been so endorsed, may be
treated by the Company and all other persons dealing with this Debenture as the
absolute owner and holder hereof for any purpose and as the person entitled to
exercise the rights represented by this Debenture, or to the registration of
transfer hereof on the books of the Company; and until due presentment for
registration of transfer on such books the Company may treat the registered
holder hereof as the owner and holder for all purposes, and the Company shall
not be affected by notice to the contrary.
8. Register. The Company shall maintain, at the principal office of the
--------
Company (or such other office as it may designate by notice to the holder
hereof), a register for the Debenture, in which the Company shall record the
name and address of the person in whose name a Debenture has been issued, as
well as the name and address of each transferee and each prior owner of such
Debenture.
9. Replacement. Upon receipt of evidence reasonably satisfactory to the
-----------
Company of the loss, theft, destruction or mutilation of any Debenture or
Warrant and, in the case of any such loss, theft or destruction, upon delivery
of an indemnity bond or other agreement or security reasonably satisfactory in
form and amount to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of such Debenture or Warrant, the Company will issue
a new Debenture or Warrant, of like tenor and amount, in lieu of such lost,
stolen, destroyed or mutilated Debenture or Warrant; provided, however, if any
-------- -------
Debenture or Warrant of which the Purchaser, its affiliate, or the registered
holder is lost, stolen or destroyed, the affidavit of such principal or general
partner or any principal or corporate officer of such holder setting forth the
circumstances with respect to such loss, theft or destruction, together with an
agreement to indemnify the Company with respect thereto shall be accepted as
satisfactory evidence thereof, and no indemnity bond or other security shall be
required as a condition to the execution and delivery by the Company of a new
Debenture or Warrant in replacement of such lost, stolen or destroyed Debenture
or Warrant.
10. Remedies. The Company stipulates that the remedies at law of the
--------
holder of this Debenture 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
Debenture are not and will not be adequate, and that such terms may be
specifically enforced pursuant to a decree for the specific performance of any
agreement contained herein or by an injunction against a violation of any of the
terms hereof or otherwise.
<PAGE>
11. No Sinking Fund; Payment Unsecured. No sinking fund or similar
----------------------------------
provision shall be required to fund payment of principal or interest under this
Debenture. Payment of principal and interest on this Debenture is unsecured.
12. Subordination.
-------------
(a) The Company agrees, and Purchaser by its acceptance hereof likewise
agrees, that the payment of the principal of and interest on the Debentures is
hereby expressly made subordinate and junior in right of payment to the prior
payment in full of all principal of and interest on all Senior Indebtedness (as
defined below) whether now outstanding or hereafter incurred, created or
assumed.
(b) The term "Senior Indebtedness," as used in this Agreement, shall
-------------------
mean: (i) the principal, interest and other amounts outstanding at the date of
execution of this Agreement as set forth and identified as "Senior Debt" on
Schedule 4.29 of the Securities Purchase Agreement (the "Existing Indebtedness")
- ------------- ---------------------
or (ii) the principal, interest and other amounts incurred, created, assumed,
modified, renewed or extended after the Closing Date on the following: (w)
secured indebtedness of the Company for money borrowed (including any bank loan
or credit facility) approved by the Board of Directors; (x) obligations of the
Company as lessee under any lease of property which is reflected on the
Company's balance sheet as a capitalized lease in accordance with GAAP; (y)
guarantees by the Company of indebtedness for money borrowed by a Subsidiary or
of any obligations of a Subsidiary under any lease of property which is
reflected on the Subsidiary's balance sheet as a capitalized lease in accordance
with GAAP; and (z) unsecured indebtedness of the Company approved by the
Company's Board of Directors and which is issued following the Purchasers'
execution of a subordination agreement on terms and conditions acceptable to the
Purchasers.
(c) Notwithstanding the foregoing provisions, the total aggregate amount
of Senior Indebtedness shall not, at any time, without the written consent of
the Purchaser, exceed the sum of the Existing Indebtedness plus $1,000,000.
Failure to comply with this Section 12 shall constitute an Event of Default.
13. Notices. All notices, demands, requests, or other communications
-------
which may be or are required to be given, served, or sent pursuant to this
Debenture shall be given, served and sent in accordance with the provisions of
the Securities Purchase Agreement.
14. Miscellaneous. This Debenture and the Warrants attached hereto and
-------------
any term hereof or therein may be changed, waived, discharged or terminated only
by an instrument in writing signed by the party against which enforcement of
such change, waiver, discharge or termination is sought. Any amendment,
modification or addition to this Debenture is subject to the provisions
governing same in the Securities Purchase Agreement. This Debenture and the
Warrants attached hereto shall be construed and enforced in accordance with and
governed by the laws of the State of New York (excluding the choice of law rules
thereof). The headings in this Debenture and the Warrants attached hereto are
for purposes of reference only, and shall not limit
<PAGE>
or otherwise affect any of the terms hereof. The invalidity or unenforceability
of any provision hereof shall in no way affect the validity or enforceability of
any other provision.
[Balance of Page Left Blank Intentionally -- Signature Page Follows]
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Debenture to be duly
executed on its behalf as of the date first hereinabove set forth.
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
By:__________________________________
Name: Andrew L. Simon
Title: President and Chief Executive Officer
ATTEST:
[SEAL]
______________________________
Name:
Title: Secretary
<PAGE>
Exhibit 1
---------
Warrant No. 1
<PAGE>
Exhibit 2
---------
Warrant No. 2
<PAGE>
Exhibit 3
---------
Warrant No. 3
<PAGE>
Exhibit 4
---------
Warrant No. 4
<PAGE>
EXHIBIT 7
THIS WARRANT AND THE SHARES OF COMMON STOCK UNDERLYING THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
UNDER APPLICABLE STATE SECURITIES LAWS. THIS WARRANT MAY NOT BE SOLD, OFFERED
FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS WARRANT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS
OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO TOUCHSTONE APPLIED SCIENCE
ASSOCIATES, INC. THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT
TO THE PROVISIONS OF RULE 144 OF THE ACT.
THIS WARRANT IS SUBJECT TO THE PROVISIONS OF A SECURITIES PURCHASE AGREEMENT,
DATED AS OF SEPTEMBER 4, 1998, AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE
DISPOSED OF EXCEPT AS THEREIN PROVIDED.
[FORM OF]
WARRANT TO ACQUIRE SHARES OF
COMMON STOCK OF
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
Warrant No. __ ____________, 1998
THIS CERTIFIES THAT CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P. (the
"Holder"), for value received, or its registered assigns, is entitled to
- -------
purchase, on the terms and subject to the conditions hereinafter set forth, from
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC., a Delaware corporation (the
"Company"), at any time after the Effective Date (as defined below in Section
- --------
2.3) of this Warrant and on or before the Termination Date (as defined below in
Section 2.7) of this Warrant (the "Exercise Period"), that number of shares (the
---------------
"Warrant Shares") of common stock, par value $.0001 per share, of the Company
--------------
(the "Common Stock"), as set forth in Section 2.1 hereof. The Company issued
------------
this Warrant with three other Warrants (each, along with this Warrant, a
"Warrant" and, collectively, the "Warrants") and a debenture (the "Debenture"),
- -------- -------- ---------
to the Holder pursuant to a Securities Purchase Agreement, dated as of September
4, 1998, by and between the Company and the Holder (the "Securities Purchase
-------------------
Agreement"). Capitalized words not defined herein shall have the meanings set
- ---------
forth in the Securities Purchase Agreement.
SECTION 1
Exercise Price
--------------
<PAGE>
The exercise price at which this Warrant may be exercised shall be $0.35
per share of Common Stock (the "Exercise Price"), subject to any adjustment
--------------
pursuant to Section 3.3.
SECTION 2
Exercise of Warrant, Etc.
-------------------------
2.1 Number of Shares for Which Warrant is Exercisable. This Warrant shall
-------------------------------------------------
be exercisable to purchase [________] shares of Common Stock, which represents
[______] percent (__%) of the Company's issued and outstanding capital stock on
a fully diluted basis at the date of issuance, subject to any adjustment
pursuant to Section 3.3.
2.2 Procedure for Exercise of Warrant. The Warrant may be exercised in
---------------------------------
whole or in part during the Exercise Period by surrendering this Warrant, with
the purchase form provided for herein duly executed by the Holder or by the
Holder's duly authorized attorney-in-fact, at the principal office of the
Company or at such other office or agency in the United States as the Company
may designate by notice in writing to the Holder accompanied by payment in full,
in cash, bank cashier's check or certified check payable to the order of the
Company, in an amount equal to the product of (i) the Exercise Price multiplied
by (ii) the number of Warrant Shares being purchased. In addition to payments
of the Exercise Price by cash or said checks, payment of the Exercise Price with
respect to the Warrant(s) being exercised may be made, at the option of the
Holder, by the reduction in the principal amount of the Debenture issued to the
Holder pursuant to the Securities Purchase Agreement (or forgiveness of any
accrued and unpaid interest thereon, even during a period in which an Event of
Default (as defined in the Securities Purchase Agreement) has occurred and is
continuing under such Debenture, in an amount equal to the Exercise Price with
respect to the number of Warrant Shares being purchased; and in such a case,
this Warrant shall be accompanied by said Debenture (with the purchase form duly
executed) which shall be substituted and replaced by a new Debenture identical
in form and content to the original Debenture except that principal amount shall
be appropriately reduced to reflect the reduction in the principal amount
applicable to the payment of the Exercise Price with respect to the Warrant
being exercised. If fewer than all of the Warrant Shares are being exercised,
the Company shall, upon exercise prior to the end of the Expiration Period,
execute and deliver to the Holder a new certificate (dated the date hereof)
evidencing the balance of the Warrant Shares that remain exercisable.
2.3 Effective Date; Conversion.
--------------------------
(a) The "Effective Date" of this Warrant shall be the earlier of:
--------------
(i) [the date hereof / the eighteen (18) month anniversary date
of the Closing Date]; or
(ii) upon the occurrence or existence of an Event of Default (as
defined in the Securities Purchase Agreement).
<PAGE>
(b) Beginning on the Effective Date, this Warrant shall
immediately become exercisable for that number of shares of Common Stock
issuable upon exercise of this Warrant (subject to adjustment under Section
3.3) and this Warrant shall remain exercisable for such number of shares
(subject to adjustment under Section 3.3) until the Termination Date.
(c) If prior to the Effective Date, the Company satisfies all
obligations under the Securities Purchase Agreement and the Debenture
(including without limitation paying in full all principal and interest
thereunder), this Warrant shall terminate and be null and void ab initio.
Satisfaction of all obligations under the Debenture and Securities Purchase
Agreement by the Company on or after the Effective Date shall not affect
this Warrant, which shall remain in full force and effect until the
Termination Date
2.4 Transfer Restriction Legend. Each certificate for Warrant Shares
---------------------------
initially issued upon exercise of this Warrant, unless at the time of exercise
such Warrant Shares are registered under the Act, shall bear the following
legend (and any additional legend required by any securities exchange upon which
such Warrant Shares may, at the time of such exercise, be listed) on the face
thereof:
"These securities have not been registered under the Securities Act of
1933, as amended, or under any state securities laws and may be offered,
sold or transferred only if registered pursuant to the provisions of such
laws, or if in the opinion of counsel satisfactory to the Company, an
exemption from such registration is available."
2.5 Acknowledgment of Continuing Obligation. The Company will, if the
---------------------------------------
Holder exercises this Warrant in part, upon request of the Holder, acknowledge
in writing the Company's continuing obligation to the Holder in respect of any
rights to which the Holder shall continue to be entitled after such exercise in
accordance with this Warrant, provided, that the failure of the Holder to make
any such request shall not affect the continuing obligation of the Company to
the Holder in respect of such rights.
2.6 Termination of Warrant. Unless the parties otherwise agree in writing
----------------------
to extend or modify the Exercise Period, this Warrant, or the unexercised
portion of this Warrant, shall terminate and be null and void on the date five
years from the Effective Date (the "Termination Date").
----------------
SECTION 3
Ownership of this Warrant.
-------------------------
3.1 Deemed Holder. The Company may deem and treat the person in whose
-------------
name this Warrant is registered as the Holder and owner hereof (notwithstanding
any notations of ownership or writing hereon made by anyone other than the
Company) for all purposes and shall
<PAGE>
not be affected by any notice to the contrary, until presentation of this
Warrant for registration of transfer as provided in this Section 3.
3.2 Exchange, Transfer and Replacement. This Warrant is non-detachable
----------------------------------
from the Debenture and may not be transferred, assigned, sold, pledged or
otherwise hypothecated ("Transferred") except with the Debenture, and if so
-----------
Transferred, then only as permitted under the terms and conditions of the
Debenture and the Securities Purchase Agreement. This Warrant and all rights
hereunder are transferable in whole or in part upon the books of the Company by
the Holder in person or by duly authorized attorney, and a new Warrant shall be
made and delivered by the Company, of the same tenor as this Warrant but
registered in the name of the transferee, upon surrender of this Warrant duly
endorsed at said office or agency of the Company. Upon receipt by the Company
of evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and, in case of loss, theft or destruction, or
indemnity or security reasonably satisfactory to it, and upon surrender and
cancellation of this Warrant, if mutilated, the Company will make and deliver a
new Warrant of like tenor, in lieu of this Warrant, provided, however, that if
-------- -------
the Holder of this Warrant is the original Holder, an affidavit of lost Warrant
shall be sufficient for all purposes of this Section 3.2. This Warrant shall be
promptly canceled by the Company upon the surrender hereof in connection with
any exchange, transfer or replacement. The Company shall pay all reasonable
expenses, taxes (other than stock transfer taxes and income taxes) and other
charges payable by it in connection with the preparation, execution and delivery
of Warrant Shares pursuant to this Section 3.2.
3.3 Antidilution.
------------
(a) If at any time while all or any portion of this Warrant remains
outstanding all or any portion of this Warrant shall be exercised
subsequent to (i) any sales of shares of Common Stock of the Company at a
price per share less than the Exercise Price per share then applicable to
this Warrant, or (ii) any issuance of any security convertible into shares
of Common Stock of the Company with a conversion price per share less than
the Exercise Price per share then applicable to this Warrant, or (iii) any
issuance of any option, warrant or other right to purchase shares of Common
Stock of the Company at any exercise price per share less than the Exercise
Price per share then applicable to this Warrant (except, in each case,
pursuant to an employee or director stock option plan or similar
compensation plan approved by the Board of Directors); then in any and
every such event the Exercise Price per share for this Warrant shall be
reduced and shall be equal to such lower sales, conversion or exercise
price per share.
(b) If all or any portion of this Warrant shall be exercised
subsequent to any stock dividend, split-up, recapitalization, merger,
consolidation, combination or exchange of shares, reorganization or
liquidation of the Company occurring after the date hereof, as a result of
which such shares of any class shall be issued in respect of outstanding
shares of Common Stock of the Company (or shall be issuable in respect of
securities convertible into shares of Common Stock) or upon exercise of
rights (other than this Warrant) to purchase shares of Common Stock or
shares of such Common Stock shall be changed into the same or a different
number of shares of the same or another class or classes, the Holder
exercising this Warrant shall receive the aggregate number and class
<PAGE>
of shares which such Holder would have received if this Warrant had been
exercised immediately before such stock dividend, split-up,
recapitalization, merger, consolidation, combination or exchange of shares,
reorganization or liquidation.
SECTION 4
Special Agreements of the Company
---------------------------------
The Company covenants and agrees that:
4.1 The Company will reserve and set apart and have at all times, free
from preemptive rights, a number of shares of authorized but unissued Common
Stock deliverable upon the exercise of this Warrant or of any other rights or
privileges provided for herein sufficient to enable the Company at any time to
fulfill all its obligations hereunder.
4.2 This Warrant shall be binding upon any corporation or entity
succeeding to the Company by merger, consolidation or acquisition of all or
substantially all of the Company's assets.
SECTION 5
Notices
-------
Any notice or other document required or permitted to be given or delivered
to the Holder or the Company shall be delivered, or sent by certified or
registered mail, to the Holder or the Company at the address as set forth in the
Securities Purchase Agreement.
SECTION 6
Governing Law
-------------
This Warrant shall be governed by, and construed and enforced in accordance
with, the internal laws of the State of New York, without giving effect to its
conflicts of laws provisions.
SECTION 7
Assignment
----------
Notwithstanding any provision of this Warrant which may be construed to the
contrary, this Warrant and any rights hereunder shall not be assignable by the
Holder except in accordance with the provisions governing assignments hereof set
forth in the Securities Purchase Agreement
<PAGE>
and any attempt by the Holder to assign this Warrant or any rights hereunder
other than in accordance therewith shall be void and of no force and effect.
This Warrant is non-detachable from the Debenture and may not be transferred
except with the Debenture.
[Balance of Page Left Blank Intentionally -- Signature Page Follows]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer under its corporate seal, attested by its duly
authorized officer, and to be dated as of the date first hereinabove set forth.
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
By: _____________________________________
Name: Andrew L. Simon
Title: President and Chief Executive Officer
ATTEST:
______________________________ [SEAL]
Name:
Title: Secretary
<PAGE>
ASSIGNMENT
TO BE EXECUTED BY THE REGISTERED HOLDER IF IT DESIRES AND IS PERMITTED TO
TRANSFER THE WARRANT OF
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
FOR VALUE RECEIVED ___________________________________ hereby sells,
assigns and transfers unto __________________________ the right to purchase
[______%] of the number of shares of Common Stock covered by the within Warrant,
and does hereby irrevocably constitute and appoint
__________________________________________________ Attorney to transfer the said
Warrant on the books of the Company (as defined in said Warrant) with full power
of substitution.
The undersigned represents and warrants to the Company that this assignment
has been effected in compliance with all applicable provisions of said Warrant
and any applicable provisions of the Securities Purchase Agreement referred to
in such Warrant.
Signature: __________________________(SEAL)
Address: ________________________________
Dated:___________________199__
In the presence of
______________________________ By: _____________________________________
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
<PAGE>
WARRANT CERTIFICATE
TO BE EXECUTED BY THE REGISTERED HOLDER
IF IT DESIRES TO EXERCISE THE WARRANT OF
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
The undersigned hereby exercises the right to purchase shares of Common
Stock obtainable by exercise of [_____%] of the within Warrant, according to the
conditions thereof and makes payment of the Exercise Price for such shares in
full by the enclosed payment and/or by reduction in the principal amount of the
Debenture (as defined in the Warrant) as more specifically set forth below:
Signature: __________________________(SEAL)
Address: ________________________________
